The Challenges of Buying (and Selling) a Business

A month or so after a business buy-sell transaction the buyer said he had found some challenges but was making his way through them. Finding a business to buy is much different than finding a house to buy. There’s no MLS, the seller doesn’t want anybody to know the business is for sale, there’s a lot more information to verify, and comparable sales information is limited.

Similarly, moving into a house is easy, especially compared to taking over a business. The house is clean, it’s been inspected so you know what to fix or upgrade, and it’s really about unpacking and getting settled. 

When taking over a business you have to deal with customers, employees, operations, culture, cashflow, and more. Here are three things owners should do to make it smoother for buyers (and increase the ease of selling and the price).

Run it as a business, not a lifestyle. Run it as if you’re not selling but are in it maximize growth and profit. Realize the little things you know how to do in your sleep from 37 years as an owner (as an unconscious competent) aren’t second nature to the buyer. There not second nature to your staff, which is why a business plan, job descriptions, and delegation are so important.

As I’ve written many times before, the buyer is buying your people as much, or more, than they are buying your “company.” Employees are the lifeblood of any business so treat them well, pay them well, let them grow, and trust them.

Financial people will tell you to measure everything. Those numbers are the buyer’s (and the bank’s) insight into your business. The abovementioned buyer bought a good business that didn’t follow normal accounting practices (not even GAAP, just normal). This is a project-based business and work in process was not being recorded on the balance sheet. How do you know how profitable a project was if you don’t track things correctly? This means have a good accounting system and pay attention to it.

I could go on but you get the point. Take the little extra time it takes to do things right, not just run from project to project.

“If the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Thomas Aquinas

Hobbies of any kind are boring, except to people who have the same hobby.” Dave Barry

Why Buy and Own a Business?

The March 1, 2021 comic Non Sequitur by Wiley gives us a great answer (to the headline). You can see the comic here* and in the second panel one of the characters answers the question, “If you could go back knowing what you know now, what would you do differently?” with:

“I wouldn’t be so self-conscious in high school and I’d work toward the career I really wanted instead of settling for a job I can’t wait to retire from…”

Something you want to do as a career verus “just a job” is what it should be about, right? This is why people leave their corporate jobs to own a business, whether by starting one, buying one, or getting a franchise. But this is not a rah-rah for ownership, because that’s not needed for those serious about it. Rather, here are a few things out of the news that all business buyers should watch out for and sellers should correct, if it’s an issue with their company.

  • Greensill Depended On a Few For Much Revenue,” Wall Street Journal, March 8, 2021. Customer concentration can be a killer. Greensill had 90% of its revenue from five clients in 2019. There’s a reason buyers and banks get nervous about concentration. Often the seller (and sometimes the broker) will dismiss this by saying things like, “They’ve been a customer for years.” Yes, a customer of the seller and what happens when there’s a new owner? Or a change in the customer’s management, or how a problem is handled?
  • UPS’s new CEO is focusing on the bottom line by weeding out less-profitable customers (Wall Street Journal, March 6, 2021). This is where good job-cost accounting comes into play, so you know your customers profitability. An owner I know was approached by his top (30%) customer about buying his business. For a variety of reasons, he turned down the offer, said he realizes he will lose the customer at some point, and pointed out the 30% of revenue was only 10% of gross profit so it won’t be that big a hit (and he works daily to diversify the customer base). If you’d like a slide deck on customer loyalty and due diligence from a ACG webinar send us an email.
  • Boeing has been in the news again as a couple Pratt & Whitney engines lost parts while flying. Note to buyers, inspect the equipment, the inventory, and the technology. Owners thinking of selling in the near future are notorious for not investing in assets as they did in prior years. Owners should invest in the business as if there’s no plan to sell. The price can only go down if anticipated capital expenditures are higher than normal.
  • Microsoft Exchange customers, at least 60,000, were hit by an aggressive hacking operation that saw stolen emails and malware installation. A client of ours was recently hit by ransomware. Owners need to keep the technology up to date, have protections, and really pay attention to all aspects of cybersecurity. Our podcast series features (separate) discussions with Jennifer Hill and David Henderson on cybersecurity and Dan Weedin on crisis management. Spoiler alert, cybercrime is one of the top two risks businesses face.
  • Trust is the currency that is most valuable in this uncertain moment” is on the front page of the March 5, 2021 Puget Sound Business Journal and it’s a quote from KD Hall. I disagree. Trust is most valuable at all times, especially in a buy-sell situation. No trust, no deal. What seller or buyer would sell to or buy from someone they don’t like or trust? Who would make or accept a job offer to or from someone they don’t like? Not a sane person, that’s for sure.

