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:
- Deal making
- 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):
- 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.
- 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)?
- 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.
- 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):
- 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).
- Don’t just say the business can grow, grow it.
- 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.
- 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.
- 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.
- Make a great first impression.
- Do a thorough analysis without getting analysis paralysis.
- 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).
- 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).
- 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.
- 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.
- Realize there are no perfect businesses and no perfect deals.
- 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.