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Should You Be Selling Your Company…Now?
The answer to the question asked in the title is, "It all depends!" There are all sorts of studies, surveys and the like suggesting that as more and more "baby-boomers" reach retirement age, the market will be flooded with companies for sale. The consensus is that with these privately-held company owners reaching and nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.
While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now – and some reasons that may compel you to hold off. One good reason for any owner to sell "now" is that it just may be time to "smell the roses," as they say. After running the business for so many years, "burn-out" is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don't make the effort to replace them. Or, you don't make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It's too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.
On the flip side, it is also easy to convince yourself that business is down a bit this year, maybe due to the current economy or recent legislation, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be a good idea. Thirty-five percent of business owners, in one survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value. Unfortunately, no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that "fire-in-the-belly" you once had, so the business may slide even further.
You could also point your finger to the tightening of credit and ask, "How is a buyer going to finance the business?" Despite very low interest rates, borrowing money is now more difficult.
There is an old saying that the time to plan your exit strategy is the day you start running the business. Business owners can't outgrow interest rates, legislative changes or aging. The time to sell is when you are ready to sell. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, call a professional intermediary.
The Confidentiality Agreement
When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don't want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.
The following are some of the questions that a seller should expect a confidentiality agreement to cover:
- What type of information can and can not be disclosed?
- Are the negotiations open or secret?
- What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
- What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
- Which state's laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
- What recourse do you have if the agreement is breached?
Obviously, executing an agreement does not mean a violation can't occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.
While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.
A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes "common ground" between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.
Common Reasons for Selling
It has been said that the sale of a business is usually event driven. Very few owners of businesses, whether small or large, wake up one morning and think, "Today I am going to sell my company." It is usually a decision made after considerable thought and usually also prompted by some event. Here are a few common "events" that may prompt the decision to sell:
Boredom or "Burn-out" – Many business owners, especially those who started their companies and have spent years building and running them, find that the "batteries are starting to run low."
Divorce or Illness – Both divorce and illness can cause a rapid change in one's life. Either of these events, or a similar personal tragedy, can prompt a business owner to decide that selling is the best course of action.
Outside Investors – Outside investors may include family, friends, or just plain outside investors. These outside investors may be putting pressure on the owner/majority owner in order to recoup their investment.
No Heir Apparent – In this scenario, no family member has any interest in the business; and the owner has not groomed his or her successor. Unfortunately, in this event the owner often continues to run the business until he is almost forced to sell.
Competition is Around the Corner – In this scenario, the owner would have been better off selling prior to competition becoming an issue.
A "Surprise" Offer is Received – This may be about the only reason not truly event driven; an unsolicited offer is presented that is too good to pass up.
Everything is Tied Up in the Company – The owner/ founder sometimes becomes aware that everything he or she has is tied up in the business. In other words, all the eggs are in one basket.
Should Have Sold Sooner – Owning a small to midsize company (or even a large one) is not without its risks. A large customer goes under, suppliers decide to increase their prices, trends change, business conditions change, etc.
Surveys indicate that many small company owners do not have an exit strategy; so, when an event does strike, they are not prepared. Developing an exit strategy doesn't mean the owner has to use it. What it does mean is that a strategy is ready when the owner needs it.
A professional intermediary can supply a business owner the real world information necessary not only to develop a plan, but also to know how to implement the plan when it becomes necessary.
Valuing the Business: Some Difficult Issues
Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.
Here are some issues that must be considered when arriving at a value for the business:
Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.
Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.
Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.
Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.
ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.
Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.
Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.
*All articles are courtesy of The Business Brokerage Press.