The Vann Group Journal - 10 - 2

Demographic and economic forces are creating an environment ripe for ownership transfer among privately held businesses. A recent survey by Grant Thornton found that four in ten businesses will transfer ownership in the next decade; half of these will be in the next three to five years.

The primary driver of this transition of businesses is the impending retirements of the 78 million members of the Baby Boomer generation – the first wave turns 62 next year. Following behind them to take up the leadership mangle is Generation X, which is 44 million strong.

It doesn’t take much to figure out the math. When it comes to the sale of small and mid-market businesses, it is likely that there will be far more sellers than buyers. Considering that the primary source of wealth for business owners is their business we could see some potentially significant devaluations of businesses as these owners attempt to convert their equity into cash.

In this month’s issue we lay out the realities that you need to consider if you are already prepared to sell. Next month’s issue will focus on positioning your business for a longer-term sale/transfer.

The text books will tell you that Fair Market Value is the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, the latter is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts.

But the real world is far different because buyers are not hypothetical – they are real people who have to deal with the realities of cash flow and the way it can be leveraged. For the majority of buyers, the value of a company is going to be defined by what the cash flow will provide for compensation and debt financing.

It is all well and good to get a business valuation from your accountant or a third party appraiser, but don’t get too wrapped up in the value they provide you. Rather, if you decide to not use an intermediary have a discussion with your banker as to what they believe can be financed. Your banker will be able to explain what level of risk they are willing to take, what level of commitment they expect from a buyer and what level of risk they expect you to take.

Don’t get too wrapped up in the sale price, because the structure and terms are far more important, because terms dictate what you end up getting at the end. Uncle Sam will be waiting for his piece, so in considering the sale of your company, it is critical that you have a good conversation with your accountant about how you can minimize the tax impact of a transaction.

The Fairness Equation

Along those lines, remember that a deal structure has to be fair. What is generally good for the seller is not good for the buyer and vice versa. In transactions both parties need to give to get. There are basic and creative ways to ensure that everybody suffers a little bit. Talk to your advisors about what you really need – not just from a dollar perspective but from a support standpoint as well.

Also, learn to manage your own expectations. Yes, the business is your baby and it does have a value but don’t expect the sale to make all your dreams come true. To keep perspective you and your advisors need to strongly consider the perspective of the buyer – ask yourself “would I take this deal” if you were looking to buy? The bottom line is if you expect an all cash stock purchase at full value, you are going to be waiting a long time to sell your business.

Understanding the Buyer's Mindset

If sellers have the tendency to look at a business through rose-colored glasses, buyers tend to look at a business with urine colored glasses. In considering the sale of your company, remember that:

They are generally not interested in history; they are buying the future.
They will not pay a premium for that future.
They tend to focus on the business weaknesses and will overanalyze things that probably do not matter.
Their expectations of fair market compensation are probably different than yours. Today’s buyers often feel that a six-figure salary is an entitlement.

Additionally, make sure that when you talk with a buyer about your reasons for selling that you are pragmatic and honest about its prospects. Buyers get nervous when the seller:

Has vague reasons for selling.
Has consistently expressed how tired they are by the business.
Has overhyped the business, and it appears too good to be true.

Deal Killers

If you’ve gotten to the point where you’ve come to agreement on a price and structure; don’t assume that a deal is completed. We’ve learned that a transaction isn’t done until it’s done, so be aware of the following deal killers:

Emotion – Buying or selling a business is often the most difficult and life-altering decision a person can make. A deal is like a roller coaster and making sure you don’t get too high or too low is key to making it a success.
Ego/Posturing – Professional advisors are usually very good at what they do. Often times they know it and like two lions in the jungle they may engage in a game of “one ups-man-ship” to prove they are the king. Keeping your advisors focused on getting the deal done is critical to its success.
Greed – A natural reaction to the ups and downs of the emotional deal rollercoaster is to revert to asking for more every time a compromise is needed.

There is obviously a lot more to getting a deal done, but if you keep these issues in mind you’ll be in a good position to be successful in selling your company. If you have any questions about anything you’ve read in this edition of the Vann Group Journal, please call: