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Selling a business can mean writing the final chapter in a lifelong story of entrepreneurial setbacks and successes. Beginning in 2020, Ingram’s will help you write a successful conclusion.
Fact: America has never seen a bigger shift in business ownership than it is seeing now and will witness by 2025. The nation has 30 million businesses today, and while the vast majority of them are sole proprietorships with no other employees, an estimated 15 million of them will change hands over the next five years.
Or simply cease to operate altogether.
That dynamic could overtake between two-thirds and 75 percent of all those companies by 2030. That, as it happens, nearly coincides with the increased “retirement age” set by Social Security—the last members of the Baby Boom generation (those born in 1964) will turn 66 a decade from now. They’ll hit their official retirement age of 67 the following year.
Brokers and buyers may disagree on how prominently the Boomer effect is asserting itself into the sales environment, but there’s no question the dynamic is part of the current equation. Fueled in large part by the drive for owners in that age cohort to establish their exit plans for business life and head into retirement, and in part by a global surge in wealth creation that has infused unprecedented amounts of cash into capital markets, the environment for business sales has been more robust in the past two years than anyone living today has seen.
And all indications are, that froth is going to get frothier.
But selling a business is a complicated process even under the best of conditions, and many a business owner will be flummoxed by questions about where to even begin. In this year-long series, Ingram’s will break down the process of a business sale into a dozen steps. With each, we’ll summon the thought leadership from brokers, bankers, capital managers, accountants and others to accompany you on a deep dive into strategies that can lead you to a successful transition.
A number of factors complicate the process of any business sale, not the least of which are the emotional ties an owner might have to putting a price sticker on a lifetime’s worth of work. Experts in this field say emotions can cloud judgments and prevent desired outcomes, perhaps more so than factors like business growth potential, industry/sector trends, personnel/staffing considerations, and tax implications, among others.
“The amount of capital looking to be invested, both from a strategic and from a financial perspective, is driving business valuations higher.”
— BILL CONWAY, CC CAPITAL ADVISERS
Bill Conway sees that at work almost every day as managing director for CC Capital Advisors, a division of Country Club Financial.
“From our perspective, the first step, the very first, is wrestling with the emotional aspect of selling something or parting ways, transitioning an entity that has been the identity of an owner, a group or a family for an extended period,” Conway says. Whether it entails an outright sale, a new generation of ownership or bringing in a partner, it’s an emotional exercise. You need to separate emotion from rational decision-making. That’s absolutely critical, because a big piece is, once you understand the emotional process, you have to look a the strategic elements and what’s important.”
Many sellers, says Doug Hubler, president of Apex Business Advisers, “make the mistake of thinking that they have a business that will be attractive to many buyers and that they have built something very unique. They have strong emotional ties and have difficulty understanding why the years of hard work don’t necessarily translate to a big payday.”
Truth be told, the starting points on the path to a sale might vary for any given owner, depending on individual circumstances. Next month, for example, we’ll address issues involving management of family relationships in closely held companies, which might be the first point of exploration for those owners who want to know how a sale might affect those most personal of relationships.
Others will want to start by determining, before anything else, just what their company is worth. Still others might begin by exploring what it would mean to sell to current management, taking the company employee-owned, selling to a competitor or finding a strategic buyer. All may have different starting points.
The best way to set a strategy for your own process, brokers and others say, is by identifying the broader goals of your planned sale:
Are you looking merely to capture the highest sales price you can?
Is the business brand and corporate legacy something you want to ensure well into the future, even if it doesn’t produce the top price?
What about establishing a philanthropic profile with the proceeds of the sale?
Are you looking to reward the key personnel who helped make your company a success?
Those questions just scratch the surface of the elements that will factor into an owner’s decision to sell. And for all of those reasons and more, says Chad Peterson, of Peterson Acquisitions, “you have to contact a business broker to look at the value of the business. That should be the first thing. Most people can’t identify what’s in the marketplace for potential buyers.” Determining what you’re working with by evaluating what your business is really worth, he says, “will set a value that will dictate what the market is.”
Chris Kerth, principal broker for Murphy Business & Financial Corp., sees the challenges facing smaller-company owners every day, as his firm specializes in sales of $5 million or less. “Most sellers,” he says, “don’t realize all the effort that goes into a transaction—physical and emotional.” And most businesses advertised for sale, he says, simply do not end up selling. Even when they do, Kerth says, “the average time on the market is nine months.”
