by Bob Moses

Selling your business right means more than having a good business to sell.

You will want to use the methods that best suit your primary objectives.

When your goal is to obtain the highest price, try selling to an outside third party, not to family or employees. Why, you ask? Typically, outsiders have the ability and a willingness to pay a higher multiple of your company's earnings.

However, if your primary goal is to retain family ownership while providing yourself with a steady retirement income, you may want to consider a different approach.

When you sell to an insider, you are gambling your payout on the insider's ability to keep the company profitable in the long term, with enough cash flow to run the business and pay your retirement benefit. You retain a personal interest in the success of your company but have little or no control over future business decisions. Outside advisors provide an extra, objective level of analysis. Advisors help you determine the capabilities of the proposed future organization. They can also suggest ways of fairly treating any family members who are not part of the company deal.

There are some important steps to take before you decide to exit your company:

  • Try to enhance your firm's value. Clean up your finances and smooth any rough edges.
  • Decide your exit objectives. What do you most want to accomplish?
  • Decide on the sale method that will best meet your most important objectives.
  • Determine the value of your business. Value can vary, depending on whether you sell to family or others. Valuation specialists can be retained to provide objectivity and a defensible value.

Selling the company generally is not the time to take a "do-it-yourself" approach! Most owners lack the experience of selling a business. Professional advisors can help you set objectives, determine the best path to follow and obtain a suitable independent valuation. Advisors also help you evaluate offers. You may want to retain a Certified Public Accountant and/or a tax attorney to check the potential tax consequences as the sale proceeds.

As a transaction progresses, you may also need the help of an investment bank or business broker to handle marketing your company to outsiders. These advisors qualify prospects and assist with detailed and possibly multiple negotiations.

A well-structured sales strategy is vital. Two basic ways to sell are:

  • Auction with more than one prospect
  • Negotiated transaction

To help gain the best deal for your situation, plan ahead and know what you really want to accomplish. An owner may wish to use the auction approach. With the auction approach, an investment bank or broker sends a short letter that introduces your company to a list of qualified prospective buyers without divulging your company by name. The introductory letter may uncover several interested and qualified parties who then request additional, detailed information. The interested prospects sign confidentiality agreements, and your advisor gives each prospect a detailed sales document they prepare from your input. Better offers tend to appear when multiple prospects, given the same information, compete for a company at the same time. Auctions generally work best when a company has a value of several million dollars and when the owner retains experienced advisors to negotiate unemotionally on his/her behalf.

Here is a simplified example illustrating how an experienced advisor and the auction method might increase the sale price of a business:

A major competitor approaches you to see if you are interested in selling your business. After the signing of a confidentiality agreement and some discussions, you receive an offer of $10 million for your company. Before accepting the offer, you decide to contact an advisor who is experienced in negotiating company sales and acquisitions. Your advisor recommends the auction approach, but you fear that an auction might cause your competitor to rescind his initial offer. Instead, the competitor raises his offer to $12 million in an effort to avoid the auction. Your advisor, a local investment bank, advises you to proceed with the auction and later helps you sell the company to a third-party investor, unknown to you, for $15 million, a substantial gain over your competitor's original offer. [Note: This illustration is hypothetical and there is no guarantee that you will achieve similar results.]

In contrast, a negotiated sale occurs when a buyer targets your firm as an acquisition. You hold initial discussions and decide that the acquisition makes sense. A negotiated sale removes the need for marketing your company to others, but it may also put the buyer in a stronger position. Often, the prospective buyer is a more experienced negotiator, having made prior acquisitions. You decide to engage an experienced advisor to be in your corner during negotiations. After the initial due diligence, the buyer makes a low initial offer. Competitors often attempt to "steal" the deal when they know you are interested in selling. Your advisor acts as an intermediary and unemotionally presents your counteroffer, keeping the negotiations open and cordial. The process continues until both parties are satisfied with the deal or the parties fail to agree.    

Investment advisors undertake the many tasks inherent in selling the company, taking a tremendous load off the owner's back. Advisors contact and qualify buyers and provide an extra level of confidentiality. They prepare a sales document that presents the company in a positive, interesting and truthful manner. Finally, the experienced negotiators on your team help clinch the deal and successfully close the transaction.

Advisors are there to help an owner maximize the sale proceeds and they generally receive a prearranged percentage of the proceeds as their "success fee." When a deal is properly structured and well-managed, the owner may receive a significantly higher sale price that more than covers advisory fees.

Construction Business Owner, July 2008