I felt I could handle the meeting and when they called I made sure the house was clean and the boys room was straightened up.  Once they arrived I took them around and showed them the house.  I thought the house would sell itself but I was wrong.  I thought since I loved the house that they would too.  It made me think of what I tell my business owners when they want to sell their business.  Just because you love your business, don’t think that everyone else will too.

In order to sell anything you need to find the pain and then sell to solving that pain.  Listen to the buyer and find out what they are looking for and then explain how your business fills this need.  Some buyers are looking for a job, some an opportunity, some an investment and some all the above.  Each buyer has a specific need they want fulfilled and your job is to find it.

Don’t expect to put your business for sale online and what for the calls.  You have to make it special, call attention to yourself and, if you are lucky enough to get someone to call you, sell it hard!

Interview the buyer and find out what they are looking for.  Listen to them and see if there can be any fit.  If there is nothing there then learn what they are asking and see if you can be ready to address it the next time a buyer comes by.  Learn from each buyer, what and listen to what they ask and say.  Sell to them your business plan and you will have a better chance of being one of the few who can actually say they sold their small business.

Pride in ourselves, our personal accomplishments and our business are all very healthy and strongly recommended.  It is that pride that has made your business so successful.  Pride makes us work harder on and in our business and shows that we really do care for our business. 

Everyone knows that homeowners take better care of their house then any renters will.  That’s because tenants don’t take pride in the house like the owner.  The same goes for a business where the employees often do not take the same pride in it as we do.

Pride connects us to our business and this emotional connection is exactly what makes it one of the seven deadly sins when it comes to selling your business.  That connection the business owners feels about their business sometimes, actually I will say most of the time, blinds them to reality.  Just as parents are often very defensive to criticism about their children, business owners are defensive to advice about selling their business.

A prideful person is someone who is not able to listen, they often get angry at the defense of their feelings and cannot listen to another point of view.   Most business owners do not sell their business more than once in a lifetime so this unique experience should be done with advisors.  This requires you to relax on the pride, we know what you think of it, and let your advisors help you sell it.

Your emotional attachment to creating, nurturing and growing this business needs to be put on the shelf and looking at it objectively should be your new goal.  Let me put it this way, you pride, passion, hard work and commitment have taken you to where your business can be sold.  Words like profit, opportunity, flexibility and creativity will sell your business.

Please don’t miss understand what I am saying, pride is great when managing the company, just not selling one.  Listen to your advisors and let them help you.  Remember if you can transfer the pride you have into a potential buyer then you have just sold your business.

When you consider leaving and closing your business instead of selling it there are a few choices to think about.   We have seen those signs in business windows saying “Liquidation Sale”, “Going Out of Business” or “Everything Must Go”.  The owner’s choice in this situation is instead of selling the business as a whole, they are going to close it down and sell it in parts. 

Liquidation generally means that the company will sell its assets and any sale proceeds will go to pay off their creditors.  If there are no creditors or, if there is any money remaining after repayment of debt, then the final proceeds are then distributed to the owner.

The challenge in liquidating is when the sale proceeds do not satisfy the debts on those assets sold.  The business owner should negotiate with each debt holder and speak with legal counsel on the ramifications of the difference.  I have seen some desperate business owners sell the assets, not pay off the debt, and keep the cash for themselves.  There are some very serious legal issues around this and I would strongly suggest any business owner considering liquidation where the debt exceeds the cash value, get legal advice.

Bankruptcy is very different from liquidation. Bankruptcy is a legal process where an individual or company legally declares its inability to pay off debts.  Consider this process like you going in front of a judge, on your knees, and saying “uncle” or “I give”. You are asking the courts to tell your debtors that you have no money to pay them back and thus “forgive” the debt you owe them.

The reason why someone would go down this road is when the debt owed is too far in excess of the asset value and there is no way the debt can be repaid.  Unfortunately, as in most small business debt cases where the owners have personally guaranteed the company debt, this means that all available assets (both business and personal) are liquidated and the proceeds are distributed to creditors.