Business ownership, especially via buying a mature, profitable, and fairly priced business, is the best thing for a lot of people. Just make sure you buy the right business the right way and you pay attention to the above (and all other details of the business).

* Due to copyright laws, I can’t publish the comic’s panel.

Questions and Confidentiality When Exiting

By Jessica Martinka

There’s an old song that starts out, “Signs, signs, everywhere a sign.” What about, “Questions, questions, everywhere a question,” when it comes to planning to exit a business?

  • Why am I thinking about selling my business and do I really want to sell? 
  • Will it be enough money?
  • What does my spouse think about it?
  • Who do I let know? Is it employees, vendors, customers?

Jim told his two (very) key employees he was planning to sell to a company in the same industry. This was all of a sudden, they panicked, and within days both turned in their two-week notice. Yikes!

Owners are scared because a confidentiality breach will scare employees, vendors, customers, and competitors. And potentially drive down the value of the business.

Last month I wrote about what happened when corporate took over the company I was working for. I didn’t give notice, but should have. I can tell you all the worry affected my productivity, especially once I found out I was training my replacement.

At the management level, consider letting your team know about a potential sale as you’ll need them during the process. Have them sign an NDA and consider giving them a retention bonus, post-close as an incentive to stay. 

Customers finding out can create problems. Competitors finding out can be a disaster. Even suppliers, as they may put you on C.O.D. But it’s mainly about the employees because buyers are buying the people not just the business.

I was naïve when corporate took over. Most people will look for a way out which is the number one reason why owner’s keep the potential sale of their business quiet. And a business buyer doesn’t want to come into a business with no management team or missing employees. Hiring an advisor familiar with buy-sell deals who understands the importance of confidentiality will be beneficial through the process.

A good place to start planning your exit is with our book: If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)

“The size of a planet doesn’t strike you until you start looking for something.” David Sedaris

Business – It’s Not Rocket Science

I have never worked with a business buyer who didn’t want to grow (aka scale) the business they buy. I don’t know if I’ve ever met a buyer who only wanted to keep it where it is. So I found a Bloomberg article in the February 14, 2021 Seattle Times interesting when they quoted Pierre Poignant who is running Branded, a VC back firm that has acquired 20 houseware and leisure brands. He said:

“We want to be a multi-billion-dollar company” and acknowledged, “buying businesses is one thing. Scaling them is another.”

My initial takeaways from this are:

  • It takes more than energy to grow a business. It takes a plan, the skills, and the resources. When buying one, a little luck is often involved. Luck often being defined as finding a company whose owner is “coasting” while making a great living. Some may say the seller is “leaving money on the table” by not fully exploiting their competitive advantage.
  • Sellers really need to up their game to show how the business can grow. This means grow the darn thing instead of keeping it stable and saying something like, “You can easily grow it, I just don’t want more employees.”
  • It takes a team. That’s why owners/sellers need to show they can attract and retain great people and let those people flourish. This is really what any buyer is buying.

Some may say about growing a business, “It’s not rocket science” and maybe they’re right. Given how many business failures and struggling businesses there are it might be tougher.

“The greatest and most important problems of life cannot be solved. They can only be outgrown.” (Novelist) Frank Herbert

“You want me to do something – tell me I can’t do it.” Maya Angelou

Texas Energy Screw-up and Small Business Impairments

The headlines about the Texas freeze and energy disaster caught my attention. I read two long articles, one in the Seattle Times and the other in the Wall Street Journal. Both had the same conclusion; Texas took the easy way out (again) and paid for it.

The bottom line is Texas officials had been warned many times over the last 30 years about their energy infrastructure not being winterproof. They ignored the advice because deep freezes rarely happen in Texas and by ignoring it they kept their electricity rates the lowest in the country. But enough about those details, let’s discuss how too many businesses are like Texas electricity and wishful thinking.

A lot of business owners are like Texas and ignore the planning part of exiting their business. They flip the switch and say they want to sell. Like the Texas utilities, there’s no preparation for the actual event. So here are some thoughts on the subject.

Mr. or Ms. business owner, your company is not the greatest thing ever. There are a lot of other businesses out there, all wanting the best buyer possible to buy them. I mean, who wants to sell to someone who won’t be successful. That means you have to look at your business like a buyer will look at it. Better yet, get an independent set of eyes to look at it. Perform a mock due diligence (self-promotion here: as in our book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?). Have a banker who does buy-sell loans look at it also, because they’re the ones who will provide the money.

