Sellers have to ask this question and give it serious thought prior to making the decision to sell. In too many instances sellers get to the proverbial altar and then back down the aisle. In most cases, this happens because the seller’s decision to sell has not been considered carefully enough.
There are the obvious event-driven reasons such as failing health, partnership, marital issues or because the business is going downhill. In cases such as these, business owners generally don’t have a lot of options. Selling the company is the easiest and most obvious one.
In too many other cases, the owner claims retirement, “burn-out,” or some other reason, none of which is necessarily a permanent state of things. Take the example of the owner of a company who is also the founder and after a lot of hard work and probably years of financial hardship on his part, the company is now quite successful. It is, as they say, the owner’s “baby.” The first question that needs to be asked is: Do I really want to sell? The second question is: If so, why? And the third is: What am I going to do after the company is sold? These questions involve not only business decisions, but important emotional issues as well.
Attempts to formulate answers should not be made until the owner has discussed these questions with family and personal professional advisors. There are books on exit strategies and consulting firms that deal with these issues. A professional business intermediary is also someone that has experience in this area and can provide a good idea of current pricing issues and market conditions.

Is Your Company Tired?

It can be easy for successful company owners, especially founders, to rest on their laurels. The sales keep coming in, so the owner buys a bigger house, takes a lot of expensive vacations and devotes time to charities and/or civic activities. All well and good, but ignoring the business can create problems that may not surface immediately.
Continued from Cover

Here are some examples:
• The owner, who used to call on the large and important customers or clients, turns them over to the sales manager.
• The CFO started as the bookkeeper and isn’t really qualified to do the financial reporting necessary to provide the information to continue to grow the company.
• The owner appoints his friends to important roles as outside advisors such as corporate counsel and outside accounting professionals. They may not be qualified or willing to provide critical advice.
• There is a tendency to not rock the boat since everything seems to be going fine.
Company owners should remember that they are the leaders. They set the work ethic, discipline and standards for the senior management, the managers and the employees – and the business itself.

  
 
   
 

This latest issue of the Privately Held Company is compliments of Gary Papay, CBI, M&AMI. Gary is president of CK Business Consultants, Inc. and is an active member of the M&A Source. Gary has been involved in the sale and acquisition of businesses for over 30 years, and is available to handle all of your merger, acquisition or divestiture needs.

P: 570-584-6488
F: 570-584-0199
gpapay@ckbc.net
www.ckbc.net

 
   

 


Four Potential Mistakes Sellers Make When Selling Their Companies


Poor Timing: As the saying goes, “Timing is everything.” Selling one’s business at the proverbial top of the game is almost impossible, but selling on the upside is certainly better than selling on the downside.
There is another side of timing. The owner is 63 years old and says he doesn’t plan on retiring until he is 65. Besides, business is really good right now so why sell now? Because timing is everything and the business is better than ever, it will command a much higher price now. Waiting may mean accepting a much lower price – the time to sell is now!
Not Prepared: This is like beating a dead horse. It is a subject that is talked about often, probably because it is so often ignored. Too many sellers come to the process woefully unprepared. Financial information is lacking, agreements expired or non-existing, too many open-ended items, etc. Time is wasted



gathering information that should be at the ready (and, incidentally should be current for the normal course of business).
Not in Agreement: Too many deals fall apart because family members, stockholders or partners were not in agreement on the details or of actually selling the company. Agreement is paramount prior to even considering selling.
Not Using Your Sixth Sense: The business owner has built his or her business using his or her own judgment or sixth sense. Another term for this is “gut feel.” It is what probably has made the business, and its owner, so successful. The same is true when selling. Is it the right deal, the right buyer, the right deal structure? Some situations are beyond one’s control, but sellers have to remember to use the sixth sense that served them so well in the past.
 

The deal is getting down to the wire, the price differential is close, but the parties are not yet in agreement. Following are some ideas that might set the ball rolling and help bring the parties together.
• Let the seller retain the real estate and rent it to the buyer, thus reducing the price. The same could be done for major pieces of equipment. Let the seller lease them to the buyer reducing the price. The lease should, however, like most leases, provide for a buyout at
the end.
• Structure a royalty on sales rather than an earnout on gross margins or EBIT.
• Have the parties create a subsidiary for the fastest growing part of the business in which the buyer and seller share 50/50.
• Let the buyers acquire 70 percent of the business with the requirement that they purchase 10 percent more each year on the same multiple of EBIT as in the 70 percent sale.
• Arrange a consulting agreement with the seller to provide additional compensation to be paid annually.
Certainly, any agreement or deal structure should be approved by the party’s professional advisors.
 
 
 

Is the Business Sustainable?

One of the important issues in valuing a company is the sustainability of sales and income. It is a major issue in the due diligence process. It is also one of the most difficult to assess since many of the factors are so subjective. To bring things into focus, here are some of the factors that should be considered in looking at the sustainability of sales
and profits:
• proprietary products and/or services
• market share
• customer concentration/broad distribution
• quality of financial systems
• depth of management
• seasonality/cyclicality
• current appraisals on equipment & real estate
A few of the questions a buyer may be trying to answer are:
• Is the company’s market position weaker than purported?
• Is the competition weaker or stronger than represented?
• Is the market struggling or growing?
• How does the company “benchmark” against the competition?
The analysis of the above factors and questions are a necessary part of not only the valuation process, but also the areas that a prospective buyer would investigate.