Goldilocks Status: Getting Everything “Just Right” to Sell Your Business

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Goldilocks Status: Getting Everything "Just Right" to Sell Your Business

Photo by Ioana Motoc

When we check in with business owners who have short to medium-term plans to sell, we might get a variation of, “call me back in three months.” We’re always happy to do that, but what we hate to see is nothing being done in that interval, be it three, six, or even nine months before we talk again. There are three things you want to “get right” before listing your business, and you should always be working on at least one of them, if not all three.

The Business Has to be Ready

Can your business survive your being gone? Have you tested this out by taking extended vacations out of the area? Do you have SOPs written or Loom-recorded in every aspect of your business? What about key employees? Are you certain about their willingness to stay long-term, because you have taken the time to get to know them well enough? Are you certain they are attached to the business, not just to you as a person?

Note: If the answer to any of these questions is no, you’ve got work to do to turn all of them into Yeses. A no answer to any of these means your business is not yet ready for sale.

The Owner Has to be Ready

There are some questions we often ask business owners to find out if they are “ready” to sell:

  1. If you were to celebrate a big event, who would you invite? How many of those people are related to your business?
  2. What do you do for fun?
  3. What would you do if you sold this?

There are no “correct” answers to these questions, but blank stares, particularly on questions 2 and 3, are troubling.

The first question is there to help illustrate how much the business is tied up with someone’s life. It helps remind them that when a sale happens, many of these “friends” may disappear, not for any malicious reason, but primarily because the main reason for the friendship is tied to operating the business.

The second and third questions look beyond the sale: what will you do with your time?

Note: As with the first set of questions, there isn’t a right answer, but an inability to answer these questions indicates that someone is not yet ready to close this chapter of his/her life. That’s something each person is going to have to tackle on his/her own.

Proceeds Have to Fund What is Next

For our clients who have been working hard in an industry or business for 30-40-50 years, “what’s next” is pretty easy: retirement. For younger sellers, “next” could mean a new business venture or even a job. What these sellers have in common is the need to match the proceeds of the sale to that next step.

Too often sellers primarily focus on the sale price of the business, but that number is only helpful in knowing that you are definitely not going to get to keep that number. You can start with settling your business debts, then your attorneys and adviser commissions, and then Uncle Sam is waiting to take his cut. What about if you pledged seller financing? Carve that out for now…it may be 2-3-5 years before you get to collect that. Earnout? Same thing. What you’re left with after all these deductions is “walk away” money.

Will that “walk away” money fund what’s next for you? If you wait until closing to consult your accountant or financial advisor for the answer to the question, the answer may be very unpleasant. In fact, it’s the main answer you need when you’re starting the whole process of selling a business.

Note: It’s not the end of the world if your business can’t generate your necessary “walk away” number right now. It’s important that we find out what the gap is and how we can bridge it.

Want to get your business to Goldilocks status? Give us a call so we can help with that process starting today.

Common Misperceptions in Business Sales

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Common Misperceptions in Business Sales

Photo By: Kaboompics.com

While we do sometimes deal with repeat buyers and sellers, most of our clients are either selling one business and will not sell another, or buying one business and will not buy another. That means we’re always revisiting common — and understandable — misconceptions from buyers and sellers. In this article, we’ll share some of the ones we hear most frequently.

Seller Side

“I heard I can get 2-3 times revenue for my business.”

We’re polite, so we don’t lead with, “Who told you that?” What we’re more likely to do is say that we have different valuation methods we can use to find out what your business is worth, but ultimately, the true decider is the marketplace, and we won’t know what it thinks until we list.

Answer: Your business is worth what the market is willing to pay.

“So, I can get all cash at closing, right?”

If you have a cash buyer, yes. However, many of our deals are done with the help of the SBA, and banks often ask for some kind of seller financing. Sometimes, you might have a portion of the sale subject to an earnout. Whatever the case may be, what’s more important is that you have a handle on the tax strategy you’re going to use for the liquidity event itself.

Answer: Possibly.

Buyer Side

“I’m going to have access to the seller for at least six months, right?”

