The Sale of a Business May Actually Excite Employees
Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale. Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business? 3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news. Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.
Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale. She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.” As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.
Interestingly, Taylor points to something of a paradox. While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case. Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.
Here Taylor brings up an excellent point for business owners to relay to their employees. A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.
A second reason that employees may be excited with the prospect of a new owner is their potential career advancement. The size of your business will, to an extent, dictate the opportunities for advancement. However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities. As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.
Finally, selling a business could mean “new growth, energy and ideas.” Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business. This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.
There is no way around it, Taylor’s article definitely provides ample food for thought. It underscores the fact that how information is presented is critical. It is not prudent to assume that your employees may panic if you sell your business. The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.
7 Fundamentals To Due Diligence As A Buyer You Need To Know
A recent article from Divestopedia entitled “7 Fundamentals to Due Diligence You Need to Know” explains the due diligence process and what it means regarding sellers and buyers and their roles in the process.
Whether a company is being sold or it is merging with another company, it is standard practice to go through the due diligence process. Therefore, they should be aware of all the factors involved with the due diligence process. The fundamentals of due diligence can be broken into 7 categories:
- Historic and Projected Financial Information
- Technology Developments and Intellectual Property
- Customers and Revenue Streams
- Contract Agreements and Insurance
- Key Staff and Management
- Legal and Compliance
- Tax Issues
In each of these 7 critical areas, the buyer and the seller each have to do their part in order to see the deal make it to the finish line. The seller has to be open and honest with the attorneys, their advisory team and the potential buyer; and the buyer has to be thorough in examining and combing through all of the information provided.
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A Look at Divestopedia’s Article, “The Myth of Fair Business Valuation”
In Divestopedia’s article, “The Myth of Fair Business Valuation: What Professional Valuations Don’t Tell You,” author Chak Reddy is quick to point out that the “type of buyer and method of sale are two important (yet often overlooked) value determinants when finding a starting price for your business.”
Reddy brings up some excellent points. One notion in particular that every business owner should be aware of is that there is “NO fair value for illiquid assets.” He points to the fact that between January 2007 and March 2008, the historic Bear Stearns went from a value of $20 billion dollars to just $238 million. In a mere 14 months, Bear Stearns lost most of its value.
Additionally, the article points to the fact that business owners often suffer enormously from “dramatic valuation compression.” In Reddy’s view, this compression is the direct result of poor planning and a failure on the part of business owners to select the right advisory teams.
Reddy believes that professional valuations can be quite lacking. He feels that they are “contingent on multiple assumptions,” and that the valuations are only as good as the assumptions upon which they are based. In other words, professional valuations can be limited and flawed. In particular, he points to the fact that two of the most important factors in valuations, future growth rate and operational synergies are “highly subjective and no two views on these topics are likely to be identical.” Summed up another way, valuations are inherently a matter of opinion and perspective. Reddy feels that a seller will be “lucky” if the real sales price comes within 10% to 20% of the professional valuation.
In the end, as always, it is the market that determines value. It is the acquirer who will determine the value more than any other factor. The perception of the buyer will play a key role in the process and, further to the point, no two buyers will perceive the business exactly the same way. In other words, valuations can be tricky and certainly do involve a personal element of the individual who is appraising the business’ value. Adding to this point, Reddy states, “From our experience, the type of buyer and the type of sale skew the valuation to such an extent that it is unwise for a business owner to not be familiar with these variables and their impact before the beginning of the sales process.”
Ultimately, finding the right buyer is essential and this is where a business broker can prove simply invaluable. And finding that right buyer may take time.
3 Things to Remember About Third-Party Sales
As a business owner, you’re likely used to having as much control over how the business functions as possible. You’re the go-to person for big decisions and you own the consequences of those decisions, whether they’re good or bad. This attitude is often good and sometimes necessary for the business’ success. But when you begin to consider how you will plan for your business’ future, you might be positioning your business poorly, especially if you have any intentions to one day sell your business to a third party.
In this article, we’ll outline three facts about third-party sales and present a few consequences you might face if you aren’t aware of these facts.
1. Buyers Want to Buy the Business, Not the Owner
A mistake many owners make as they consider a third-party sale is that they should remain heavily involved in business operations. However, staying too heavily involved in how the business runs is the last thing a buyer wants to see. Buyers prefer businesses that run smoothly without the owner because they usually don’t want to commit the time and capital necessary to replace the owner after the owner sells the business. This is even true of financial buyers and private equity groups: They may be more likely to support continued owner involvement, but too much owner involvement can have a negative impact on the overall value of the business.
