Selling Your Business How to Get Ready and What to Expect

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At some point, every business owner considers selling their company. Most that don’t go out of business are sold at some time in their history. But between considering it and selling are a host of issues, surprises, conundrums, and general confusions for the business owner who has never been through the process before. I have spoken with or heard of sellers who are minimizing the chances of making a good deal by

·         Requiring that the buyer make an offer before seeing the seller’s financial statements
·         Stating prices that are so unrealistic as to make any further discussion futile
·         Hoping to close a sale without using appropriate professional advisors.
 
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
 
Get Real
 
It’s as predictable as the sun coming up in the morning. The owner believes in his business. He believes in it so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. 
A sophisticated buyer won’t ignore your projections, but he will discount them very heavily. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. In determining his maximum purchase price, he will value your business in ways that are standard for valuing companies in this or similar industries.
 
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
 
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
 
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done, and you may need help to do it, you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
 
This knowledge is a powerful negotiating tool. Make sure you have it.
 
Get A Goal
 
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like. You can be successful in your negotiations if you know specifically what you want to accomplish and why.
 
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
 
Get Ready
 
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes, based on the kind of valuation and goal setting described above, that her best long term strategy is a sale of the business.
 
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals. You may be better positioned to negotiate if the buyer comes to you. 
 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
 
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
 
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
You can’t put your best foot forward if it’s stuck in the mud.
 
Get Agreement
 
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal before the negotiations begin. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
 
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. At the very least, make sure they have good information about what is going on as negotiations reach their final stages.   They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
 
Get Help
 
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
 
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
 
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
 
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
 
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kind of issues.
 
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
 
The same is true of the other professionals who may work with you; your financial advisor, tax accountant, business valuation advisor and possibly others. Get help. Do it right. You may only get one chance.

 

 

SIA 1996; It’s Just Business

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Business. It was all business.

 
Well, maybe not quite all. The ladies and gentlemen at Mervin Manufacturing were dressed in all white outfits (they claimed not to be angels) and Mike Olsen was shooting money out of a cannon at irregular intervals.   But the snowboard side of this year’s SIA show in Las Vegas showed that the industry is maturing. There were the usual crowds and noise and excitement. But there was also, especially among the larger companies coming to dominate the industry, a more subdued sense of purpose and focus.
 
They weren’t there to have fun; they were in Vegas to do business. 
 
You felt it as soon as you saw the booths. Many were the size of my house, except my house doesn’t have a second story . Now I know why Morrow did a public offering. To pay for their booth.
 
Larger, sleeker, cleaner, sophisticated, with more controlled access and private rooms for meetings and order writing. Less beer being consumed during show hours. No companies thrown out for use of controlled substances. To put it succinctly, snowboard industry leaders had booths that looked, well, like ski company booths; except they were busy.
 
This was the year where it seemed that the ten or so companies that control 70 plus percent of the US snowboard business heaved a collective sigh of relief. They knew snowboarding was here to stay. They knew they were going to have a prominent part in it. They realized that the small, undercapitalized companies not being run like businesses would disappear or, at worst, be like fleas on a dog; occasional and momentary distractions.
 
Their focus was on taking market share before the competitive situation solidified and establishing their positions against the other large players.
 
Their tools were complete product lines, payment terms, discounts, pricing, reliable delivery and customer service coupled with marketing and promotional programs only they could afford. Retailers, nervous after late deliveries, poor and/or late snow in much of the US, and left over inventory didn’t have to have their arms twisted-much. Their interests, and those of the Burton/Sims/Ride/Morrow/Mervin snowboard juggernaut generally coincided.
 
Now under these circumstances, you might expect that the size of the show would have stabilized or (be still my heart) even declined a little. Nope. Booths spilled out into the lobby and took over the meeting rooms on the second floor. I don’t know how much of the growth was the result of companies taking more square meters, but I’d estimate there were a couple of dozen new snowboard companies. Or at least people with boards in booths hoping to become companies. The directory lists about 300 snowboard brands in total.
 
My conversations with them tended to be the same as with other new companies last year. They had limited capital and product lines, no competitive strategy, and couldn’t explain how they were going to differentiate themselves. If I hear “We’re closer to the market than our competition” one more time, I’ll shoot myself (I shouldn’t say that. I’ll be dead at the next trade show.). I didn’t have the perception that these companies were writing any significant orders, though of course you can’t expect anybody at the show to say “We’re doomed” when you ask them how it’s going.
 
There didn’t seem to be much change in board design or construction. What I did notice was the size of the line of some of the players. Between the Ride, Mercury, Liquid and 5150 brands, Ride, if I counted right, had 84 boards. Let’s see a sales rep put all those in his van. Graphics were simpler and colors varied but muted. Yellow seemed popular. As companies go mainstream, the goal of graphics seems to be not offending anybody.
 
Traditional bindings offered incremental improvements. The hot product had to be the step in bindings. In addition to K2’s Clicker, Switch and Device, Wave Rave, Blax and Marker/DNR had models to sell. Burton didn’t have one, but was taking orders anyway. That’s market power.
 
Over 300 companies were listed in the show directory as offering snowboarding apparel. The statistics I’ve seen indicate that Burton and Columbia by themselves account for 50 percent of sales in the US, making it pretty clear that many of these companies have their work cut out for them if they are going to succeed.
 
One thing I didn’t see at the show was the usual number of representatives from Japanese companies frantically looking for new snowboard product lines. This seems consistent with current conventional wisdom about oversupply and general competitive conditions in Japan. As discussed below, it has critical implications for the viability of a large number of US snowboard hard and soft good companies.
 
Essentially, what happened was that companies were pushed down the feeding chain. Larger companies tried to require bigger commitments from retailers, pushing out second tier brands. These brands sold to stores they had not previously done business with to try and maintain their volume. The smaller companies were pushed out of these stores, sometimes leaving them with no place to go.   
 
What was seen at the show has been confirmed in the six weeks or so since it ended. I’ve had calls from perhaps half a dozen smaller apparel companies who did not write the anticipated orders at the shows, and who’s Japanese orders have been significantly reduced or are not yet received. At least one larger apparel company has picked up an additional distributor in Japan because of the reduction in orders from its existing distributor. Where orders have been placed, there’s increasing reluctance to provide the historically favorable financing terms of 50% down and 50% sight letter of credit.
 
In the US hard goods reps for other than the major companies are having a hard time getting orders, and personal relationships appear to be the key factor in determining their success. 
 
Retailers are cautious in their ordering. Often they are already committed to the major suppliers. In addition, some have more stock than anticipated left from last year.
 
A new factor seems to be retailers perception of product availability. Historically, companies produced only what they could sell in the preseason, and retailers were confronted with an inability to get reorders. Late season availability was not a problem last year. Late deliveries and poor snow conditions in much of the country meant retailers were getting called by snowboard companies with product to sell at attractive prices. Combined with the increased availability of quality domestic manufacturing, retailers seem comfortable in holding back some of their open to buy for later in the year.
 
An industry consolidation does not start with a bang at a particular moment in time. However, the SIA show this year made is absolutely clear that the long awaited consolidation isn’t just starting. It’s in full swing.