Sellers are often out of the business within months, but in a few cases, a transition could stretch to a year or more. Buyers underestimate how much a company has been systematized and owner-proofed to be worth selling, so they often overestimate how much they need access to a seller post-sale.

Sometimes the seller becomes an employee of the buyer, working in some specialized part of the business, but this is rare.

Answer: You’re going to get him/her for at least 60 days, but you won’t need that access as much as you think you do.

“Do I need expertise in the industry?”

We’re never going to tell you that expertise is a bad thing. Sometimes a particular license or certification has to be obtained, which may require additional money or training. But often it’s not expertise in an industry that is required, but a passion to grow the business in general. Let’s be clear, if you don’t like being outdoors, buying a landscaping business is a bad idea. But don’t fall into the trap of needing to be “passionate” about the industry you’re buying into. What you’re looking for is an opportunity that’s exciting and fits your skills and situation.

Answer: No.

Both Buyers and Sellers

“So can we get this done in a couple of weeks?”

This is only slightly kidding. Let’s just say that buyers and sellers often have unreasonable expectations when it comes to how long it takes to close a deal. What we usually say around the office (because it’s true) is that an average deal can get done in three months from an accepted LOI,  start to finish.  We’ve seen deals close faster and sometimes take much longer. But what else is true is that there isn’t a shortage of qualified buyers. We have, thankfully, a ton of those here at Apex whose trust we have earned over the years. What we love, and what we’re always looking for, are qualified sellers. If you’re one of those, we’d love to look at your business and see if we can help.

Answer: Probably not.

What are some things you are thinking about that might be misperceptions? Give us a call so we can tell you.

Trust During Sale and Transition

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Trust During Sale and Transition

Photo by Alex Shute on Unsplash

Unlike many other transactions in life, a buyer and seller of a business need to establish trust with each other, as that trust will be called on even after the date of sale. If that trust doesn’t start during the due diligence period, a sale may even fall apart.

Contrast this with a real estate transaction, in which the buyers and sellers may never meet, even on the day of closing. They are represented by others and can close without meeting employees or learning processes.

Help in the Present

Many buyers may be owning and operating a business for the first time, so they will appreciate any kind of help they can get. Basic examples of easy connections a seller can make for a buyer:

  • A resource or service to get incorporated, obtain an EIN, etc.
  • Some business banks to consider, including a personal introduction to your own banker, if appropriate
  • Introductions to other peers and colleagues who you have leaned on for business advice and help who may also offer some helpful advice to the incoming owner

Help in the Future

While some business owners are happy to ride off into the sunset after the transition period, never to think about or worry about their former business again, the truth is that many business owners like to know how their former company (and employees) are doing. Many really appreciate the phone call, long beyond an agreed-to contractual transition time, of, “Hey, could I run an idea by you…”

The trust and relationship behind such a phone call underline a great key to success in a business transaction: trust.

We always say that buyers and sellers are building trust not just with each other, but with everyone involved in the transaction, creating an environment of everyone rowing in the right direction. This means that buyers are disclosing everything to the bank financing the deal. This means that sellers are not hiding bad inventory or employee challenges. It means that advisors are using the right kind of communication, be it text, email, or phone calls, to move the transaction forward in a positive manner, always implying cooperation on all sides.

Checklist of Trust

So, to review, sellers should keep the following in mind:

  • Share everything you can think of and even some things you might have forgotten about. Try to put yourself in the shoes of the buyer, taking into account what he/she knows about your industry and business in general and work from there.
  • Be realistic. There may have been some areas you didn’t develop when you were an owner that are opportunities for the buyer. Be moderate in your claims.
  • Communicate as quickly as you can. Nobody wants to be left waiting in any aspect of life, much less one of the most important transactions they can make. Try to get back to every request in a timely manner or ask for time you need (and deliver).

Buyers should keep the following in mind:

  • Ask questions. There is no such thing as a dumb question in life, and certainly not in buying a business. Our advisors are here to help you with every single question you might have (and some you didn’t know you had).
  • Disclose. Whether the bank is asking you for financial statements or the seller is asking you about your experience in the industry, always be transparent. There will be no benefit in hiding or withholding.
  • Get help. You’re not expected to do this on your own. Use the right suite of experts, be they attorneys, accountants, or mentors, to help you with things you don’t know. If you don’t know something, go back to the previous point: ask questions.