There are different chapters of bankruptcy under federal bankruptcy code and they are Chapter 7, which is liquidation of the assets; Chapter 11, which is about the reorganization of the company; or Chapter 13, which relates to work-outs of debts by individuals.   Once the courts have legally approved the bankruptcy and the debtor turns over all their assets to the court-appointed trustee, then they are relieved from the payment of any previous debts.

Any business owner that is considering bankruptcy should speak to an attorney.  Here is a great piece of advice one bankruptcy attorney gave my client considering bankruptcy.  He sat my client down and told him to consider himself a pilot and accept that the plane he is flying is going to crash.  There will be a crash landing and the plane will be destroyed.  The goal of the attorney is to help talk the pilot through the landing so he is to be able to walk away from the accident.  Hopefully he will be able to walk away, with or without injuries he could not promise, but at least he is alive to live another day. 

That is a great analogy every business owner needs to think about before they go down this road.  I know no one wants to go into bankruptcy but be honest with yourself, your family and close friends when you do.  It will be a bumpy, scaring and exhausting crash landing but hopefully at the end you can walk away and start over. 

Whether you liquidate your business yourself or go through the legal process of bankruptcy you will need a very good team of legal and tax advisors that understand your situation and the legal process.  Please don’t be penny wise and pound foolish on this one.  Get good help, listen to them and hold on.

Whether you are a Christian or not the bible does have some great advice to live by.  The 10 commandments are the backbone to our Country and judiciary system here in the United States and there is some good advice there to consider.  Another great list of rules to consider is the 7 Deadly Sins – Sloth, Anger, Envy, Pride, Gluttony, Greed and Lust.

I want to take one at a time here so we are starting with Sloth.  This is generally referred to when someone fails to utilize one’s talents and gifts.  The modern view goes further, defining it as laziness and indifference.  

I see this in business owners in a couple of ways.  First, entrepreneurs are very controlling and micro-managing.  Please don’t be offended here because I am one too and I know this because I have been called to the table by more than one of my managers. It is true that we think we “need” to be that way but in reality this is more of a control thing than a business need.

This management style might work great for day to day operations but when it comes to selling your business the more involved the owner is to the day to day operations then the lower the value of the business becomes.  Rarely, actually I will go out and say never, have I seen any owner have all the talents and gifts required to take a company from a small couple hundred thousand dollar a year revenue company to a multi-million dollar operation by themselves.

We all have our talents and strengths. Some business owners are sellers (they can sell ice in a snow storm) and love to be out networking and generating leads.  That is where their passion is and where they get their energy. Others owners hate selling and would rather spend all their time making their product better and better.  They assume that if you have a great product then it will sell itself.   There are still other owners who think that finance is the main driver and they spend most of their time in the books and make all decisions based upon the numbers.

The point here is that to sell your business all entrepreneurs need to know their strengths and weaknesses.  They need to hire people smarter than themselves and motivate them to excel.  They need to put into process rewards for the over-achievers and allow the employee to be empowered to take the business to the next level.  Once they do that then they should be rewarded by more than a “you have a job so be happy”.

If you are a business owner then look at Sloth this way.  Consider yourself building a baseball team where there are multiple positions and skills to make it to the World Series.  You need to be the coach, not the player, who is always looking on how to improve each player.  Teach them how to succeed and make the substitutions when required.  Do not be the player because the more the team’s success is dependent upon your playing skills the less it is worth.

Try to let go control and concentrate on your talents and gifts.  You are an entrepreneur so the internal optimism and drive is there.  Let that be the fire to empower your employees to their strengths and give them the tools to run the company without you.  I promise, if you can do just that one thing, the chance of success in selling your business has just gone up dramatically.

This leads me to the second critical question, “Can I legitimately identify buyers having an interest in this business?”   This is a much tougher question to answer because each business and industry is different enough from the last that there isn’t a pre-subscribed list of potential buyers one can reference for every deal.

There are, however, some rules of thumb that I’d like to share with you that help me address this question.  The intent is that with these rules in hand, you will know where to start.  You can then create a list of potential buyers and segment them into categories from which you strategize about the most effective approach that protects your interests and competitive information.

