WHEN AND HOW TO SELL A BUSINESS

By Scott Rouse

When a wave of consolidation hits an industry - a classic example is funeral homes, but many others are developing -- an independent owner is forced into some choices. You can sell, and join the trend, or you can maintain your independence -- and face stiffer competition than ever before.

The consolidators have access to more plentiful and more inexpensive capital, and they benefit from economies of scale. They can drive prices down when they choose to seek market share.

It can be advantageous to be the first in your region to sell to the consolidator. You might get a higher price, and you might be chosen as a "flagship" for the area. Other acquisitions made in the region would then come under your management -- and you might enjoy acquiring other businesses with someone else's money. If you delay, your profits might be reduced by the impact of new competition, and you would have a less robust business to sell.

The best advice is to be prepared. A company making several acquisitions in an industry is comparing managements. Many well-run and highly profitable businesses function perfectly well without a business plan, but professional managers in public companies have such plans, and today you can acquire software to help you accomplish the task for about $100.

Documentation, like a business plan, allows a prospective buyer to evaluate a business more readily. The buyer's focus is on expected profits, and a business plan is where you tabulate these projections. It means less disruption of your business if much of the evaluation of your business can be accomplished off-site. And disruption of your business can unsettle employees and customers, and it can threaten its value.

Financial statements are central to any discussion of selling a business. They become more important than ever, and professional presentation will impress the buyer and allow the transaction to proceed quickly. Audited or certified statements would allow you to make the best possible impression, and might allow you to demand more in cash at the closing (because the audited statements reduce the buyer's risks).

Mistakes Sellers Make

Overconfidence is the first mistake commonly made. Buyers know the subtleties of mergers and acquisitions; for sellers it is usually all new. It is not an even match. So sellers should consult lawyers and accountants early to understand the tax and other issues that recur. You can sell the assets of your business, or you can sell the shares of your corporation, and the tax consequences are quite different. Buyers typically prefer to buy assets, and sellers typically prefer to sell shares. You must consult professionals to understand, in advance, how much money is at stake. You need to know the tax treatment of payments for a consulting agreement, or a non-compete agreement. The buyer is likely to suggest that part of the price be attributed to such agreements, but the taxes on these payments are higher than the capital gains rates that usually apply to the sale of the business.

Timidity can be another problem. Sellers don't ask buyers enough questions, especially about the financing. Buyers often want to borrow part of the purchase price from someone - usually a bank, or the seller, or both. Notes owed to sellers are almost always subordinated to bank debt, and the unsuspecting seller does not discover this until final papers are being reviewed. A seller who expects to be owed money by the buyer after the closing -- for notes, payments under a non- compete agreement, or a consulting agreement -- should understand the buyer's proposed balance sheet for the day after the closing. Few sellers ask enough questions about the planned financing.

Negotiations

If you want to sell your business, you strive to get an offer in writing. It is a key milestone towards the target. But too early it is a problem. An offer in writing routinely asks the seller to accept within about two weeks, and it routinely asks the seller to stop talking to other buyers. A seller should not accept an offer before developing a sense of what other buyers might be willing to pay -- and this takes time. Take time to understand an offer thoroughly -- is the buyer going to assume the debts in your business, or expecting you to pay them off out of the price?

The best weapon of a seller in negotiations is a good, credible alternative, another buyer or a decision to keep the business. The smartest sellers keep the buyer guessing -- guessing about how interested they are in making the deal, and at what price. They know that getting too friendly too early (this is tempting, and a natural instinct in these circumstances) can be costly -- buyers won't stretch to the top end of their price range if the deal appears "in the bag."

Negotiations for the sale of a business extend beyond one day, and they often last several weeks. After a handshake on the price, the buyer investigates the business, the due diligence. The buyer can often point to some new information and say this is a reason to decrease the price. The seller is now weaker than the buyer -- the buyer can walk away without stigma; the seller, on the other hand, may be considered "soiled goods" if the deal is not completed. This underscores the importance of doing your homework about the buyer, and talking to others that have dealt with them, before you shake hands on a deal.

The stakes are high, financially and emotionally. The best price usually comes when the seller agrees to run the business for the new owner for a few years. Then price is not the seller's only concern. The working environment could cause extraordinary stress, and exact a price of its own.

Scott Rouse is a merger/acquisition specialist and consultant based in New York.

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