Looking forward to working in trust with an advisor to sell your business? Give us a call today.

Tell the Bank Everything (We Mean It!)

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Tell the Bank Everything (We Mean It!)

Photo by Expect Best from Pexels:

“The government can’t loan you money if you already owe the government money,” said Doug Hubler, President of Apex, on a recent podcast episode. What Doug said is part of what we want to cover today, which is full disclosure to your lender in the process of buying a business.

The Bank Is Your Partner

You may be the brains and labor behind this upcoming deal, but the bank is putting up a large part of the money, and as such, they need to know as much about you as possible to justify the loan. You have to remove the idea that the bank “works for you” as you might rightfully consider them when you’re in a regular consumer banking relationship. You are working for each other in a business banking relationship. They give you money, and you ensure that they get that money back, along with some interest.

What to Disclose

As part of the lending process you will sign paperwork attesting to “telling the truth” and not “willfully hiding” any items which may be detrimental to your application. Things you must disclose include:

  • Outstanding loans
  • Outstanding liens
  • Child support in arrears
  • Being party to a lawsuit
  • Declared bankruptcies (even if more than 7 or 10 years in the past)
  • Credit charge-offs (even if more than 10 years in the past)
  • DUI or other similar felonies

As part of their diligence process, the bank is going to find out about any of these if you didn’t disclose them. None of the items above would by themselves, if disclosed, be enough to stop a loan process. However, failure to disclose any of them may (and sometimes has) blown up a deal in progress.

All of the items listed above can be cured in some way before closing:

  • Loans and liens can be paid back or accounted for as part of the transaction
  • Child support can be brought current
  • Terms of the deal can account for the outcome of a lawsuit in relation to the business, if needed
  • Bankruptcies and credit charge-offs can be examined for their severity and distance in the past in relation to the present
  • DUIs and other similar felonies can be contextualized by personal statements along with attestations of character and a period of time (for example, you are unlikely to be approved for a loan if the DUI has happened during the course of the deal).

In a pre-Internet world it might have been reasonable to think that “nobody would find out” about something. But it’s not reasonable to think that way now, and it’s an immature way to approach a business deal, which requires everything to be in the open so everyone can walk away as winners.

Remember, we all have some kind of skeletons in our closets. It’s not the skeletons that are problems, it’s the non-disclosure of said skeletons that is the problem. A big enough problem that it could kill your deal.

Wondering if you have an incurable skeleton in your personal or professional closet? Let’s talk about it.

Little Things That Can Threaten a Business Deal

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We recently ran into a situation in which a business deal started to teeter on the brink of falling apart. This wasn’t because the buyer and seller didn’t get along (meetings always went well) or because there was a haggle about price (it was a full price offer) or even because lawyers were overstepping boundaries. Deal points were being pushed back in a way that started to create suspicion and the seller’s response was, “Well the buyers need to just trust us.” We let them know that wasn’t going to cut it.

Consultation Time

In the original deal the buyer had wanted twelve months of access to the seller by phone or email to ask questions. Sometimes things come up later that aren’t covered in transition, and a buyer wants access to institutional knowledge and reflection. The seller revised this down to six months. This in itself was not a problem, as six months is still a lot of time, but as you’ll come to see, when added to other items, it started to contribute to a narrative of suspicion.

Note: very often, despite having negotiated transition time, buyers rarely use all agreed-upon consultations with the seller post-sale. By offering a generous consultation window, in some cases paid, sellers can give added confidence to buyers.

Training

The original deal had specified four weeks of training. The seller pushed back, saying he only wanted to do “20 hours a week, because that’s all I work anyway.” This is a fundamental mistake of the seller. It’s a mistake in attitude, treating a transition to a new owner as “just another week, which shouldn’t take any more time than any other week, and I better not be bothered.” It’s also a mistake in reality: just because the seller was only working 20 hours a week at the time of the sale doesn’t mean the buyer will be at the beginning of his business journey and will be putting in many more hours to learn the business.

Note: be ready to give the new owner all the support he/she needs. This is a big change for you as the seller, but realize how much bigger of a change it is for the buyer, who has to learn what you know like the back of your hand.

