Selling Your Business - Treat It Like An Investment

Think of the joy you feel when you look back and realize that you sold a stock at a big profit and got out within a few percentage points of its all time high. You chuckle a bit as you watch the stock pull back by over 100% while you have redeployed your proceeds into other diversified investments that have performed well. That is a very disciplined approach to investing and unfortunately I have failed to execute that on several very costly occasions.

So now I preach to business owners to execute the same dispassionate approach when it comes to their privately held business. It is so much more than an arm's length investment.  It is their life's work, their identity, their pride and joy. The very nature of the entrepreneur means they are confident and optimistic, otherwise they would not have started the business in the first place. This attitude can really cost them in both good times and bad. When things are going well, he projects that they will get even better. When things go poorly, he reasons that this is just a short term issue and he will power through it.

Getting back to investing for a minute, I find that my best decisions are made when the market is closed and I am in planning mode.  I might put on a stop loss order for that mining stock that has run up 40% in the last 3 months or put in a sell order if it hits 50% above its previous 52 week high. I might place a buy order for a hot stock anticipating a pullback rather than buying it in a high volume upward move. I am trying to take the emotion out of my decision making by planning ahead for my trigger points.

For a business owner, it is important to recognize something is always for sale at the right price and terms. The business owner needs to recognize trigger points, both positive and negative and should establish a plan to be able to act upon them. Some positive triggers are you just had your most profitable year ever, you just got your first big order from the coveted blue chip account, or you just introduced a promising new product. The owner thinks this trend will continue indefinitely.

On the negative side, triggers might be your largest account runs into financial difficulty, the loss of a key employee, a health issue with the owner, or a competitor that has introduced an improvement on your major product. The owner believes that these are just challenges that he can manage his way around.

On the positive end, you can very effectively sell the trend to potential acquirers. Often times competitive forces act to bring the short term upward trend back closer to the norm. If the owner in his optimism waits to capture a second helping of his initial trend, he may have moved back to the norm and can no longer sell the positive trend.

If, on the other hand, an owner, especially later in his working life, tries to power through a negative trigger, the likelihood is that his business is in for a protracted downward slide. If he recognizes this in advance and has prepared for his exit, he may be able to sell the company before too much financial damage has occurred. A strong buyer can stop the slide if they get involved early enough. Just like you can sell the trend on the upside, the market will impose the negative trend on your company's selling price with a downward trend.

The Basics of Exit Preparation

1. Recognition of potential financial impact

Your business is likely your family's largest asset. In many cases it represents over 80% of your family's net worth.

Your business is illiquid and the price is subject to broad interpretation by the market.

Your business can not be sold quickly. An orderly business sale usually takes between 6 and 12 months.

If you have a debilitating health issue and are not able to work or you die, your business value could drop 20, 30, 40% or more over a very short period of time.

Buyers will be predatory if you are selling from a position of weakness

2. Have your business in move in condition at all times

Have a well-documented procedure manual

Make sure that there is management in place (beside the owner) that has decision making ability and authority

Create a growth plan - a 5 to 10 page document identifying the potential you have created in your business and where you would invest to grow if you had greater resources

Have your books reviewed by an outside CPA

Ensure your data processing systems are updated and reflect best practices in your industry

Institutionalize your customers - they are owned by the company, not by the salesman

Institutionalize your vendors

Move whatever time and materials business and handshake business to contracts if possible

Provide price incentives to move short term contracts to longer term contracts

Once you have acknowledged the importance of your exit strategy and put these disciplines in place, you can be prepared for the triggers that either you create or that have been created in the marketplace. An important point to recognize is that your business sale date will not necessarily be your retirement date. More often than not the new owner will want your continued involvement for some time after the sale.

So let's say that there is a positive trigger like a big consolidation in your industry at very attractive multiples. You could sell now and stay on for one year or perhaps several more in a different or reduced role.  You could wind down from the rigors or day-to-day management and take on the role of CEO - Chief Evangelical Officer.