Too often, says Hubler, “sellers don’t take the time to plan ahead to sell and haven’t made necessary adjustments to attract a large number of buyers. Many sellers also mistakenly believe that buyers commonly pay for the seller’s perceived potential of the business.”
Selling a company, then, is a process of discovery, and one that will often yield a new perspective for owners—especially when things reach the stage of valuation and negotiation with a potential buyer who is looking for leverage to hold down the acquisition cost.
“At a certain level, they are being told their baby is ugly; they have to be prepared to hear that—the good, the bad or otherwise,” said Conway. “And to understand, in an extreme scenario, why their business is not worth more than a buyer believes it is. It’s just math, that’s all it is.”
That math, owners should note, will be different for every entity they speak with. Every potential buyer has different motivations and goals as well, creating different matrices of valuation.
“The tangible value, cash flow—you can get your arms around that,” Conway says. “’How bad do I have to have this, how bad do I want it, what will it allow me to do going forward?’ And how much of that benefit are you willing to pay the current stakeholders?”
Other considerations that will shape terms of a deal, brokers say, include whether an owner wants to make a clean break of things and simply get off to Bermuda, whether a buyer is insisting on a transition period that keeps an owner tied to the company for a year or more, whether the acquisition is a strategic move by a competitor with deep pockets or a financial move by another entrepreneur looking to build on an established platform.
“At the end of the day, all people are buying is money,” says Peterson. “They’re not buying a business. Well, sure, they are—it is a business—but what they are buying is the ability to make money through that business.”
The key, say experts in the sector, is for owners to engage with a potential buyer who is aligned philosophically with the owner’s goals, not operating
in conflict with them. Otherwise, it’s not a good marriage.
Ryan Sprott fits the latter profile, as a founding member of Great Range Capital, a 10-year-old private-equity firm that focuses on buying companies with solid potential.
“We are one resource and an option to buy a company,” said Sprott, “so we’re the actual group with the capital, raising it from big institutions, investors, wherever. We see a thousand companies a year looking to be sold, and pick just a couple every year to invest in or buy.”
Making that difficult cut doesn’t happen, he said, if the owner hasn’t figured out what he’s trying to achieve. Whether the goal is finding a partner to drive growth, keeping the management team (and corporate culture) intact, ensuring that a family member can carry on the legacy—all, he says, “can determine whether you sell to a competitor, a private-equity firm, management team, family member or ESOP.”
Your objectives, though, will determine the first steps you should take.
That journey will take you through a number of steps to prepare your business, experts say. Among them:
The last of those is hugely important. While we’re in the midst of a massive wave of transitions, conditions for that won’t last forever. A presidential election year looms, with the outcome likely to determine whether the regulatory landscape remains as friendly to small business over the next four years as it is today. Overseas factors and domestic fiscal policy could tighten the valve on capital available for acquisitions. Trade disputes could reshape certain business sectors and cut down on the chances for optimal returns in a sale.
But for now, says Conway, “it’s clearly a seller’s market, and not just from the perspective of the volume of sellers or the volume of buyers. It’s with the volume of capital that is looking to be deployed and invested. Whether they are an investor or corporation, buyers want a return on their dollar, rather than having it sit in a bank.”
Economists largely believe that the huge run-up in equities throughout 2019, after a disastrous close in late 2018, means that stocks will be challenged to produce glittering returns in 2020. Given that, a great amount of capital may be looking to pivot to business acquisition.
“The amount of capital looking to be invested, both from a strategic and from a financial perspective, is driving business valuations higher,” said Conway. That, however, won’t last forever.
Neither will myriad other conditions that make this an ideal time to sell. But if a near-term sale is on an owner’s mind, and little has been done to position the business as an attractive acquisition target, much is at risk.
So too, is an older owner’s biological clock. After decades of toil, anything that extends the timing of a prospective sale could have disastrous consequences.
In too many cases, Peterson says, “they just don’t want to make the call until they are ready to sell right then. That’s a faulty thought process. Even if you came to me to sell, it will take me six to eight months. By that time, and with a three- or four-month transition period to teach the new owner, you’re still a year from being totally out of the business.”
If you hold on to a company too long, brokers say, you risk losing passion, performance and profit. The worst position an owner can be in is trying to sell an enterprise that no longer ignites his own passions—buyers can sense it, see it and measure it in the company’s performance metrics.
Just as the right time to plant a tree was 20 years ago, the right time to plan for a business sale in 2020 is in the rear-view mirror. Owners can take some steps to recover some of that lost opportunity. But they need to start moving—quickly.
The clock is ticking.
