Plan Early and Be Flexible

By Nathan Alexander, CPA,CFP

The number of small businesses seeking an exit and transition strategy appears to be at an all-time high, and I thought it would be helpful to broadly frame the idea of selling your business. The key takeaway is that the process of successful business transition of control, and transition of wealth takes more time than one might think, and also takes a tremendous amount of flexibility by Seller and Buyer.

Buyers kick the tires, some seemingly qualified are not, while Banks can promise easy and hefty loans to Buyers, but then when it comes to underwriting they sing a different tune. Smooth and successful small business sales generally have the following in common: A Seller that takes enough time to get educated, evaluate values, consider what they are willing to offer the Buyer in terms of transitional help or Seller’s financing, but most importantly they try to assemble a team to get their ducks in a row before directly negotiating with a potential Buyer. All too often, by the time the CPA, Attorney, or other advisors are consulted, a Seller and potential Buyer have already had so many conversations and planned the sale out in their minds that they have dreamed an un-workable transaction.

Here is how I like to counsel Sellers when they are just beginning to think of selling:

First, what are you considering selling? Are you selling an operating business and the real estate that goes along with it? Does your pool of potential Buyers include only those offering a cash down payment? A Seller who might be focused on a full cash-out of business and real estate all at once, for mainly cash at closing, may have a more limited pool of Buyers than a Seller who is open to selling the business in stages or offering financing.

Second, know what a successful sale means to you. Are you interested in top dollar, or preserving as much of the business culture, team, and customer experience as possible even if that means selling to a Buyer who might not be able to offer top dollar but will honor those core values? Does anyone within the organization show the promise of a potential Buyer and operator?

Third, spend some time and resources independently assessing the fair values of what you are selling. This might mean engaging both a property appraiser and a qualified business valuation specialist. Some business valuation folks work for brokers and may offer “free” valuations that might at first appear more attractive than hiring a separate firm to offer some pricing context. Business valuation is as much art as it is science, so it is so important to make a thoughtful choice about who to engage to price out what you are selling. Sellers need to understand that an operating business is often valued based upon its discretionary recurring cashflow and is NOT valued based upon all the individual assets of the business. This is often a sticking point with Sellers who focus on all their collective investment over the years and may have a hard time understanding the valuation conclusions in a financial model. Take your time, ask for help to come up with a reasonable price, and then spend time understanding how the value was actually derived BEFORE you begin chatting about numbers with a potential Buyer.

Fourth, ask your financial advisor or CPA to model out some possible sales prices and financing scenarios to see what might be reasonable. Often the Buyer will offer proposed terms, but the transaction must “cash flow” to show that future anticipated profits will cover debt burdens with additional margin for the unknown, and an unsophisticated Buyer may not have plotted out reasonable numbers. A Seller could have a fair selling price that was independently determined, but any business can only sustain so much debt.

Fifth, Banks need to be managed as well when they are offering financing ideas to Buyers. So often, a Bank will lead with the Buyer’s rosy financing proposal that may have an SBA (Small Business Administration) lending guarantees requirement. As the transaction progresses with this Bank, the Seller finds out their subordinate financing contains so many restrictions that they opt to not sell to a Buyer that is depending on SBA guaranteed loans, and now the Seller is back to square one. Having a CPA, attorney, or other teammate work as an intermediary with possible Banks will help save time by avoiding financing proposals that (to the Seller) are nonstarters.

Finally, take your time and talk about it way ahead of talking terms to Buyers, because once an idea is floated, or a price, it’s very hard to take it back. Momentum is key, and as your trusted advisors we are here to help ensure your valuable time is optimized for a successful result.