Case Study #20: When You Had No Plans to Sell

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sell a businessJim McManaman owned Solution One, an accounting and tax firm that handled business and personal accounts.  

At its peak, he had six employees and had just added a fee-only financial planning practice to the company.

The company was very much a “main street” business, and for Jim, apart from tax season, it was a lifestyle business as well.

This was mostly because he had read The E-Myth early on and ensured that his entire company was systematized, even down to having an internal wiki that had hundreds of pages.  

Out of the Blue

Jim had no plans to sell.  One day a letter came to him out of the blue from a competitor in town with a soft offer to buy his firm.  Jim didn’t think this person was a good cultural fit for his clients, so he unhesitatingly turned it down.

But a few months after that, he got a second letter, this time from someone who he considered a friendly colleague more than a competitor, and he took a meeting with her.

He had a productive first meeting, but spent most of the time politely thanking her for the interest, but reiterated that he had no intention of selling.  

And yet, as it often does, even the thought had pushed forward one domino. Within a couple weeks, he started a series of meetings with her that lasted six months, with only a delay for a few weeks during the peak of tax season.  

At the end of the day, the potential buyer didn’t have the finances put together to really make the deal happen, and so the deal collapsed.

Ball was already rolling

Jim wanted to take the momentum from that deal and move it in another direction. Soon, he became the hunter instead of the hunted.  

He reached out to another respected colleague and let him know he was interested in selling. There was a clear meeting of the minds.  They started the process in midsummer and closed on December 31 of that year.

The buyer was very slow and methodical. Jim is an A-type personality and at times he mistook their difference in styles for a lack of seriousness about the deal.  

But they got their communication style down. The buyer was so impressed with how Jim’s operation worked that he vowed he wouldn’t change a thing, from the name to any of the employees or operations. The buyer even had the humility to say he would be taking some of the best practices and applying them to the two offices he had.

The Deal

Jim worked off a 1.25X multiple on gross revenue. This was something he saw in the two previous offers and the buyer himself had used that approach in a previous acquisition.  

It’s a number that’s often used in regards to accounting practices. However, sometimes those sales are subject to earnouts and financing, but Jim held firm. If he had a good business, he wanted to get paid. He ended up getting an all-cash upfront deal, with no financing.

Key Lessons

Jim went through six months with one buyer only to find out at the end she didn’t have the funds to even be having the discussion in the first place.  

One of the things we ensure at APEX is that you’re not dealing with a potential buyer who doesn’t have what it takes to buy your business. We do our diligence so you don’t have to.

Keep in mind that whatever your personality is, your correspondent – be he/she the buyer or seller, may not have the same personality.  

A broker can stand in the gap and help ease those communications so that a text or email doesn’t get misinterpreted and blow up a deal for absolutely no reason whatsoever.  It’s happened, believe us. Lean on our experience to help you manage the communication flow.

Finally, remember that it’s important to manage how you tell your employees and customers that a sale is happening.  

Ironically, Jim mentioned that months later some clients still thought he was involved in the business because it was running how he’d always run it…in a lifestyle manner.  

Why You Should Buy Instead of Build

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buy a businessThere is an inordinate level of romance associated with building a business from scratch.  Shows like Shark Tank and The Profit only exacerbate the issue.  

Though such shows do show the struggles that these business owners face, the very appearance on television creates aspiration:

“I want to do that too.”  

First-time entrepreneurs looking to get into business see building from scratch as a great option. Seasoned entrepreneurs know better. They know it’s always easier (and often better) to buy than to build.

Why make it hard?

When you start from scratch, you have to build a customer base, market a new business (with a brand and logo you’ll need to come up with), hire employees, and oh yes, generate cash flow during the runway (the financial amount you can survive on during startup) you have to build the company.  Not so with an established business.

They have customers, they have employees, they have procedures, marketing and a brand in place. And yes, there’s cash flow from Day One. It’s even easier to secure financing from a bank, which views an established business as a much safer bet than an untried startup – even more so if the owner has never run a business before.

Lots of choices

You think you know what kind of business you’re interested in, but the truth is, you’ve often not even scratched the surface beyond some daydreaming.  Not only are there businesses out there you’ve never even considered existed, but they’re often for sale – and sometimes, in your price range.

If there’s a type of business that you have your heart set on and it’s not listed, we as brokers can go in as a trusted intermediary to see if maybe there’s an openness to selling.  

Rather than confine yourself to one specific idea that has to work, you can examine dozens of possibilities and see what really ticks the boxes for you.

Take your time

Buying a business isn’t something that most people do overnight.  It’s a process that begins with financial qualification – putting together your assets and seeing what you can afford.

It then continues on with meetings with businesses and owners who truly interest you. And it culminates in an exciting ending: you getting the keys to a business that already works!  

Your concern isn’t keeping the lights on, but deciding what to do next.  

Will you keep it as is?

Convert it to a lifestyle business?

Scale it to the moon?  

A bought business gives you that luxury. A business started from scratch never does.  The failure rate among started-from-scratch businesses compared to bought businesses isn’t an apples-to-apples comparison. Heck, it’s not even a galaxy-to-galaxy comparison.