The first rule of thumb is that your most likely buyers are right under your nose.  I work with business owners to list out their key employees, family, friends, college buddies, and service providers to consider whether or not they have ever expressed an interest in owning a piece or all of the company.  The conversation with key employees needs to be carefully scripted so as not to spook them, but the rest of the business owner’s network makes for some relatively comfortable and easy introductory conversations.  Incidentally, these conversations can also lead to a series of additional buyers culled from their networks.  This is especially true of your advisors such as CPAs, Attorneys, Insurance Brokers, etc.  Because they work with business owners across many businesses and industries, it is probable that their client base could yield a number of prospects.

The second rule of thumb is that your suppliers, customers, and competitors are likely prospects as well.  Small business owners usually already have a list of competitors in mind when they come to me to sell, but they usually haven’t listed out their entire supply chain as potential opportunities.  For example, if you run a gallery and happen to sell a number of pieces by a specific artist, that artist may want to buy the gallery space to allow him or her to better showcase their work, and to earn commissions off the sale of other artists (I’m sitting on the shores of the Cove of La Jolla writing this, so forgive me if the example seems incredibly niche – but there are at least twenty galleries within a chip shot of my laptop).

The third rule of thumb is that the internet is the best possible window to the marketplace you could ever need, and search engines like Google are perfectly designed to provide you with an array of potential prospects.  I once worked with a company in the beverage industry.  Between myself and a friendly intern, we were able to identify more than fifty potential buyers, complete with executive’s names, contact information, and often emails and phone numbers with just over an hour’s work.  Once you feel like you have the narrative down regarding the value proposition your company would provide to a new owner, give one or two a call.  You’ll likely spend most of your time talking to receptionists and gate-keepers, but I have found that if a small business owner has any inkling of desire to grow through acquisition, they are likely to return the call.  And if they don’t? It’s just a couple minutes of your time in making the call and leaving a message.

In my experience, it usually takes about 100 prospects to yield a single real buyer.  You want more than 1 (and best to have at least 3) to ensure that you have a competitive auction process for negotiating the deal.

If, by following these steps, you have not procured a list of 100 potential contacts, then it’s likely time to bring in a professional who can expand upon your lists through his or her expertise, relationships, and network.  Advisors will know intuitively and through experience what types of buyers have an interest in companies at various revenue and earnings sizes.  They also know how to quickly prepare and place the minimum documentation required to generate interest among potential buyers.  Additionally, their network of relationships often turn up financial or institutional buyers most small business owners cannot effectively access.

So back to the second critical question – if I can’t establish a list of more than 100 potential buyers, then the time may not be right for the company to sell for both external and internal reasons; perhaps it’s the economy, the market, financing opportunities, or maybe the company is just too small, too leveraged, or poorly managed.  Sometimes the best advice I give is not to sell… and the leading indicator there is often the lack of potential buyers.  In these cases, I advise the owners to focus on working on their business, keeping in touch, and then going to market again when the time is right.

In the midst of this, life goes on, and you want to sell your business.  Your buyer wants to buy your business.

As it’s pretty much guaranteed that ambition exceeds cash, to make the transaction happen you are likely required to agree to some form of seller financing.  That means that you, yes you, are the bank.  So you need to act like a bank.

Whether you structure seller financing as an installment sale, an earn out, a term loan, or some combination of the above (which is a decision best made between you, a qualified CPA, and an M&A Advisor, Investment banker or Broker), the probability of ever seeing the cash associated with the financing is highly dependent on the strength of the buyer’s loan guarantees.

There are typically three levels of guarantee; cash flow financing, asset based financing, and personal guarantees.  Let’s look briefly at each.

