Three Common Mistakes Business Owners Make When Selling Their Business: A Three-Part Series
Part 1: Deal Team
Why would a small or medium size business want to go it alone, considering publicly traded companies that are part of a Mergers & Acquisition process always have professional representation? Is it the thought of paying for representation? Do owners question the return on investment (ROI)? Do they consider the amount of time and resources it takes to successfully navigate a business transaction? Do they have a reasonable expectation of value?
According to Bo Burlingham Author of Finish Big “You should build a business today as if you will own it forever but could sell it tomorrow.” Considering this information, we know it is never too early to build a strong advisory team / deal team. Who better to learn from than the professionals that specialize in selling businesses?
A great advisory / deal team consists of a Mergers and Acquisitions (M&A) Advisor / Investment Banker, an Attorney that specializes in mergers and acquisitions, an experienced Accountant and Tax Advisor, a Banker, and a Financial Advisor. Collectively the team collaborates to meet the owner’s goals and achieve the best possible outcome in terms of cash and non-cash considerations.
M&A Advisors are the quarterbacks, and they manage and coordinate all activities including initial business valuation, creating marketing collateral, building buyers lists, running the blind auction process, maintaining secure access through data rooms, facilitating IOI’s (Indications of Interest) and LOI’s (Letters of Intent), due diligence, definitive purchase agreements, employment contracts and non-compete agreements. This list, while not exhaustive, needs to be managed. Some of the events are chronological and others happen concurrently.
At Blue Sky Business Resources, we limit our engagements to three to four clients per advisor depending on their experience level. Running three engagements concurrently will consume forty to fifty hours per week of the advisor’s time. How can an owner expect to manage a transaction and keep the company running smoothly at the same time? We have heard multiple stories about owners managing the process and during the time frame the company sustains losses in revenue and or profit which results in a lower sell price (best case scenario) or the buyer abandoning the transaction all together (worst case). I personally struggle with this, and, at times, must remind myself about best and highest use. Where is your biggest bang for the buck?
An experienced M&A Attorney is worth their weight in gold! They understand that all deals will include tolerable risks and they work diligently to protect and shield you from harmful contract terms and language while still getting the “deal” done. They should be included in editing / creating the initial NDA, working through the Letter of Intent, the Definitive Agreement (asset purchase or stock purchase agreement) including representations and warranties (reps & warrants), material adverse change clauses, non-competes, and employment agreements to name a few.
They will not only help you navigate the complex contracts and agreements but can also offer guidance on deal structure that will enable you to legally shield and take advantage of the tax code and keep Uncle Sam / the IRS out of your wallet. A few strategies require “seasoning”, they must be in place up to five years prior to the taxable event. Without the time frame involved the IRS sees this as an effort to dodge taxes and unwinds the transaction to the original operating structure.
While CPA’s have a reputation of being a little stuffy and socially awkward, great accountants are literally able to put additional dollars in your pocket. They can help you create business structures that allow you to deploy tax strategies that limit your tax liabilities. Reviewed or better yet audited financials will yield higher multiples on profit when and if you decide to sell. We normally see at least one full turn higher in offered business value. What does this mean? If you have profits of two million dollars and the average multiplier is 3x you would receive $6 MM at closing, with audited financials you could reasonably expect $8 MM generating an extra $2MM at closing. We are confident that you will never pay your accountant two million dollars over the life of your business.
Another advantage comes to play if the IRS decides to audit you. Financial information that has been independently audited by your CPA, makes an IRS audit much less painful. If you find your business needing a loan from a bank, or if you start looking for investors to fuel the growth of the company or a new business unit, financial information provided by your CPA makes this process much easier as well. The list goes on and on and at the end your CPA becomes one of your best advocates and can guide you through the financial needs of your business.
Financial advisors bridge the gap between today’s financial needs and tomorrow’s. Business owners are famous for having all their eggs in one basket. Frankly, they bet on themselves and their business, but diversification is the answer to multiple questions and concerns. In the beginning you will need to focus on ensuring your company has the cash it needs to grow and thrive but as it matures the cash you make should be diversified.
Great financial advisors understand money management and tax saving strategies that those of us not in the field may not know about. They will not only help you grow your money but can utilize tools and vehicles that will keep more money in your account and less in Uncle Sam’s.
Bankers are extremely important to your business. We advise owners to establish a relationship with a commercial banker right from the start. They are great resources and can make a positive impact on your business right out of the gate. You may need working capital, lines of credit, capital equipment or real estate loans and a great banker can help you anticipate and capitalize future growth and operations.
This article started off as the “Deal Team” but, working with a team of professionals from the start will greatly increase your chances of success and being able to stand the test of time. I know it may sound “funny” to suggest that an M&A advisor can help you from the start, at Blue Sky we have developed processes and reports that will enable you to create, grow and maintain a business that is sellable from inception. Your plans might not include selling the business, you may want to hand it down to the next generation or a management buyout regardless of how or when you exit, businesses built to sell will always be easier to run, enjoy more profit and provide better lifestyles.