Are you thinking about becoming a business owner?  Let us help you as we have helped so many before you.  Give us a call today!

Book Club #18: Before the Exit, by Dan Andrews

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exitThere are some books out there that can tell you the financial side of how people exited their businesses, but there’s not too much literature on the emotional process of selling.  

Bo Burlingham often refers to a sale as just another “phase” of the business. Dan Andrews and his business partner experienced a seven-figure exit some years ago.

Rather than feeling content, they felt something unresolved, and this book, Before the Exit, Thought Exercises for Entrepreneurs, is an extended reflection that resolved those thoughts.

The book is divided into two parts.  The second part is the one we’re used to – the origin story of how someone went from wage slave to plucky business owner.  But that story takes a turn as Dan honestly explains mistakes they made along the way to an exit.

The first part is a fascinating set of exercises. They’re meant to push an owner who is either currently considering a sale or who hasn’t thoughtfully considered an exit at all.  

The goal isn’t to tell you all the exercises (as the book is under 100 pages and we want you to discover them for yourselves) but to get you started thinking about the bigger question of why and not just how when it comes to an exit. Here are two of them:

Lifestyle Ladder

Dan discusses (in a Dave Ramsey sort of way) how an entrepreneur progresses forward in income.  At first, it’s simply a matter of getting out of debt to zero. Then there’s a certain amount of income in the bank – say $20-40k liquid.  

It’s the stage at which money is less of a worry, but you can still be a prisoner of your thinking when you were at a lower stage of the lifestyle ladder and severely deplete this cushion.  

Further up the ladder, you have 10 times that liquidity plus an income-producing asset that means you don’t have to touch the liquidity. At each stage Dan continues to probe the reader…What is it that you want? Will this business be a vehicle to take you there? Why or why not?

So many people just have their foot on the gas for so long that they seldom stop to think what it’s all for and what real numbers interest them when it comes to lifestyle or an exit.

Boredom?  Or incompetence?

Seth Godin famously advised a woman who asked how to grow her $10M business to $100M: “Find someone to run your business, go and apprentice under someone who runs a $100M business for two years, then come back and do it yourself.”  

We’re all familiar with the idea that “what got you here won’t get you there” but sometimes we’re masking our own inadequacies.

What’s going to take you to the next level?  

Will it require you to do some things or learn some practices you don’t know?  

Will you need to bring in some outside help?

Maybe you’ll need to reinvest?

Sometimes these possibilities don’t occur to the business owner who is tired of the fight and looking for the door.  

But if he/she is willing to do the work of thinking it through, there could be an even more valuable exit after more work has been put in. It all depends on what you want long-term and has to contextualize the pain of the short term.

As noted above, the book is a lonely one in a space not often discussed. The ideas and challenges it offers in such a short read make it very much worth your time.

Is It Time to Sell?

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is it time to sellIn a previous article, we discussed various signs that it’s the right time to sell your company.  

What so many people see as ultimately mostly a financial transaction is possibly going to be one of the most emotional things they ever experience.  

So, even clicking through to read an article with such a title as “Is it time to sell?” means you’re contemplating it in the near future, or you want to inform yourself on future possibilities.

Whatever the reason, there are three things we want you to think about.

Clearly articulate your why

“Why do you want to sell?”  You may think this is a question only your family and friends will pose to you, but we promise that every single potential buyer will ask this question, particularly if your business is doing well.  

Often “I’m tired” or “It’s time” is plenty good enough, but that needs to be framed within a position of growth and optimism.  Buyers don’t often want something that promises a flatline future.

Whatever your why is, make sure you consider how it sounds to someone who wants to buy your business.  If you don’t like how your reason sounds, that’s a good opportunity to step back even further to get a better perspective.

Sometimes you need to look at the really big picture to appreciate the details.

Spring Clean

We’ll be honest.  We sometimes see complete disasters when it comes to financials and taxes.  Taxes haven’t been paid for years and the financials wouldn’t even have passed the smell test at Enron. Don’t wait for an imminent sale to get your business house in order.  

A potential buyer is often scared off a “fixer-upper” when it comes to a business, and the very first thing we will ask you when considering listing your business is for the last 3-5 years of financial statements and tax filings.  

Even if you don’t end up selling your business, you should want that feeling that comes with any spring cleaning…the relief that it’s done and wondering why you didn’t do it sooner.

Have a conversation

Talk with your family and trusted friends and confidantes.  Figure out what’s next for you.

We often see business owners who, after the sale, simply wander figuratively or literally, being cut off from what gave them a purpose for so many years.  

By taking that time to think about what’s next, you can go from a passive seller who is ready to move on to an active seller who is moving (or running!) towards what’s next.

That will give a potential deal momentum, and also fuel the narrative for a potential buyer that you’re looking forward to what’s next.

Of course, we welcome conversations with us as well!  With centuries (yes, literally) of experience in our office, we’ve got a broker who will suit your needs and help you through this important next phase in your business and stage in your life. Give us a call.