Cash flow financing is the typical way that small business sellers finance the sale of their business.  Simply put, the buyer agrees to pay the seller over a period of time based upon the excess cash generated by the company.  As you just convinced the buyer that the company will generate lots of excess cash (and that’s why they are buying), it is a little tough to turn around and say, “Uh, that’s not good enough.”  But the truth is; that’s not good enough.  Many, many things can happen that can quickly turn a profitable business unprofitable; the least of which is the transition between your steady hand and new ownership. In other cases, you and the new owner may dispute the profitability of the company once you have left – perhaps the new owner is “reinvesting” excess cash in the company as part of a growth plan, perhaps the buyer is running more personal costs through the business, perhaps salaries are adjusted upward to keep key employees.  There are many ways that your cash heavy company might no longer be “able” to pay the loan.  Once loan payments start being delayed, it is a never-ending battle to bring them back to current (think about delinquent tenants on rental property).  If you stop at this level of guarantee, it’s fairly unlikely you will ever see all of your cash.

The second level of guarantee is to attach your financing to the assets of the company.  Think about it this way; many small business owners manage their working capital requirements by bank financing Inventory and Accounts Receivable in their business.  The reason banks are willing to do this is that these assets can be fairly easily assumed by the bank (well; the threat of having your inventory repo’d is usually enough to keep business owners honest on their payments as the alternative is an immediate shut down of their business).  While it is unlikely that your buyer will agree to allow you to remain senior on Inventory and AR financing (which would limit his ability to finance w/a bank), it is not unusual to have the assets minus those just mentioned be pledged as a guarantee.  In other words, if the buyer fails to make payments, then the seller can in effect reclaim ownership of the business.  However, a clever and dishonest buyer can arrange an asset sale from himself to a new entity (even if owned by the new owner) and in the process create mayhem in your attempt to recover your payments.  This is where it is critical to have a qualified attorney draft the guarantee language of your note.

The third level of financing is the personal guarantee.  Many buyers have a misperception about what this actually means; it isn’t just a handshake that says if the business fails, the buyer will be personally responsible.  Well, actually, it does say that – however, to be an effective personal guarantee, the guarantee needs to be attached to specific assets owned by the buyer; this is usually their house, their investment portfolio, certificates of deposit, etc.  I usually suggest that you attach to assets that aren’t easily moved, and avoid assets like jewelry which can quickly disappear.   When there are multiple partners buying into a business, it’s a good idea to designate a lead buyer whose assets are attached to the guarantee, and then require the multiple owners to work it out amongst after you’ve been paid.

Once you have the guarantees in place, you need to negotiate the interest rate and terms of repayment.  I typically look at current SBA loan rates which can be found by calling your local community bank (assuming they haven’t shut down while you were reading this article), and then add a couple of points to cover the risk of holding a note tied to a single investment (as opposed to a diversified portfolio) and to cover the cost of having to recover your assets should the payments fail to materialize.  There is a limit to what a buyer will accept, and as with every transaction – it’s a negotiation.   Ultimately, you want to see the business succeed, and straddling them with usurious interest rates won’t contribute to that ambition.

I leave you with this final recommendation; a business transaction, in fact any transaction between people, requires a certain level of trust.  A solid transaction starts by making sure you pull enough cash out on the front end to satisfy your current ambitions and goals with the understanding that all financing is Risky Business, and then trust your buyer has every intention to live up to his promise of repayment. Those guarantees are like life insurance; you want to have it, but never use it.

I am working with a small, family run business that is quite successful and who is considering selling their business.  I say “consider” because they do not have to sell it right now so they are evaluating the potential sales price vs self perceived worth.  Like all of us business owners we have a self determined worth we have put on our business. This takes into consideration our knowledge of the business valuation process, the effort we put into starting the business and the after tax cash we would receive if we did sell it. Value and worth are very different and is usually in the eye of the beholder.  The biggest challenge in negotiating a business sale is the difference between the seller’s view of worth and the buyer’s view of value.

This business is the typical husband/wife combo with a few employees and the owners are getting tired of working all the time.  They make good money but are becoming burned out so they wanted to look into possibly selling it.

When I met them, and before I reviewed their financials, I asked them how much they wanted to sell their business for.  They told me $500,000 and explained how they came up with the price.  Quickly followed after their response was them looking for my opinion of that price.  My answer was short and surprised them a little. I told them that they set the price and I set the terms.

What that means is that I can sell their business for $500,000 if the terms are right.  If they are willing to work for 5 years for free under the new management, if they are willing to take $10,000/yr for 50 years or they have assets in excess of $500,000 that the buyer will get free and clear of debt.  This is an extreme example of how terms can make/break the deal.