Noncompete

The original deal offered a five year/50 mile noncompete clause. The seller was trying to push back to 2 years/25 miles. This, more than anything else, was a problem for the buyer, and it would have led to problems with the bank if we hadn’t quashed it. If you’re looking at a ten-year note on an SBA loan, but the seller is implying he would like to be free to compete with you within a two-year time, banks (and buyers) aren’t going to be thrilled!

What was even more strange was that the reason for the sale was given as “retirement” by the seller…so why was he asking for the noncompete to be drawn down?

Note: if you want the freedom to compete again and start a business in the same category, be advised that this has every chance to sink a deal.

Ultimately, we got the deal across the line largely due to direct and honest communication with everyone involved. We spelled out understandable fears and we pushed back when modifications were unreasonable.

If you’re considering selling your business, you should be thinking about some of these issues. If you’d like to talk through them, give us a call.

Advisers Buy Businesses, Too

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Many of our team here at Apex came from business owner backgrounds. It’s part of what draws us to this work. We can stay, in a way, involved with the challenges and struggles of entrepreneurs without having the onus and accountability for running the businesses day-to-day.

But that doesn’t mean we aren’t occasionally tempted (or sometimes actively looking for businesses). How does it work when an adviser attempts to buy a business?

No Special Treatment

We don’t get any special deals. Our main advantage is that we get eyes on the business before anyone else does. But that means other advisors are potential “competitors” for such deals and most likely want to put their own buyers on the deal. But we are still invested in the best deal for our clients. So even if we were to love a company and put an offer in on it before it’s even listed on the market, it would be unprofessional and unethical for us to then pressure a seller to take our offer. A business adviser’s offer has to stand on its own beside all the other ones a seller is considering.

Here at Apex if an advisor does want to put in an offer on a business he has to get the President’s signoff first, for various reasons, and certain disclosures would need to be made to the seller that the person making the offer is an Apex Advisor.

Reminder: offers aren’t only about offering full-price, there are also the questions of down payment, earnouts, and seller financing.

Operating Partner Needed

Unless they’re planning to exit the business adviser space (and sometimes that happens), an adviser who buys a business is going to need to install an operating partner of some kind immediately. There are cases in which an adviser forms an investment group of sorts in which various individuals add value or contribute financially. Still, as attractive as any business would be, it’s rare that an established adviser leaves the field of business advising to become a full-time business owner again.

We’re here to help. Give us a call today.

When You’re Ready to Sell, But You’re Business Isn’t

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Back in 2019 someone came into our offices wanting to sell. We did an informal valuation and told him we thought the business could get $575,000 on the market. He demurred, stating he needed $1M. We told him what he needed to do, which included working less in the business and more on the business. If he did, we could attain something closer to that value in a few years.

He kept checking in with us each year, all the while implementing the advice we gave him. We kept giving him better numbers as we observed those changes. Sure enough, four years later, we listed the business for $950,000 (and it sold).

We wish we could say how that always goes, but more often than not what happens is that someone comes in to tell us, “I need to sell now.” We walk through numbers and explain that the business is not ready to sell at the moment, at least not for the desired price, and that some time, from as short as nine months to as long as a few years, will be needed to get the business ready to sell. You being ready to sell doesn’t carry over to the business. The business has to be ready too.

When we tell this to people in this situation, they can get upset. But it’s not personal. In fact, we’d love to take a listing because there’s a chance for us to work and get paid. But we have to turn down far more listings than we accept. Accepting a listing means we believe:

  • The business will sell. Brokers spend hundreds of hours on each successful transaction (and sometimes on the unsuccessful ones too). We’re not interested in taking on a listing if we don’t think the market is interested.
  • Our buyers would be interested. Each of our brokers maintains a curated list of qualified buyers and we work as a team here so that all of those buyers find out when one of our brokers lists a business. We’re always learning new things and selling new kinds of businesses and while some buyers are only interested in a specific type of business or industry, many of them are interested in any solid business.
  • The deal will be bankable. The majority of our clients at Apex are people who are using SBA financing to close the deal. There are clear criteria for SBA loans, (or any loan), including clean financials and current tax returns.

