The decision to sell your business is one that most owners do not think about until it’s time to retire, or a life situation has shortened the runway. The reality is that getting a family-owned business ready to sell will take 2-3 years. The sad reality is that many times we do not have enough time to get everything done before the need to sell arises. It’s important to point out that the business will still sell, it just might be at a lower than ideal multiple. The truth is that if you have not started preparing to sell your business yet, you should start now. Every mechanical contractor should be operating a business that is ready to sell for the highest profit at a moment’s notice. You never know when an unsolicited offer will land on your desk.
If you do decide to sell your business, it will take 9-12 months to get the business listed and sold. Many of the factors involved in that process are described below. One thing that you need to consider is the risk involved in trying to time a business sell. Every year we encounter business owners that need a rapid sell due to divorce, death, health issues, family sickness, too much debt, death of a spouse, and more. The truth is that life can throw you a curveball out of nowhere. So, your best hedge against this risk is to keep your business ready to sell every day. If you want to risk it and wait until you are ready for retirement then just know you need to engage a team of consultants about 5 years out. This team is made up of a business M&A broker, your CPA, your financial advisor, and your attorney. Every member of the team needs to be on the same page and know what the goals are. To make sure your team works together for your best interest we recommend that you engage a Certified Exit Planning Advisor (CEPA). Our brokers are CEPAs, and we routinely get all the key team players on the same page working to put the most value in your pocket at the end of the day.
TIP: Having a team of advisors who are all on the same page that your goal is to sell the business at a given time will help prevent you from getting conflicting advice. A common complaint I hear is that owners get different advice depending on who you talk to. I would only listen to the people who have done it, they are the only ones that really know how to do it.
Deciding to get a business ready to sell or to sell it usually brings up a lot of questions. Such as how much should I list it for? Should I sell while the stock market is high? Should I wait for the stock market to bounce back? Should I sell to the consolidator that is on a buying spree? What if I wait too long? The truth is that you should sell your business the moment it will sell for enough money to meet your personal financial goals. If it’s not ready yet, then let’s get it ready. If it is ready, then let’s sell it and take some risk off the table and harvest the value. Or if a life situation forces a sell, then let’s try to get as much value as possible while still meeting the timeline. The first step is understanding the most common reasons why a business does not sell and then taking steps to avoid these pitfalls:
- The price is too high
- The financials look bad
- The terms are the business has too much debt
- Business is in a bad area
- The business has no real leadership team
- Owner does not want to sell
- There are lawsuits against the business
- Significant back taxes
- Owners’ personality
Let’s take a deeper look at four of the most important factors that make your business sale successful:
- The right price
- Terms and conditions
- Earnouts
- Marketing the business for sale
- Finding the right buyer
Right Price
The price you set for the business is very important. You must keep in mind that the price you are asking, and the actual selling price are two different numbers. When a business has no major issues, it will usually on average sell for about 75-80% of the asking price. This means that generally, business owners see the value of their business as higher than that of the market. At the end of the day, every business is only worth what the market is willing to pay for it. It’s understandable that the owner sees a higher value for the business. In most cases, the owner has invested a significant amount of time that represents a large piece of their life to get the business to this point. Buyers are looking for a deal. They want to get the business for the best price so they can realize a profit sooner and make a higher return on their investment. Buyers are looking to take risks off the table. As a result, sellers usually have a higher emotional connection to the price than does the buyer.
TIP: The market will always tell you what the right price of your business is when it’s listed for sale correctly. When you engage multiple buyers who are actively acquiring companies, the market will define the right price. You just have to be willing to listen to what the market tells you.
To the buyer more like any other financial transaction. To the seller, a higher price equates to a higher perception of success. Getting both to the closing table and inking a deal takes a significant amount of negotiation and emotion management. Therefore, it is so important to utilize the services of an M&A advisor during the process. The goal of the seller is to sell the business at the highest possible price. If the emotions of the seller wreck the deal, then no sale, no price. The best practice is to use example transactions of similar businesses that have sold previously to give the owner a better understanding of what is reasonable. This creates a fair and unbiased starting point and a firm point to negotiate from for each party. The seller should not get a premium over similar business sales without a strong reason for an increase in multiple. A buyer should not get a large discount on the price just to get a good deal. The M&A broker provides this middle ground to negotiate a fair and honest price for the business using the proof of financials and managing emotions.
