Owning a business is a lifestyle. Whether it’s small or large, five employees or five hundred, a business demands as much of its owner’s love and care as a child. Small wonder that many business owners don’t even dream of selling until retirement beckons or something comes up.
Consider Tom. Tom has owned a thriving community pharmacy for the past forty years. Business is good, but Tom’s back isn’t. He’s starting to notice his aching feet in a way he never did when he was young. He realizes that it’s time to retire. In fact, he realizes that he can’t wait to retire! He’ll have time with his grandkids and wife, time to travel and enjoy himself. But Tom’s wealth is tied up in the store. Not only that, but that wealth isn’t well tracked. Tom’s missing a year of his financial statements and while he knows he filed last year’s tax return, he’s not sure under which stack of papers in his office it currently resides. (Tom’s a great pharmacist but a so-so accountant.) He’ll have to sell the business if he wants to be comfortable, but the job looks huge. How should he prepare?
Luckily, Tom’s wife Maria has been talking to a business broker. Using a qualified business broker (a.k.a. business intermediary) is the best way to prepare a business for sale because they know exactly what is required throughout the sale process and can anticipate what buyers may desire. It can take between three and five years to properly prepare your business for sale, depending on the state of your finances and the industry in which your business operates, the current and projected cash flows of the business, and how available buyers are to name a few key considerations. Sometimes, if a business is in generally great shape, this process could be accelerated to as little as a year. But waiting until the last minute is never a good idea. In our scenario, Tom’s in pretty good health and could conceivably keep the pharmacy going for a while. But what if he had fallen and couldn’t work anymore? In selling your business, as in life, planning ahead is the best strategy.
The first step for any business owner contemplating an exit is to understand their exit options. There are five primary options for a business owner to consider:
1. The Open Market
The world is a wide place, and for a competitive, profitable company, it’s the most ideal marketplace. A good broker can find a buyer quickly and guide the business through the complicated, sometimes lengthy transaction. The payoff is worth it! Of all the options for selling your business, this is the one with the one of the highest potential economic return. The buyer may be likely to retain the business’s current employees, customers, and vendors, making sure that a pillar of the business and civic community remains intact. While the broker manages the sale, the business will need to stay open, looking good and maintaining its finances. It might take a little while for the broker to manage this strategy, but it’s definitely the one of the best options for a business in good condition.
2. Sell to Family
Many business owners see a transfer to family as an ideal situation for small businesses. The business itself doesn’t necessarily have to be in perfect shape. After all, the hope of keeping the family tradition alive may smooth over any wrinkles. But mixing business and family can be tricky, especially if members tend to disagree about money. And if there are no qualified or interested family members, then this option isn’t ideal.
3. Management Buyout
If the business for sale has qualified and committed employees, the owner might consider selling it to them. After all, they already have years of experience, they’re invested in its continuation, and they know the ropes. Some longtime workers at a small business may also have as much of an emotional attachment to their job as family would. On the other hand, a lot of workers don’t stick with one employer long-term anymore nor may be qualified to manage the transaction or the company.
4. Acquired by Another Business
Big companies gobble up little ones all the time, and this can be a great option for a business that’s small, reliable, and has a sound customer base. Better yet, a large company that’s eyeing a small business’s market share may pay well just for access to its customers, employees, technology, or other competitive advantages; not to mention when there are significant synergies. But whenever a business’s management changes, there may be repercussions for staff, customers, and suppliers. Bigger companies can be impersonal, and for some employees, wearing a uniform or answering to a corporate office might be a deal-breaker.
5. Liquidation
If you want to get out of business with a minimum of muss and fuss, then liquidation may be a good option. This means that the business owner will sell off everything that goes with the business – the shelves, the inventory, the service desks, and even in building, leaving you free to dissolve the business. This strategy may be fast and low-cost, though it won’t necessarily net the same payout as a full sale. If your business has major financial or legal issues, this may be your best bet.
Assuming the owner has decided, often with the advice of trusted advisors, to pursue the sale of his or her business, engaging a qualified business intermediary is critical. The key to any transaction is knowledge, and that’s the business broker’s main value add. Specifically, the broker will try to intimately understand the business, its opportunities and weaknesses as well as the appetite for such businesses among eligible buyers. The broker will need to know what makes Tom’s business special. What would make someone want to buy it? Why might someone pass it over? This all aids in developing a compelling story – a critical facet of effectively marketing the business for sale.
The business’s financial statements and tax returns for the past 3-5 years are the foundation of the broker’s understanding of what the business is worth. Buyers will want to see these (as will any financial institution involved in financing the transaction). All of the business’s assets, liabilities, bank accounts, profits, and expenditures need to be accounted for. It goes without saying that a broker will need to know what the business’s assets are. For example, does the business own its building? That’s valuable! Does the business have adequate assets to continue to grow? Finally, any vendor or consumer information will tell the broker – and any potential buyers – what kind of customer base the business serves, whether it’s diverse, and how easy it will be to be retained by new ownership.
An accurate portrayal of the financial history and status of the business is only one critical element in preparing for sale. A business owner must also identify any legal considerations that would impact a potential buyer. Additionally, any licensing information, regulatory requirements, leases, union or employment agreements, insurance policies and claims history, etc. will prove valuable to have readily accessible. Being well-organized will facilitate smooth due diligence. If significant documentation is not present, a buyer may abandon ship. After that, the broker may suggest a coat of paint for the storefront or repairing wear and tear. First impressions matter!
After all of this preparation, the broker will finally be able to estimate the business’s worth. The ultimate price will depend on the buyer, but one of the broker’s main jobs is to know, approximately, what to ask. They may compare the value of the business for sale with similar past transactions or with the relative value of other companies in the same line of work or engage an independent valuation company. Ultimately, the broker will need to know how much the business makes and costs in a year. A business that turns a neat profit will be a much better sell than one that occasionally dips under the black line. Strong projected cash flows are the best billboard a business could want!
The business broker helps Tom sell his pharmacy to a bigger chain. Everyone is happy: the community keeps its drug store, the employees keep their jobs, the chain gets new customers, and Tom gets to play with his grandkids. Not least of all, the broker has the satisfaction of knowing that the sale of an exceptional business went smoothly, thanks to years of preparation and care.
Don’t go at it alone – reach out to Michael Lannie, CBI to partner with an experienced transaction practitioner that you can trust and is dedicated to providing the highest quality of services.