Once you’ve done this 30,000-foot overview it’s time to put a plan in place so you can exit with style, grace, and more money.

Don’t try to do everything at once. There’s a reason experts say start this three to five years in advance. Things take time. And three to five years allows you to show the results on your financial statements.

Have a list of tactics, whether it’s for growth, margin improvement, expense reduction, process improvement, an improved culture, or something else. Know what you are going to do.

Get into the details.

Implement the darn thing. Don’t have it be a shelf plan, make it an action plan (see my blog for my ACTION™ plan to sell a business).

Get your team involved. Everybody wants to do better and they don’t have to know it’s exit planning. They’ll think it’s a growth strategy at work.

Cover the basics first, and as I’ve written many times, the basics include:

  • Solid financial systems and accurate financial statements. Don’t emphasize minimizing taxes. Show profit because banks and buyers like profits. Don’t blend your personal and business checkbooks.
  • Grow. Prove you can do it versus saying how it can grow in the future.
  • Shed your ego. Get to the point you do as little as possible with the day-to-day operations. Concentrate on strategy and vision.
  • Hire and be able to retain great people. Buyers are buying your people as much as anything else.
  • Like searching for customers, you have to keep doing the things you’re supposed to do. Do so and good things will happen.

Don’t be like the Texas utilities and ignore all the preparation until it’s time to exit. Because “things” happen, as per the example below.

Lesson: A client lost a deal to sell his company (for more than it was really worth). He wasn’t prepared to provide the buyer what the buyer needed, which was the usual and customary information. While regrouping, the company got hit by a cyberattack, closed operations for days, lost customers, and now his business might not be worth much of anything. And he’s got a handful of leases on which he’s obligated (in a tough office real estate market). 

Tip: He thinks the cyberattack was like what happened with Solarwinds, via a third party. His attackers got in through his previous managed service provider that had not deleted access to his system. Do disaster planning on anything that can interrupt your operations, and cyber is on the top of the list, way ahead of any natural disaster.

Our podcast channel has discussions on cybersecurity, disaster planning, and much more.

A Job Disguised as a Business

We’re working on a client grow-by-acquisition project and have found the industry is not only very fragmented, with a lot of small companies, but too many of them are “A job disguised as a business.”

These owners are so busy bidding, selling, designing, installing, doing service work, etc. they don’t have time to pay attention to the business itself. They can’t answer basic questions every owner should know, and it overwhelms them to fill out a short questionnaire that should take no longer than 10 minutes (most are check the box type questions).

A big question is, “Is there value and if so, how much?” The only (real) buyers for these businesses are companies in the same industry who can handle all the functions the owner is doing. There’s not nearly the equity there would be if the owner worked on the business versus in the business.

My advisory business doesn’t have much value. A CFO for hire, on his or her own, doesn’t have much value. A firm with multiple advisors (of any kind) has value, either to an outside buyer or via an internal succession like law firms, CPA firms, construction firms, and others. It comes down to an owner doing the basics:

  • Create a capable team.
  • Delegate responsibility not only tasks to them.
  • Realize your employees might not do it as well as you, or as fast, but three people at 80% is better than just you at 100%.
  • Let them grow so the business can grow.
  • Be organized with processes and especially with the financial systems and statements.

In a recent deal the business buyer said while he’s never managed 50 people before he feels comfortable because of the middle-management team. That’s a heck of a lot better than when the owner has their fingers in every aspect of the day-to-day operations.

“If you attack the establishment long enough, they will make you a member of it.” Art Buchwald

When the Corporate World Attacks You

By Jessica Martinka

Horror stories abound! Both parents working from home, kids taking virtual classes, and bandwidths stretched thin, both internet and personal.

The virtual work world makes it much more difficult to know what’s going on. Unlike the schmoozing, collaboration, and gossip we used to do in person. 

Not knowing what changes and/or decisions are being made that could affect your employment and life can bring the fear of the unknown, and I can surely relate to that.

I was working at Online Trading Academy when corporate bought out the local owner and started “taking over.” The next day corporate employees swarmed the place and we were left in the dark wondering if we would still have our jobs.

Every night I went home worried sick. Soon after the takeover, everyone was gone except for me. They had brought in a new GM and my job was to get her up to speed. Once I did, they let me go. I had convinced myself they were going to keep me, not realizing I was training my replacement. Pretty naïve.