Terms and Conditions
Only 10% or less of business sales are all cash purchases for a selling price of less than $100K. This means that as a seller you are going to have to finance a portion of the selling price. This is known as a seller note or seller financing. You must understand that your willingness to finance part of the deal also shows that you believe in the financial future of the business. As a bonus, you will also receive interest on the money you agree to finance. The more flexible you are as a seller, the more cash you will put in your pocket over the long run. If you are less flexible, then the buyer is going to negotiate a reduction in price to represent the added risk they are accepting. The Small Business Administration (SBA) is most likely going to require a 20% seller note along with 80% financing from the SBA If you use SBA to finance the deal.
TIP: Terms and conditions are where inexperienced sellers get taken advantage of when they do not use an experienced broker. A price of $100M is no good if $99M is based on an earn-out that will never occur.
Earn-Out
There is most likely going to be some sort of “earn-out” over some time. If your financials and description are painting a business with opportunities for future growth, then you should be more than willing to accept part of your payment as a condition of the business hitting those goals. This is also where the guidance of an M&A broker is critical. Depending on how the deal has been structured an earn-out can either be a fair way to mitigate risk for future earnings or a way simply to reduce the price by setting goals that will never be hit. Either way, you need the guidance of an experienced M&A broker to help you understand what is fair and reasonable and what is unlikely to earn out. During this earn-out period you the seller might be required to lead the business during a transition period where you help your team meet the revenue goals for the earn-out. In some situations, this earn-out can be 18-24 months or longer depending on the deal.
Marketing the business for sale
Selling a mechanical business is highly dependent on how you market that business for sale. Finding the right buyer is critical to earning a good multiple with fair terms and conditions. This is another area that an M&A advisor is critical in the process. Most M&A brokers have a database of potential buyers from strategic buyers (those in the business) all the way to private equity groups (investors that routinely buy businesses). The price each type of buyer is willing to give is different and the terms and conditions of the sale for each different type of buyer are different. An experienced M&A broker will know who the best buyer would be to meet your personal selling goals. An experienced broker will also take the proper legal steps to ensure the confidentiality of your business selling is maintained until the transaction is complete. If employees, suppliers, and competitors learn that the business is for sale before it sells you could find yourself with fewer employees, higher prices from your supplier, and rumors that your company is going out of business floating all around town.
Finding the right buyer
Finding the right buyer for a business is more than just finding someone who would like to buy it. You must find a buyer who wants to buy the business, has the funds to complete the transaction, can get approved for financing, and will go through with it all the way to the closing table. Believe it or not, finding the right buyer means many times that you sort through 100 potential buyers for every 1 qualified buyer. Each qualified buyer then must be sorted until you find one that wants the deal and will close the deal. This takes a tremendous amount of time and work. Way more work than you can do on your own. It also takes access to databases of potential buyers and expensive CRMs to effectively sort the buyers through the process. The process is time-consuming and labor intensive.
Timing the sale
Trying to time the stock market to align with getting your business ready to sell is not recommended. It is better to get a business ready to sell and miss a hot market than to sell a business quicker for a lower multiple because the business was not ready. Good businesses will sell for a premium even in cold markets. The truth is that you would net more money if you took the time to get your business ready, increase your profit margins, improve your internal processes, and put a management system in place. One of the by-products of getting a business ready to sell is that the owner can now be way less involved and enjoy more time outside of the business. We find some sellers who delay the sale after they get the business ready. Many begin to have an incredible time running the new business and they just want to enjoy the ride for a couple of more years. Other owners have plans for a second career or a serious hobby like car racing or fly fishing or starting a band. These owners go ahead and sell because they need the money to enable the new thing.
A business that sells for the highest multiple is a business that you would probably love to run. So, getting your business ready to sell now, gives you the freedom to choose to sell it whenever you decide. It’s much better to have a business that is fun to run and easy to sell than to have a business that is super stressful with bad financials when a life situation forces a quick sale. So, the answer is to get your business ready to sell now and then actually list it whenever you want.