Owners who want to sell their businesses need to begin preparing years in advance and plan carefully to do it right, M&A experts say.
Getting the right price and finding the right buyer for a business takes a lot of preparation and requires expert advice, local speakers said during a recent webinar on how to sell a business.
Owners also need to keep in mind that selling the business impacts many more people than just themselves.
“The process of selling your business is not only important to the owners but also to all of the different parties involved. If you think about it, every time a business transitions, you’re affecting the buyer’s families and seller’s families, the employees’ families, the vendors and the customers, and even the community,” said Randy Rua, the principal of M&A firm Rua Associates LLC in Zeeland.
Rua was one of four presenters during the webinar hosted by Grand Rapids law firm Smith Haughey Rice & Roegge PC. He was joined by Jonathan Siebers, a partner at Smith Haughey; Doug Holtrop, a senior vice president at Mercantile Bank; and Dan Slate, a partner and CPA at H&S Companies.
In working with a seller to establish a process and a plan to exit a business, Rua uses a model where the owner sets down expectations and puts together the right team of legal, financial and tax advisers.
Sellers should begin with documenting why they want to sell, their expectations with the transaction and what they want to accomplish, Rua said. They need to consider, for example, whether they want to retire or if they’re just looking for a lifestyle change.
“What’s driving them? Maybe they are just tired or burned out or just looking forward to retirement, or they want to do something different,” he said. “Once you get all of this down, it really helps to focus and avoid all of the noise that can derail a transaction.”
A plan should include documenting the attributes that a seller wants in a buyer. They can then use that to screen buyer candidates or to develop a list of prospective buyers to approach, Rua said.
The seller should also have an “ideal transaction picture” in mind that includes a targeted closing date, how much cash they expect to receive at the close, and the valuation they see for the business. And they need to ask themselves the question: “What should life be like after the transaction?” Rua said.
By answering what they intend to do after the deal, a business owner can avoid seller’s remorse, he said.
“This is important because a lot of the times if the seller doesn’t understand what they are going to be doing after the transaction is complete, then during the closing process, the deal can fall apart,” Rua said.
The final preparation piece is assessing the value of the business. The assessment should include the perspective of others, looking at the risk for a prospective buyer and how a deal’s structure can shift around the risk, Rua said.
“When you talk about valuation and assessment of a company, it’s all about the point of view,” Rua said. “If you look at it from the owner’s viewpoint, there’s a lot of pride in ownership, a lot of work that went into their business, and they see a lot of value. Then you have a buyer that comes along and they’re looking at the business and they’re seeing it differently than the owner. They’re looking for the risk in the business and trying to understand the potential pitfalls.”
Rua notes that only in a quarter of instances when a buyer and seller get together and a proposal is exchanged does a deal actually close, often because a buyer concludes the deal does not meet their goals, or a seller feels it’s not the right buyer.
Siebers, who has extensive experience working with sellers and buyers, said that many sellers begin considering exiting their business two to five years in advance. The wider the window, the better they can prepare properly, resolve any outstanding legal issues and increase the value of the business to get a better sale price, he said.
In preparing for a sale, sellers need to “put yourself in the buyer’s shoes. You’re going to perform what we call ‘seller’s due diligence,’” Siebers said. That process includes identifying what red flags a potential buyer is going to find when they look at the business. “And those red flags can be scary, but they can be things the buyer can become comfortable with.”
One of the red flags Siebers often sees is unpaid taxes, whether federal, state or local. By resolving those or other issues beforehand, the seller can make a transaction go smoothly and avoid significant delays in working through the issues with a buyer, he said.
“All deal advisers know that deal fatigue is a real problem. The longer you go, the less likely it is you’re going to close. So to the extent that you can address the issues up front, before you even get a buyer, you’re going to be doing yourself a favor,” Siebers said.
Michigan law requires that if a business owes any taxes at the time of a sale, the buyer “is on the hook” for them after the close unless steps are taken to resolve them — and that’s “going to create heartburn for the buyer,” Siebers said. The usual result, if the deal goes forward, is a delay in closing, as well as the seller not getting as much cash out of the business as they hoped, he said.
Sellers should also identify and review key contacts to see if they need a customer’s permission to assign the contract to a buyer. The same goes for contracts with vendors and suppliers and real estate leases, Siebers said.
He’s had clients who renewed a lease for five years, sold the business the next year, and the buyer didn’t want the real estate.
“So the seller gets stuck with four years left on a lease that they can’t use,” Siebers said. “It doesn’t necessarily kill a deal, but it makes it a lot more difficult to get done.”
Sellers, before they sell, need to make sure their corporate records and state filings are up to date. Those issues “can be fixed and they can be fixed fairly cheaply and fairly quickly,” Siebers said. If not addressed, that could send a red flag to the buyer.
“The buyer is going to say, ‘Well, if they are not up to date on their state filings, what else am I missing here? What else are they sloppy with?’” Siebers said.
Holtrop, who specializes in working with clients through mergers and acquisitions, said that as business owners begin to prepare for an eventual exit within a year or two, one of the best things they can do is look at who is the probable buyer.
“That probable buyer or the buyer group is really going to influence how you position the company in order to maximize its value to that buyer as well as ease that transition process,” Holtrop said.
Potential buyers range from family members and employees who want to take over the business to strategic buyers and financial buyers with a specific goal in mind for their investment.
A financial buyer can typically pay more for a business because they have better access to capital, Holtrop said. There are more buyers in that category, meaning there’s more competition that can drive up the transaction price, he said.
The downside of a financial buyer is they may bring in a new management team or “you may have the end of a legacy or the loss of culture,” Holtrop said. “You may have started this business or you may have built it with a specific culture. Maybe it’s a work-life balance or philanthropic activity the company has done. (With the) new buyer coming in, that may not be the case after the closing.”
Also, as a seller works on the economics of structuring a deal, don’t forget the tax implications, Slate said.
“Keep in mind: Every deal has a silent partner, and that’s your Uncle Sam,” Slate said.
Oftentimes, “what’s good for the seller in terms of taxes is bad for the purchaser,” he said. That can create an adversarial relationship that requires the two sides to work out the mechanics of how the taxes work out for both before drafting a sales agreement, Slate said.
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.
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