We see this corporate maneuvering all the time and it’s why executives choose to escape the corporate world and buy a business. They are fed up and want to be more in control of their future.

So, what makes a qualified buyer?

  • Experience – To buy a mature profitable business, a buyer must have the appropriate experience and skills in managing people, processes, money, and enthusiasm.
  • A good personality – A person will never buy from or sell a business from someone they don’t like. The buyer and seller must trust and feel comfortable with each other. Business buying and selling is a life-changing decision for both parties. Relationships rule.
  • Capital – the cash needed is tied to the size of the business and the fair market salary for the job of running the business. For an individual buyer, figure at least two times that fair market salary from the buyer.

A smart buyer will hire a great team of advisors and make sure they have experience in buy-sell transactions of the size and type he or she seeks. This will give you a better chance of getting the deal done, which happens to be the title of our new book.

Owning your own business puts your future in your own hands.

Your chances of success are clearly best when you buy an existing, profitable business for many reasons.” Richard Parker

“Owning a business is risky but if you buy a mature, profitable, and fairly priced business your leap of faith is off a chair not the roof.” John Martinka

Tech and Our Lives

At the end of 2020 The Wall Street Journal had a feature article, co-authored by their four technology and related columnists, titled, “The Tech That Will Change Your Life in 2021.” The three topics that caught my eye were:

Death by Subscription: Yeah, pretty obvious. Every consumer company wants to be a SaaS model. Every search fund business buyer has the same criteria, which includes, “Recurring revenue.” Robbie Bach spoke at my Rotary club last fall, asked us to think about all the subscriptions we have, and guessed most of us would be at 20. I can easily get to about 15 in a couple minutes as I consider Office, Internet, Cable TV, Prime, Netflix, our CRM, Constant Contact, Beachbody, etc. Will it end? Will consumers revolt and scale back? We’ll find out, won’t we?

Return of the Trust Fall (as in the team building exercise where people fall backwards depending on their co-workers to catch them): The title is a metaphor for remote workers wanting to get back to the office, collaborate in person, and the offsite retreats, especially for companies with workers around the country or world. I agree. Once the vaccine is out en masse people are going to want to see each other, talk in person, get fodder for gossiping, and head out for coffee or lunch together.

E-commerce ‡ Amazon: Amazon disrupted a lot of industries, especially retail. But what’s next? Walmart, Shopify, Target, and others were slow to catch up and then found the barriers-to-mimicking were low. This is similar to a newsletter I recently read about how companies get complacent when all is going well (and I know Amazon is not complacent). The newsletter gave a few examples of middle market firms that thought they were on top of the world and didn’t see the competition leapfrog them. Always wonder how you can innovate, adapt, and stay fresh.

Even if you’re not a tech company you need to keep up with technology and how it can improve your business. And also realize no matter what the technology is, it still comes down to people. People have to create technology, implement it, learn it, use it, etc. A robo-dialer won’t get you customers. A good salesperson will.

“There are two things that can destroy a family business: the family and the business.” Leonard Lauder (former Estee Lauder CEO)

“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.” Douglas Adams

Getting Your Deal Done

Originally published on ibainc.com blog in February 202!

I was honored to have IBA team members Gregory Kovsky and Curt Maier contribute a chapter to my latest book, Getting the Deal Done. The book is 61 short chapters, 50 of them written by me and 11 by other deal pros like Gregory and Curt. The title is the theme of the book with each chapter being a deal tip or strategy (and it’s available on Amazon).

This post is an abbreviated overview of the book, broken into three sections:

  1. Preparation 
  2. Deal making
  3. Due diligence

Preparation starts with thinking through what you want to do, when you want to do it, and why. Business buyers need to do the following (among other things):

  1. Get our spouse on board if you’re married. This is so important. In 2020 I was introduced to a very qualified guy who said he wanted to buy a business. On our first call I asked what his wife thought about it and was told they hadn’t discussed it. On our second call I asked again and got the same answer. I told him we would not meet in person until he talked to his wife about it. Guess what? We never met.
  2. Know how much money you can put into a deal and how much you’re comfortable putting in, as your share of the down payment. These are often different numbers. How much of your investments will you use? Will you use qualified plan funds (you can use them without tax or penalty and your new 401k plan will own shares of your company)?
  3. Determine your criteria. Know what you don’t want and be open. It’s important you know what you want to do on a daily, weekly, monthly basis. I’ll know it when I see it doesn’t work. You may think it sexy to make something but if you’re a sales type with no manufacturing experience it’s probably a road to disaster.
  4. Have a search plan and implement the darn thing. This is a contact sport; the more contacts you make the greater your chance of success and in a shorter period of time.

