On a good day the cloud of misinformation surrounding the process of selling your business is irritating. On a bad day it is downright infuriating.
Over the past few months I’ve been helping a family member prepare his business for an eventual sale. The first exercise we went through was analyzing the P&L and recasting it in the way that a buyer would. I explained how cash flow affects valuation, helped him understand the cash flow of his business, and gave him a few housekeeping items for his accountant (not a CPA) to take care of.
A few weeks later I got a giddy Email about how said accountant had not only cleaned up the books as per my instructions, but had also recommended adding owner’s draws to our cash flow calculation — a move that would immediately add $400,000 to the value of the business. Wasn’t this great news?
Bam! Just like that, the expectation I’d worked so hard to set with a business owner went up in smoke. (You can’t add owner’s draws back to cash flow because they’re on the Balance Sheet.)
A good M&A advisor will spend hours educating business owners about what to expect at every phase of the selling process; a difficult job made harder by the fact that misinformation about selling a business comes from every direction — from preconceived notions held by business owners themselves, to bum advice from well-meaning peers and advisors.
Following are four stubborn myths about selling your business:
Myth #1: My current advisors will help me.
First let me say that your current advisors — primarily your CPA and attorney — may be great at what they do. A good advisor has probably saved your bacon on more than one occasion over the years. You may even credit them for some of your success as a business owner.
The issue isn’t whether or not your advisors are good at what they do. The question is whether “what they do” is deals. Lots and lots of deals.
Chances are your attorney and CPA are very competent, but they don’t do much in the way of M&A transactions. If your advisor doesn’t list M&A as a specialty area then they probably only dabble in it from time to time as the need arises. Maybe they’re good at it, maybe they’re not. The problem is, you won’t know until it’s too late.
To add a wrinkle to the problem, you probably have a great relationship with your current advisors. You may even be friends outside of business: You’re neighbors, your kids attend the same school, you go on vacations together. The last thing you want to do is hurt their feelings, or infer that you don’t trust them or their abilities.
“I have to live next to this guy!” one client blurted in frustration.
The reality is that selling your business is a one-shot deal. A transaction of this magnitude and complexity requires specialists. Good advisors will admit that they are not the man/woman for the job and refer you to M&A specialists, similar to the way a family physician might send you to a specialist for cardiac care. Whether it’s your life or your life’s work, don’t ask a generalist to do the work of a trained specialist: The result could range from disappointing to disastrous.
Reality: Selling a business requires specialized expertise in every area of the M&A process. Hire the experts.
Myth #2: My business is different.
No, I’m not calling your baby ugly. On the contrary. In my experience every business is unique in some way. In fact, the endless variety is one of the things I love most about being an M&A advisor. Businesses are a bit like snowflakes; no two are exactly alike.
This myth has more to do with thinking that we are the exception, and that the rules don’t apply to us and our business. Much of this can be explained by behavioral finance and our own cognitive biases. Simply put, it’s human nature. One example is the endowment effect — the notion that what we own is worth more than its market value simply because we own it.
The my-business-is-different myth is perpetuated every time another story is published about a VC-backed tech startup with no revenue selling to Facebook for a bazillion dollars. Do outliers like this exist? Sure they do. They’re also referred to as “unicorns” for a reason: They are incredibly rare. (Not only do they defy the rules, they seem to defy logic.)
Most middle market M&A takes place within a reasonable range of variables when it comes to business valuation, financing structure and deal terms. If you’re able to do well within these ranges, or maybe even beat the high end, then great! Just don’t expect that these norms don’t apply to you and your business. Unless you’re the next Instagram, they do.
Reality: Your business is not an outlier. Understand the rules of the game so you can set realistic expectations and play well.
Myth #3: Selling is about getting what I want.
It’s easy to think that you’re in the driver’s seat when you’re selling your business. You’re not going to walk away from a lifetime of work unless someone makes it worth your while. A buyer can give you what you want or hit the bricks, right?
Wrong. Unless what you want is to run your business indefinitely.
If you plan to approach negotiations with a take-it-or-leave-it attitude, then you might as well scrap the idea of selling your business. Buyers and their deal teams are way too smart and won’t waste time with “unreasonable” sellers who don’t acknowledge that M&A is a two-way street.
The essence of any successful sale is understanding what the customer wants. Selling a business is no different.
This is not to say that your goals for a sale aren’t relevant. They most certainly are. In fact, you’ll want to work with an M&A advisor to identify your primary goals for a sale before going to market, and articulate them early to interested buyers.
The buyer will also have clear goals for an acquisition. And while you are the one with something to sell, you’ll have a hard time closing a transaction unless you understand and acknowledge the buyer’s point of view. As a veteran M&A advisor once told me, “Deals get done when both sides are equally unhappy.”
Reality: You will not get everything you want in a deal, and neither will the buyer. Be prepared to find common ground.
Myth #4: I’ll be able to sell when I’m ready.
This myth is perhaps the most insidious on the list. It leaves behind a trail of missed opportunities, resulting in personal and financial disappointment.
Myth #4 is perpetuated by the notion that selling a business is like selling a house. You simply find someone to help you sell it when you’re ready, they find a buyer and you’re out.
The reality is that timing the sale of your business can involve much more than you deciding you’re ready. You also need to consider your business, your industry and the market:
- Is your business ready to sell? It may take months or even years of preparation to either make your business sellable, or make it sellable at a valuation you’re happy with.
- Is it a good time to sell in your industry? If you own a business in the oil and gas industry you may be ready to sell today. Unfortunately, plummeting oil prices and the state of your industry are making that hard right now.
- Is the economic climate good for selling a business? There were a number of business owners who were ready to sell in 2009. Unfortunately, the economy crashed in 2008 and wasn’t willing to cooperate again until late 2012.
If your exit strategy is to sell your business one day then a number of pieces will need to be in place for that to happen. Don’t wait until you’re ready to get started.
Reality: Successfully selling your business can take years of preparation, as well as the right timing for you, your business, your industry and the economy. It’s not like selling a house.
If you’re thinking about selling your business, let us help you get started today.