The husband was very quick in his response and that was that there were no terms available in this deal.  Only an all cash offer and 30 days transition for them will be expectable.  WOW!  Now that just made the deal much, much harder to sell.

As I explained they have a mom/pop shop that realistically the buyer will be another mom/pop.  Most people don’t have $500,000 cash in the bank and financing will be required.  The current commercial lending market is very tight (to say the least) and it would be unrealistic that no seller financing would be required to make the deal.  If the sellers are unwilling to finance any part of the deal then the number of potential buyers just went down significantly.

If they are looking for all cash deal then the type of buyer they are looking for is an investor type.  Unfortunately they do not have any key employees to run it and the company has not shown it can survive without the owners involved in the day to day operations.  Investor type business buyers are not owner-operating entrepreneurs.  They are looking for cash flow company’s that can run themselves with limited management requirements.

The bottom line is simple economics of supply and demand.  The less number of buyers (lower demand) usually means a lower sales price.  I gave them two choices to think about as they evaluate the sale of their business.  Either fire themselves and show the potential investors that the company can run without the owners involved in the day to day operations or sell it to another owner/operator and know that seller financing will be required.  I’m not saying that these are the only two choices available but are realistic considerations that need to be evaluated when it comes to selling their business.

Remember, it only takes one buyer to sell your business but be honest with yourself before you go in so you are better prepared for the multiple opportunities.

Not only was my personality a challenge but I chose to work in the accounting field (Big 8 audit firm so that will date me) right out of college and, just in case you didn’t know, accountants are not the cutting edge of risk and live on the edge type people.  So let’s just say that my length of service was rather limited before I decided to go out on my own.

I had an eye opening experience regarding employees and the value they provide when I was starting my company in the early years.  I was ambitious and a driver in my early 20’s ready to take on the world.  My goal was to have 100 employees by the time I was 30 because to me that would be the definition of success.  Now I already qualified myself as 20 so you have to give me some room here on my logic at the time.

Well I worked hard and was at 50 employees when I met with a friend of the family.  He managed a company with well over 200 employees and explained my goal.  He told me that his definition of success is to make as much money as he can with the least number of employees.  Here he was with hundreds of employees and he is trying to go the other way.  Huh, maybe he is onto something.

He went on to say that he spends more time dealing with employees than everything else combined.   He suggested that I look at outsourcing and managing contracts over managing employees.  He was right; I too spent an enormous amount of time hiring, firing, managing and evaluating employees.  I also continually tried to keep them busy so they would stay even thought the work load changed and it cost me money.  

It’s not that employees are bad; just known when you NEED them.  As it relates to your employment and selling your business you should consider firing yourself before you go on the market.  What this means is that you should be working ON your business not IN your business to maximize the value.  Many family run, private companies have the owners involved too much in the day to day operations and working 50-60 hours a week.  How do you think a buyer will feel if you have to work that many hours and you know the business?  The buyers get cold feet and nervous when owners are that involved in the business operations.

From my experience the owners ideal involvement is 15-20 hours/week where they understand everything that is going on but their time is strategic in nature and less in operational. 

Remember a buyer is looking for an opportunity to work and grow the company.  Taking over an existing company is not easy and will take a substantial amount of time.  If you, as the existing owner, are already working 50+ hours then how many will the new buyer have to work just to stay afloat?

The bottom line is that employees are both good and bad.  They can make you money and lose you more.  They are take time, emotional and financial effort and have brought me my highest highs and lowest lows.  Just remember that when it comes to selling your business, success is based upon profit and not the number of employees.   Actually the opposite is true, the fewer employees required to generate the sales revenue then the higher business value.  Efficient and tightly run companies are worth more since there are less moving pieces and fewer chances to jump the track.

You are not the best employee, you are the owner, so remember to try to work yourself out of job and your company’s value will soar.

Wikipedia defines “a non-disclosure agreement (NDA), also known as a confidentiality agreement, confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement, as a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to by third parties. It is a contract through which the parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets.  As such, an NDA protects non-public business information”.