One more thing to keep in mind. What you may be willing to do is not necessarily what a buyer would be willing to do. Consider the seller phrase (which we have heard before), “I make $150k a year and I work 65 hours a week.”

Would a buyer be willing to work 65 hours a week?

Would someone who isn’t a subject matter expert or familiar with the industry be able to get away with only 65 hours a week?

How many ready and willing buyers have on their wish list, “Must work at least 65 hours a week when I buy a business.”?

You may be ready to sell, for various reasons. But make sure you have a business that’s ready to sell. And if it isn’t, have the humility to dig in one last time to get it ready so you can cash out on all your hard work.

Not sure what your business is even worth? Give us a call and let’s figure it out together.

Elections Are Over, a New Year Beckons

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A topic we frequently come back to here and in our podcasts is timing. While people may always come up with reasons why they might want to postpone buying or selling a business, our experience as brokers is that the market never sleeps.

A particularly fascinating time of the year is now, as we head into that period of Christmas and New Year’s, in which people have a bit more free time and may be casually looking at listings on places like BizBuySell, then giving us a call to see what we think (or to find out if we have similar listings). Why is that?

New Year, New You

There’s nothing like the end of another year to remind people of mortality and the shortness of life. There’s a scene in Michael Mann’s classic Heat in which Robert DeNiro’s character is asked if he’s “doing what he wants to be doing.” He smiles and answers no, but that he will be doing that soon. Something about the end of a year can galvanize us into action the way that no other time of the year can. If you’re unhappy with what you’re doing in life, the promise of a new year and a new path is tantalizing.

Slower Pace

While there is no doubt a lot of frantic preparation for the holiday season, be it gift-buying or food preparation, or cleaning for the arrival of relatives, expectations of output in corporate America are generally lowered around this time of year, giving people more free time to think and contemplate.

Buyers and Sellers are Looking for Each Other

The phrase “now isn’t the right time” is definitely not true of the end of the year. Buyers are looking for deals and there are sellers looking to offer those deals. As we mentioned, there’s a special power at the end of a calendar year that can help push both buyers and sellers to the finish line.

Election Excuses End

For buyers and sellers who were “waiting” for an election result, that result is now weeks old. While the incoming government may still be holding cards close to its chest, there’s nothing like the general uncertainty that the population had, business-buying or otherwise, prior to the election. This is another converging reason for this being a great time of year for deals.

Time with Family

We always say that there are no deals to be had if family are not on board. This is a time of year when many people have more time with their family and more time to have some of the heart-to-heart conversations about life in the present and plans for the future. There are a number of deals we’ve done here over the years that began as a thread of a holiday conversation between relatives and friends.

Are you feeling the pull of this time of year? We can’t guarantee that there will be the right deal for you right away, but we’d love to take a look. Give us a call.

6 Ways Sellers Can Fool Buyers

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Here at Apex we pride ourselves on giving ethical presentations of the businesses we represent. Unfortunately, there are some individuals who try to sell a business without holding themselves to our standards. Here are some common ways they can hide crucial information from buyers.

Misleading Inventory

There are a few ways inventory can be misleading, starting with basic human error. Bad systems and careless employees can create inaccurate data. But more frequently, we run into inventory that includes obsolete or worthless materials marked at their purchase price. Just as bad as obsolete inventory is inventory that may be expiring or earmarked for a client prior to a sale closing (and is not otherwise marked as “work in progress”).

Inventory is one of the basic measures of value in a business, so if it’s misrepresented, there are implications for valuation and the chance for a deal to get sidelined or derailed.

Personnel/Legal Issues

Not everyone’s labor problems are as public as say, Boeing’s. Most Main Street businesses that are prepared to sell are run by competent staff. But just because staff are competent doesn’t mean that they will stay with a new owner. Oftentimes even the nicest new owners can’t change the feeling that “it’s time to move on” for employees (and customers) so it’s important to make sure that, as much as can be estimated within the bounds of confidentiality, any personnel issues are fully disclosed. The same goes for any legal issues. On more than one occasion a seller has pledged to deal with an ongoing legal issue on his/her own dime as part of the negotiations pending a sale. That sort of honesty and willingness to compromise helps to get deals over the line.

