Your Company's Ultimate Deal

 

To get it right, selling your business involves more than soliciting the highest offer

Consider the paths of two business owners selling their companies after years of success.

One jumped into a deal she arranged with little forethought into what life would look like beyond closing day. The other, after fielding a number of attractive unsolicited offers, followed a more deliberate pace, weighing what would be best for him, his family and his employees.

After a few painful years of working under her former company’s new leadership, owner No. 1 caught a break and was able to buy the business back after it neared the point of failure. The second time around, she tapped a group of advisors and developed a plan for her exit and beyond. Today, she lives in semi-retired bliss.

While brushing off the initial large suitors, owner No. 2 focused on solidifying and enhancing the value of his company to ensure its viability going forward. He groomed a number of key employees to assume leadership of the business, strategically extended minority equity stakes and gradually eased back from day-today operations. Seven years later, the company’s valuation had grown considerably, little of it was tied to his hands-on involvement and the high eight-figure sale achieved all that the owner set out to accomplish.

“He wasn’t ready to walk away seven years earlier, but being offered a pile of money tends to get someone’s attention,” said Vickie Larsen, market executive with BOK Financial Private Wealth. “It made him think ‘Am I doing right by what my goals are — not just my personal financial goals but my legacy goals?’

“And by patiently planning and working with advisors, he received a much higher value for the business.”

Selling a business that’s been your life’s focus is challenging at any age or stage. Taking a thoughtful, deliberate approach is essential to emerging from the other end of the deal content and ready for whatever comes next.

Natural Evolution
Few business owners start their company with the end in mind. The early stage is so demanding, requiring immense amounts of time, energy and resources to gain marketplace traction, and grow into a going concern.

Then, as initial success leads into new opportunities and related growth, the thrill of the chase supplants the white-knuckled ride of the first few years. Increasingly, many owners relish the natural association of the company with their identity, and by extension, the business’ valuation validates their success.

Yet, while the raw numbers tell one story, many other factors go into the final selling price for any enterprise.

“When it comes down to the true value of the business, a lot depends on where the seller is emotionally and where he or she is in terms of achieving their legacy goals,” Larsen said. “If you haven’t figured that out when you go to sell, you might be very disappointed at the end of the day.”

In short, simply selling to the highest bidder is rarely a good exit plan.

“For certain, you want the best price, but the top offer often comes with hidden costs,” Larsen said. “With a little bit of planning and thought, those costs come to the surface and you quickly see that offer may not be in your best interest.”

An Iterative Process
Thinking about your post-sale future is a great place to start the planning process.

Do you want to stay involved with the business? Do you want to completely walk away? How do you want your employees to be impacted? Do you want to be paid in full? Would you prefer to stick around the business, take some money up front and receive future payouts?

Beyond that, are you really ready to stop working? Is your family ready for you to stop working? Are you seeking financial independence? Who else would you like to see achieve financial independence through this sale — family, the management team, employees?

“There are a lot of questions that need to be answered before you put your business up for sale,” Larsen said. “But you’ve got to start with that big picture first, understand what your goals are and work backward from there.”

Once you have a handle on where you’re headed, Larsen highly recommends that you pull together a team of advisors to help steer you through the process and avoid as many potholes as possible. Ideally, this group includes a financial planner, an accountant, an attorney and an investment pro.

All of them will feed into a financial plan that prioritizes your hopes and dreams, allows for the ongoing operation of the business, and incorporates its sale.

“When you’ve successfully built up a company, your lifeblood is in it, so you really need to determine if you’re ready to turn the page to whatever tomorrow brings,” Larsen said. “Some people don’t ever really get there, but the team of advisors can help by playing an important role in leading the owner down the path and asking the questions to get them thinking.”

Prepare to Sell
To be fair, the actual process of selling a business is a considerable undertaking, and the longer you’ve been running it, the more challenging a sale will be.

“It’s not easy to sell a business and it’s not easy to transition a business,” said Mike Benedict, head of BOK Financial’s business transition services group. “It’s the most important financial transaction of a person’s life, and yet, it’s likely one they’ve never done before.”

To help smooth the way forward, Benedict offers three tips for owners:

1. Conduct rigorous pre-sale due diligence. Buyers will be ruthless in dissecting a potential acquisition. Benedict said that discovering outstanding issues, resolving them and determining how to proactively speak to them before putting the company on the market will ease most due diligence challenges that a potential buyer presents.
2. Invest in a quality of earnings report. On its face, this deep dive into the company’s revenue stream may seem like overkill, especially if the annual financials are audited (also a must-do). But since the prospective buyer will be running this report, it helps to know in advance what it will uncover. Benedict added that if you’ve already done it, suitors will have more confidence in all of the numbers they see.
3. Lock up key employees. Incentive plans that offer core workers bonuses to stay through a transition will help soothe a potential buyer’s concerns that essential employees will follow the owner out the door. Benedict said the bonus typically equals one to two years of salary and is paid out in equal portions at the close of the deal, one year later and two years out.

“The goal of every buyer is to find reasons to knock the price down or kill the deal,” Benedict said. “Selling a business is a lot like selling a house — it should be staged before it’s listed and the owners should be prepared to be scrutinized by potential buyers.”

For Business Owners Young and Old
Recently, a business owner in his late 30s approached Benedict after the company he’d built up over the last five years was valued at $40 million. He’s not ready to sell, but he figures he’ll want to take some chips off the table in a few years.

By making some estate and tax planning moves now, that maneuver should proceed more smoothly while maximizing the benefits for his family. Plus, the young owner will discover some flexibility in next steps from that point.

“That valuation made him pause and realize ‘I need to start planning now,’” Benedict said. “As he and his wife go through the process, they’re learning a lot about what that means for them into the future.”

Given all of the emotional, financial and social supports a successful business provides for an owner, a snap decision on a sale can be painful. To be fair to yourself, your family and all of your company’s stakeholders, consider at least pondering what the future might look like — if not embarking on a full-fledged planning effort — long before you’re ready to sell.

Learn more about our business transition services.