When planning for your business’ future, it’s important to position your business to function well whether you are present or not. If the business’ performance relies directly on you, you can negatively affect your business’ transferable value, which is what the business is worth without you. If you ever plan to sell your business to a third party but are also crucial to the business’ success, you will likely need to work for the buyer for a few years until they’ve found or trained people to replace you. If you do some of that work before the sale, it gives you more options and potentially more value.
If the idea of selling your business only to work for the buyer is unpalatable, you aren’t alone. Many owners share this distaste. However, this brings up another consequence of being too consequential to your business. If you put your business on the market, find that buyers require you to stay for a few years because you’re too important to leave, and you then take the business off the market, you can permanently damage your business’ value. In third-party sales, there’s no such thing as “testing the waters.” Buyers want to buy businesses that other buyers want to buy. If a business comes off the market without being bought, it’s called tainting the marketplace, and it can damage your prospects.
2. Buyers Want Your Key Employees
Key employees tangibly contribute to the success of the business in ways that go above and beyond expectations. Given this definition, it’s obvious why buyers want them to stay with the company after you sell it. However, it’s your responsibility to incentivize those employees to stay with the business as and after you leave.
If key employees feel that you haven’t properly recognized their contributions to the business’ success, they can negatively affect your plans for a sale to a third party. In a best-case scenario, they’ll simply leave for greener pastures, which can negatively affect business operations and value. In the worst cases, they’ll work for a competitor, take clients with them, or demand a cut of your final sale price at the 11th hour.
Formal incentive plans can keep key employees tied to your company as you complete the sale process. However, formal incentive plans must do four things to be effective:
- Be tied to performance standards.
- Be clear, consistent, specific, and in writing.
- Create substantial bonuses (in the eyes of the employee).
- “Handcuff” the employee to the business.
3. Buyers Want a Documented, Proven Growth Strategy
Providing a documented, proven growth strategy to buyers can make the sale process easier for you in two ways. First, having a documented growth strategy positions you to grow your company more effectively than owners who don’t have documented growth strategies, possibly making your company more valuable. Second, having a documented growth plan eases the transition between your exit and your next-level management team’s entrance as the decision-making body for the business. Getting them involved in setting business strategy and action plans to implement the strategy brings in new ideas, enthusiasm, and commitment to seeing the processes through to success. This can make the business more valuable to buyers because they will have to put minimal effort into absorbing the new business. It also positions you to move toward only doing things that you want to do within the business, rather than acting as the decision maker for every little issue.
If you’d like to discuss how you can prepare yourself for a third-party sale or do any of the things buyers tend to look for when buying a business, please contact us today.
Content provided by:
Ed Cotney
Olympus Tax, Business and Insurance Solutions, Inc.
4600 Roseville Road, Ste 150 / 260
Sacramento, CA 95660
www.olympustax.com
(530) 913-0562
5 Big Questions to Consider when Financing a Business Sale
How should the purchase of a business be structured? This is a point that you’ll want to address early in the sale process. For most people, buying or selling a business is one of the most, if not the most, important business decision that they will ever make. For this reason, it is vital not to wait until the last minute to structure your deal. Let’s turn our attention to the most significant questions that you need to answer when entering the sales process.
1. What is My Lowest Price?
The first question you should ask yourself is, “What is the lowest price I’m willing to take?” If an offer is made, the last thing you want is to be sitting around trying to decide if you can take a given offer at a given price. You need to be ready to jump if the right offer is made.
2. What are the Tax Implications?
Secondly, you’ll want to seriously consider the tax consequences of any sale. Taxes are always a fact of life and you need to work with a professional, such as an accountant or business broker, to understand the tax implication of any decision you make.
3. What are the Interest Rates?
The third factor you want to consider is interest rates. If you get a buyer, what is an acceptable interest rate for a seller financed sale?
4. Are there Additional Costs Involved?
A fourth key question to ask yourself is do you have any unsecured creditors that have not been paid off? Additionally, you’ll also want to determine whether or not the seller plans on paying for a part of the closing costs.
5. Will the Buyer Need to Assume Debt?
Finally, will the buyer need to assume any long-term or secured debt? The issue of long term and/or secured debt is no small issue. Be sure to clarify this important point well in advance. Also keep in mind that favorable terms typically translate to a higher sales price.
Business brokers are experts at buying and selling all kinds of businesses. When it comes time to structure a deal that benefits both the buyer and the seller, business brokers can prove to be invaluable. At the end of the day, working with a business broker is one of the single biggest steps you can take to ensure that your business is sold and sold as quickly as possible.
