Over time, I have seen that people who own and operate a business often view the transaction of selling their company as a means to an end, whereas professionals handling said transaction make their living doing the deal. The former tend to look at transactions as an arrow in their strategy quiver, while the latter view buying and selling businesses as their business.
Many private and family business owners are never involved in such a transaction until they decide to sell their own business. The accepted practices, knowledge and customs are foreign to them, which makes them both disadvantaged and distrusting during the process.
When working with owners who lack transaction experience, I start by sharing the lessons I have learned from being in their position before. Since selling my first company, I’ve made dozens of deals and have spoken to those who have been down this path as well, which has given me further perspective on the transaction process.
Below are a few lessons I’ve learned that can help you avoid any regrets when going through one of these transactions in an effort to sell your business:
If you have clear goals and objectives, it is easier to align the professionals helping you and manage the process. Your goals are your compass, but in my experience, it is fairly common for business owners to be thinking about a transaction while struggling to articulate their goals. This means you need more education and decision support; you likely need help understanding the decisions and consequences before you.
To help with this, find out how willing the investment bank you’re considering working with is to invest in owner education and handholding before signing an engagement letter. This is a bright-line test of fit between the parties.
If the bankers do their job right, there will be a clear set of goals before starting the process, and you will have a deep understanding of what to should expect, both good and bad, when the dust settles. The issues include majority and minority control, ability to roll over capital, price expectations, financial security, time commitment after the transaction, marketability, and unique legacy issues.
The market is always right.
“Managing seller expectations” is a common phrase that is a polite way of saying a business is often not worth what a seller expects it to be. A business is only worth what a willing buyer will pay at a point in time. In deep and liquid markets, the final bid clears the market, meaning supply and demand are matched and there are no buyers willing to pay more.
But there are two issues here: value and timing. In a recent case, we had a binding term sheet to sell a business at an agreed price, with the closing scheduled for March 2020. Once Covid-19 hit, valuations changed due to new uncertainties not priced into the deal. With great effort, we were able to get the business sold in November 2020, at 67% of the prior price. While the value had changed, the terms had also changed. The bank financing became seller paper, and the earn-out was a bigger part of the consideration. So not only was the valuation reduced, but also much of the risk was shifted from the buyer back to the seller.
My advice to owners is to first listen to what the bankers are saying about valuation. Second, if you don’t like the pricing, do something about it because it is still your business. Third, don’t dawdle toward closing. Get it done while the facts are known because negative surprises can and do happen.
Focus on representations, warranties and indemnities, not just price.
Some years after the deal closes, people tend to forget how much money they made, and that is OK. Life moves forward. But representations, warranties and indemnities might last forever. These deal terms tend to have a greater impact on sellers than the price because they cannot be changed and can come back to haunt you later.
You will likely need to make representations and warranties as shareholders, separate from the company. Once you sell, there is no business entity to pay the legal expenses for defense or prosecution of matters. That is separate from the aggravation of what was likely intended to be a blissful retirement.
So, when the lawyers are hammering out the language, pay attention.
Transactions are a team sport.
If you are not a dentist, would you practice dentistry at home? Probably not. The team of professionals you engage with and how they manage the process are critical to a good outcome. Even if you have not been involved in a transaction before, you need to understand the positions on the team and manage the game.
Understand the process.
Transactions are processes, not events. While they are intended to be well scripted, they are often turbulent. Learning how to deal with the turbulence, which means managing emotions and making tough decisions under pressure, is critical. If the professionals helping you are on their game, they will be actively managing information flow and expectations to keep clients focused. They really need to know their clients if they are doing their job.
The goal is to have no regrets. Once you sell your business, it is time to move forward with your life.
Many owners work their whole lives in their business and exit to move to the next phase of life. They want to feel good about their careers and legacies. They really do not want to be haunted by what could have or should have happened on their watch. That is why I always ask, “What do we need to do so you have no regrets when you walk away?” This is part of the goal-setting process mentioned earlier and is often the most impactful question of all.
After all, most people work to live, not live to work, so why have regrets when you are all done?