Business sellers please make it easy on your buyer, the bank, and your intermediary. Concentrate on the following (and there’s a lot more but I have space limitations):

  1. Clean up the books. Show profit, no matter what your CPA says. Have a strong balance sheet. Have accurate and consistent financial statements (this often means don’t blend your business and personal checkbooks). For example, a client of mine had, over three years, four expense items I determined were owner compensation (officer salary, owner salary, management wage, and shareholder wages). 
  2. Don’t just say the business can grow, grow it.
  3. Reduce dependencies like customer concentration, supplier concentration, a uber-key employee, and especially any dependency on you, the owner. I recently saw a business for sale and on the surface it looked great, with $1 million of earnings. However, they designed and installed very complicated systems and guess who was the only person on staff who could do the bids? Yep, the seller.
  4. Show you can attract and retain good people. Pay them a fair wage, have a good culture, and keep productivity high.

Getting to a deal is similar for both buyer and seller.

  1. Both have to be active searchers. Buyers want to see as many opportunities as possible and sellers need to find the right buyer to preserve their legacy (and pay any seller note). A couple years ago I asked a buyer if he was calling the brokers every month. He said, “No, they know I’m out here.” No, if they hear from you once they figure you’re one of 70% of (supposed) buyers kicking tires.
  2. Make a great first impression. 
  3. Do a thorough analysis without getting analysis paralysis.
  4. Use deal pros to determine a fair price, buyers, make an offer, and sellers, if it’s the right buyer, get it done.

Due diligence is a time for confirmation not surprises. Sellers, do some background checking on your buyer, get a financial statement, don’t be afraid to ask for references, and realize your gut feel is very important (as it is for buyers).

  1. For buyers, the financial statements are the starting point but they’re a long way from the end. Look for abnormalities year-to-year. Your accountant or CFO can help and depending on the size of the deal you may want a quality of earnings report, which is a fancy name for a mini-audit and proof of cash (flow).
  2. Put a lot of time in on the non-financial factors. The customers, suppliers, employees, market conditions, competition, the lease, and anything else that influences the numbers. 
  3. As I write this it’s early 2021 so don’t forget the Covid non-financial factors. Can the business be shut down (it wasn’t just restaurants it was wide reaching, so were many factories, which is why if you order a hot tub now, you’ll probably get it in 2022), can your customers be shut down, do your employees feel safe, what precautions does the business have to take, and what’s the liability.
  4. Realize there are no perfect businesses and no perfect deals.
  5. Don’t forget the transition plan. You don’t want to be like one buyer and seller who, because they ignored this, went back and forth the day after closing with, “Tell me what I need to know” followed by, “Tell me what you want to know.” It took a phone call and a lecture to get them on the same page.

There’s, obviously, a lot more to it than what’s in these 1000 or so words. Let me finish with the three key factors to getting a deal done and they’re not price, terms, and conditions. They are motivation, relationship, and education. Both buyer and seller must be motivated. It can’t be, “I’ll sell if you grossly overpay me and it’s all cash at closing” and it can’t be, “I’ll give you a little cash, a note, and an earnout so if I’m as good as I say I am you get full price.”

Relationship is the key though. Buyer and seller must get along, must trust each other, and must have confidence in each other. As one client, who had started, sold, and then bought two businesses, said, “I would never buy from or sell to someone I don’t like.” Finally, you must educate yourself (your advisors will help) on what businesses of your type and size sell for, that it is a process, you will get frustrated, and it’s tough to find a match so when you do, make it happen. Have an experienced guide, pay attention to the details, and stay on track. 

When the Union Wins

The teacher’s unions won, at least in the Puget Sound area; most districts are not returning to the classroom in any material way. Based on the teachers I know, I’d say the union protected the 20% (it’s always the 80-20 rule, isn’t it) of teachers who took advantage of the situation. All the teachers I know are working harder than ever teaching remotely.

I am not anti-union. My wife was in a union for 10 years. My son is a project manager with a union construction company. But there’s a reason almost every business buyer I’ve ever met tells me they want a non-union business. They want to be in control. In most cases, they want the flexibility to treat their people better than what the union would. And to reward those who excel. The teachers I know the best would make a lot more money if there was merit pay. Just like in business, do well and you’re rewarded.