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Tips for selling and buying a business

MISSISSAUGA, Ont. -- You’ve spent your life building your business, why not invest a little time before selling it to maximize its value? That was the advice from Doug Nix, vice-chairman of Corporate Finance Associates, who addressed a...

MISSISSAUGA, Ont. — You’ve spent your life building your business, why not invest a little time before selling it to maximize its value? That was the advice from Doug Nix, vice-chairman of Corporate Finance Associates, who addressed a crowd of potential buyers and sellers at a breakfast meeting this morning.

Preparing your business for sale

If you are looking to sell your business, Nix said there’s plenty of work that should be done in advance to maximize your return. Many owners are caught off-guard by the amount of preparation and work that’s involved, he admitted.

“It’s surprising how many people sell their business, basically without doing any preparation,” he said. “I see that all the time. If you can be more proactive about it, there are things you can do to increase the value of your business.”

When consulting a seller, Nix usually advises them to ramp up sales activity in advance of putting their company on the block.

“Whatever your sales effort is, double it,” he suggested. “Long-term trends of increasing revenues are attractive to buyers.”

It’s equally important to sustain those heightened sales efforts right through the sales process, he added.

“If your revenue starts to drop off through the sales process, it’s going to kill your pricing in the transaction. A rapid ramp-up of profitable revenues positions your company above the rest.”

Next, Nix said companies should attempt to build some predictability into their revenue streams by signing customers to long-term contracts when possible. Nix also suggested locking in key management personnel and requiring them to sign non-compete agreements.

“If your business is portable, you don’t want to be selling a business and have the buyer wonder if your key guys are going to go to the competition,” Nix said. He also said it’s vital to put in place a management team that can function effectively without the company owner.

“Often, the owner is the company and you need to get rid of that,” Nix said. “Make sure the business is not about you.”

Business owners should also bolster their branding efforts, knowing a prospective buyer will first turn to the Internet to conduct research.

“You’d be amazed at how many companies have no Internet presence,” Nix said. “How do you sell your business with no Web site? As soon as you tell the buyer the name of a company, what are they going to do? They’re going to go on the Internet and say ‘Let me take a look.’ You need to develop a Web presence.”

Sellers should also clean up their balance sheets, pay off debt and remove personal assets from the company books. Providing audited financial statements is also beneficial, Nix said.

Once all the preparation is complete, Nix said sellers opt for one of two methods of selling their business: buyer-initiated or seller-initiated. Buyer-initiated transactions usually stems from a phone call from a party that’s interested in purchasing your company, with the hope of closing a deal outside the normal competitive process. Seller-initiated transactions can be informal, involving discussions with one or two prospective buyers, or put up for a formal, competitive auction.

“What we have found is the formal process maximizes value and improves deal terms,” Nix said. This process typically takes five to nine months.

With discussions underway, a virtual data room is set up, allowing approved parties from both sides to access shared documents online via a secure site. Usage activity can be tracked.

“It’s not intrusive and a lot of due diligence can be done remotely, without (office) staff knowing people are going through agreements,” Nix said.

Business owners who are interested in taking some money off the table while retaining an ownership stake in the company may want to consider leveraged recapitalization. In this scenario, the owner sells their stake to an equity sponsor, which forms the new company. The owner pockets a portion of the cash and then uses the remainder to purchase a stake in the new company. Done this way, the owner avoids having to personally guarantee a bank loan.

This technique allows the owner to reduce his exposure and continue to manage the company, all while growing it with funding from the equity sponsor.

“You need the right equity sponsor and the right attitude,” Nix said, noting many business owners are uncomfortable being in a position where they’re no longer the largest shareholder.

The other side of the table

Company owners who are looking to grow their businesses should consider acquisition as “an essential part of the strategy,” Nix said, noting it’s difficult to grow revenue in a mature industry without stealing market share from competitors.

One of the biggest mistakes buyers make is jumping on an opportunity because it seemed to be priced right, Nix warned.

“Just because the assets are cheap, doesn’t mean you should buy them,” he said. “A lot of guys get caught up on this. You are better off paying a higher price for something that’s going to be a good fit, than a low price for something that’s a piece of junk.”

Before shopping, Nix said companies should develop an acquisition strategy that clearly identifies their target acquisition.

“But you don’t want it to be so narrow that the company doesn’t exist,” he added.

Nix also said buyers should pay close attention to the seller’s motivation. Are they getting out of the business for the right reasons? Are they serious about selling? Nix said sellers under 40 and over 70 often change their minds about selling; the younger ones because it’s in their nature to do so, and the older ones because they are suddenly fearful their life will lack purpose once they’ve sold their business.

Nix said buyers should be on good terms with their bankers before initiating discussions and be proactive about seeking out potential acquisitions rather than waiting for them to come along. Finally, Nix said, “Never bet your company on a single deal. It’s not worth it. Walk away from it.”

Tips from Nix:

“Your greatest strength in negotiation is your ability to say no.”

“There’s no such thing as perfect in M&A.”

“Drive the timelines. Everything that drags gets dirty.”

“Signed letters of intent are not a starting point for negotiations.”

“Don’t make it personal. Check your emotions at the door.”

“Listen, listen, listen. Courtesy goes a long way.”

“Cultivate trust. As soon as trust is impeded, you will never get the deal done.”

“Always honour your word. Do what you say you will.”

“Watch your advisors. Don’t let them alienate the other party or they will kill the deal.”

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1 Comment » for Tips for selling and buying a business
  1. Jacob Orosz says:

    I have bought and sold businesses for 15+ years and I would estimate that less than 95% of business owners in the lower middle market perform any planning for the sale. Many put thought into their options, however, few take any concrete steps. Unfortunately, the process is messy and involves a lot of grey areas and ambiguities (much less entrepreneurship). Any intelligent entrepreneur should spend a significant amount of time planning their exit considering how much of their wealth is likely tied to the value of their business.

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