The point of the non-disclosure agreement is to protect the seller from buyers who take non-public information learned during the escrow process and use it without compensation.  When you sell your business there is a certain amount of private information that will be exposed to the buyers in order for them to evaluate the sales price.  This information provided is protected by an NDA whereas (that’s lawyer speak right there!) the buyer cannot take this and tell anyone else or use it

A typical scenario where an NDA would be smart to have is when a buyer is actually your competition.  You open the financial books, show them your history and client list, disclose your patents and layout your business plan in order for them to evaluate your value.   They then take this information back to their nest and use it against you.  Don’t be surprised because it happens all the time.  Think about how many times you have walked around houses for sale even thought you don’t want to buy it.  You look around, get ideas and learn whatever you can.  It happens all the time in both home sales and business sales. 

Be aware that just because you have a signed NDA does not mean that you can enforce it.  Proving that a potential buyer gained information that you should be compensated for is a difficult task.  Things like patents or products are easier to prove but there are companies out there where all they do is knock off’s of successful new lines.  It is very difficult, thus expensive, to prove that you lost your top customers, key employees or business plan to another company.

Now, practically speaking all legal documents is only good if they can be enforced.  To be enforced you need to show breach of contract and damages.   The moral of the story here is unless you have money to defend your NDA and have something that someone would actually take that causes you financial damage then don’t worry too much about an NDA.  I think they are a good idea to have in place and would always encourage business owners to have all potential buyers sign them.  It’s better to have in place and not use then wish you had them later.

Just be a little street smart and protect your valuable assets.  I hear that only 30% of the business transactions close after they get into escrow so go in it with your eyes wide open.  A NDA is a good idea but don’t think that just because they signed something that they will follow the law.  I hate telling people that I told you so.

Let’s look at the difference between a job and an opportunity.  A job is somewhere that we go to provide a monthly income through wages.  Those wages can be hourly, salary or commission based but usually they have no/little rewards.  Many small businesses run this way and, to be honest, that’s completely fine.  The business provides the personal cash flow the owner needs, the flexibility of time they want and the freedom they deserve. These types of owners are not pushing to grow but rather to stabilize the company. 

They have no desire to continue to go through growing pains and push the business to the next level.  The problem with this philosophy is often times if your business is not growing, it’s actually dying.  Competition, market changes, technology and new processes will eventually kill the company.

Unfortunately many owners work the same hours, they won’t let go control to key mangers, they re-invest only the capital required to maintain their business and are not looking to grow year over year.  This type of business owner can be as simple as a coffee cart or as complicated as a manufacturing company.

The key element is that that the owner’s are the key employees and all business decisions are around maintaining a life style and not a business life cycle.  This type of business can sell but the buyer is usually someone who wants the same thing.  No problem, just be aware that there are less types of buyers that want this business and thus it’s worth less.

Take the same situation above and turn it into an opportunity then the multiplier to determine price significantly increase.  If you are a business owner as stated above and you want to add instant opportunity value then fire yourself!  That’s right, replace yourself with someone else and your business value will increase immediately.  Maybe it’s not completely but get yourself down to 20 hours a week.  The reason for this is if I want to buy your company and you are working 60 hrs/wk on the job then how am I ever going to make it?  You have been there for years, you know everyday how to do the job and yet you work so many hours, why? 

I’m looking for a company that gives me the freedom to manage and grow not work and operate.  If I wanted a job to work then I would take a job that wouldn’t require me to risk everything I own.  Running a business is 7/24 (7 days @ 24 hrs/day) so if I had a choice between a job and opportunity I will take the opportunity.

Make your company run smoothly, show a proactive marketing plan in place and working. Show me new products or services that are coming up and key employees who can manage the growth.  That is opportunity not just a paycheck.  

Too many owners try to sell their business and convince the buyer of the opportunity.  They tell buyers stories of all the things they “could” do and possibilities available but no results backing the stories. 

In order to maximize your sales price design, build AND implement an opportunity.  If you do this, you will have more buyers interested, a better chance of financing and no regrets….I promise!