Deal of a lifetime
As many business owners only sell once in their career, it pays to get it right
By Kerby Meyers | February 18, 2021
Consider two successful businesses, each with unique management characteristics.
One features a payroll that includes a number of the owner’s friends and family members. The other is run by a leadership team that has been granted near autonomy for years.
Both company owners are weighing buyout offers. Which will likely draw a higher valuation?
While several factors go into that calculation, BOK Financial corporate banking leader Christine Nowaczyk shakes her head at scenario No. 1. Sharp-eyed buyers don’t like bloated payrolls, she said.
Conversely, the hands-off approach could net a considerable windfall for the selling owner in scenario No. 2, said fellow commercial banker Sean Kelly. A knowledgeable and highly engaged management team could make all the difference in a deal, he said.
“The goal of every buyer is to find reasons to knock the price down or kill the deal,” said Mike Benedict, business transition advisor at BOK Financial. “Selling a business is a lot like selling a house—it should be staged before it’s listed and the owners should be prepared to be scrutinized by potential buyers.”
Although COVID-19 slowed the merger and acquisition market considerably in 2020, market conditions point to a likely strong rebound in 2021, Benedict said. One reason: Aging Baby Boomers own 41% of the small businesses or franchises in the U.S, according to Guidant Financial. Of those, the California Association of Business Brokers estimates that 70% will be sold or passed down to heirs over the next 15–20 years.
If you’re weighing the sale of your business in the coming years, preparing for that possibility now can significantly boost your satisfaction on closing day.
Must-dos for sellers
Selling a business is a considerable undertaking, and the longer you’ve been running it, the more challenging a sale will be.
“It’s not easy to sell a business, and it’s not easy to transition a business,” Benedict said. “It’s the most important financial transaction of a person’s life, and yet, it’s one they’ve never done before.”
To help smooth the way forward, Benedict offers three tips for owners:
- Conduct rigorous pre-sale due diligence. Buyers will be ruthless in dissecting a potential acquisition. Benedict said that discovering outstanding issues, resolving them and determining how to proactively speak to them before putting the company on the market will ease most due diligence challenges that a potential buyer presents.
- Invest in a quality of earnings report. On its face, this deep dive into the company’s revenue stream may seem like overkill, especially if the annual financials are audited (also a must-do). But since the prospective buyer will be running this report, it helps to know in advance what it will uncover. Benedict added that if you’ve already done it, suitors will have more confidence in all of the numbers they see.
- Lock up key employees. Incentive plans that offer core workers bonuses to stay through a transition will help soothe a potential buyer’s concerns that essential employees will follow the owner out the door. Benedict said the bonus typically equals 1-2 years of salary and is paid out in equal portions at the close of the deal, one year later and two years out.
Outsiders can be invaluable
Nowaczyk stressed that third-party advisors such as accountants and attorneys can devote the time needed to tackle the pre-sale chores. That will allow the owner to maintain sanity as well as achieve peace of mind through an emotionally draining process.
“Often an owner will underestimate the time it’s going to take for a sale,” Nowaczyk said. “But most owners don’t have the time or ability to manage each step without diverting time away from the business, and that creates a lot of stress.”
A professional approach—from scrubbing the financials to marketing efforts—can attract multiple buyers, which is optimal in generating an attractive price.
But the bottom line is not the only consideration when weighing a number of offers, Kelly said.
“It’s important to consider the culture, philosophy and overall core values of the buyer because it’s going to impact how many employees stay following the transaction,” he said. “If you can, talk to people at other companies the potential buyer has acquired and confirm that their actions line up with their words.”
Set the tone for what lies ahead
There are many reasons for selling a business: death, disability, market stress, personal stress, a desire to retire or an offer that’s simply too good to dismiss. Buyers can range from an in-house management group to a competitor, or a third party could acquire a controlling share to finance future growth.
Ultimately, those selling longstanding businesses are leaving a legacy, Nowaczyk said, and that’s a responsibility not to be taken lightly.
“I’ve seen a lot of business owners who have the financial wherewithal to enjoy their lives after a sale, but they don’t feel satisfied because they didn’t take the personal impact of the transaction into account,” she said.
“As the sale is usually the culmination of their life’s work, they must be clear on what their objectives are and how they’re going to meet the needs of all of their stakeholders.”