New Technology/Competition

Often buyers will be entering an industry/market for the first time by buying a business. That means sellers need to be their eyes and ears for the state of the industry: what technology is coming up (or could come up) and what competition is present or could come soon? If you have grown complacent in past years, just staying in your business lane, it’s important to do some research into these subjects so that even if you miss something, it won’t be for lack of diligence on your part.

Unclear Financials

While clean books are a gospel we preach, when we say “unclear financials” we are less referring to the types that are incomplete or poorly categorized and more the ones that have dramatic changes with no context. Examples include:

  • Large, unexpected expenditures
  • Major changes to employee compensation
  • Uneven expenses (or revenues)
  • A significant amount of “miscellaneous” expenditures
  • As mentioned above, inventory swings

The goal with financials shouldn’t ever be: “Hey, you’re the buyer; you figure it out.” Sellers should give as much context and explanation for financials as possible. No buyer yet has ever complained about receiving “too much information” about financial statements from a business.

Are you worried about getting fooled by some of these techniques? Let us help you in the process. Give us a call today.

Classic Seller Blunders to Avoid

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Classic Seller Blunders to AvoidWhile every deal is different in its own way, sellers seem to make the same kind of blunders that can either make their business unsellable or tank a sale in progress. We offer these examples as a public service announcement to those who are serious about selling a business. To those who are buying a business, these are the sorts of situations solid due diligence (and a serious broker) will uncover.

Excessive Personal Expenses

A certain amount of personal expenses run through the business is something we are used to seeing. But in most cases, it might be season tickets to the symphony or some sports events. We generally like to see less than $10,000 of these types of expenses. Where we start to get into trouble is when we see $50k, $100k, $200k in personal expenses run through the business. That’s when we get into “company boats,” “company lakehouses,” “company home remodelings” and “company plastic surgery.” Obviously, there’s nothing “company” about those expenses: they were being run through the business to evade taxes. The morality of that is a topic for another time. What matters for business transactions is that banks won’t go near businesses that operate like that.

That doesn’t mean they would never go near such businesses. It’s just that all those expenses would have to be properly categorized and live outside the business for a number of years so that your business would look the way a bank wants it to look: clean.

Not Filing Taxes

What goes hand-in-hand with not running a lot of personal expenses through the business is making sure you are timely with taxes. We had a situation one time in which a bank was validating tax returns (as they always do before a deal closes) and we found out that the seller had never filed his taxes. He had filled them out and signed them…those were the copies he had given to us. It turns out he was then just putting those in a file in his desk somewhere. He managed to rectify things with the IRS before the deal closed precisely because there wasn’t going to be a deal to close if things were not buttoned up with the IRS. We don’t know what it ended up costing him to “save” in this way but it’s not likely to be a technique he’ll repeat in a future business.

Commingling Businesses

Some entrepreneurs have multiple businesses that run in related ways to each other. And that’s great. What’s not great is when funds get commingled and improperly reported, which makes it very difficult to see which business has which kind of margin so as to help determine a proper valuation. A best practice in life and in business is to keep separate things separate. It’ll be less confusing to everyone and, as noted above, makes a deal more likely to be bank-financed.

Cash Hoarding

Believe it or not, some sellers stop paying their bills, including their rent, in the final 30-60 days of owning the business, thinking that they can just stick the tab onto the buyer. These sorts of tricks almost always get noticed and can truly threaten the closing of a deal.

Failing to Consult a Lawyer

For some reason or another some first-time sellers, in a transaction that is likely going to net them 6-7 figures, will ask, “Do I really need a lawyer for this?” as they slide over something they printed on LegalZoom the night before.

Firstly, we have an Offer to Purchase, a signature service that is precisely geared towards covering you initially without hitting you too hard financially.

Secondly, is this really where you want to skimp? The legal paperwork covering one of the most significant financial transactions of your life?

Finally, consulting a lawyer will also help get the ball rolling, if it hasn’t been rolling already, on your financial planning regarding the tax events that will accrue as a result of the sale. This is not a part of business life that you want to DIY.

Do you want to avoid these blunders? We’re here to help. Give us a call today.