By: Dennis Zink
July 18, 2019
In this interview, Buy an Existing Business, I have outlined steps one through five in the selling process leading to a successful business exit. At the same time, this process leads to a successful beginning for the person Buying an Existing Business. It’s a 2 sided coin!
My interview is with Peter Gruits a former banker, realtor, business owner and SCORE Mentor. Attorney Matthew LaPointe, is a principal at Blalock Walters P.A, a Sarasota and Bradenton, Florida law firm.
Matt, why would a seller of a business want to engage an intermediary?
I think it’s important to understand that just because you’ve a built and know how to run a business, that doesn’t mean you know how to sell that business. There are experts in all kinds of fields and there are experts in selling businesses. You should look for an investment banker or a business broker who has experience in your type of business. They can add value because they understand your business. They understand the industry and who the potential buyers are. I think it’d be foolish not to use an expert.
Peter, does SCORE function as a business intermediary for clients?
One of the biggest challenges any small business faces is how to use professional services. Professional services are expensive. However, professional services have a unique niche. At SCORE, we have a team of exit strategists who provide confidential, free and experienced mentoring. This team helps clients understand what the selling process is about and how to prepare themselves for professional services.
If you sit down with an attorney, that clock’s ticking. What we do at SCORE is provide an opportunity to prepare to use a professional efficiently. To use a professional efficiently means that you need to know where you want to go. That’s why we set up the Exit Strategy program. Dennis, in your foresight on doing this, we really wanted to help existing businesses as much as we wanted to help brand new businesses.
Matt, why should a seller conduct an in-depth review? It’s important to plan your exit strategy. I’ve found that if a client comes to me and says, I want to sell my business in the next six months or a year, I say, “you’re too late.” You should have been here five years ago. You really need to plan your exit strategy. As much as five years ahead of time is the time to start planning. When we look at conducting an in-depth review of your company, we’re looking at the legal side. We’re mostly looking at contracts. We’re making sure that you have your management team under contract with appropriate non-competition clauses, with appropriate assignment of intellectual property clauses depending upon the type of business.
If the business is owned by more than one person, we make sure you have a good buy-sell agreement, a good agreement that discusses what happens when it’s sold and how the partners are going to handle that. We look at intellectual property to see if you have the appropriate copyrights, patents or trademarks. We look at the vendor contracts or contracts with your customers. This is what buyers want. Buyers want to buy an existing business that has these things in place. A buyer is not going to want to buy an existing business where the three key employees have no contract and could leave the day after the purchase. It’s this is the kind of in-depth review you need to do before you even think about marketing the business. Those are the things that I would look for. On the financial side, mostly this would be the CPA, but I would get involved in this a little bit too. You want to see what the tax returns look like. Has the company been doing a great deal of creative accounting? If they have, now’s the time to clean that up before we go to sell.
Peter, how does the SCORE exit strategy team get involved conducting an in-depth review?
As mentors, we want the client to tell their story. As experienced and non-fee charging experts let’s see if your story makes sense. Once you’ve told us your story, then we look at validating these facts. Let’s see that your story matches where you want to go. You’re going to use an attorney and a CPA, so you have to have an idea what you’re trying to accomplish.
Well, it’s very important for the business owner to have reasonable expectations. In talking to business brokers and investment bankers who do this for a living, they tell me that this is often their biggest problem, that the business owner thinks the business is worth a lot more than the market. It’s important to have a business valuation done by an appropriately credentialed expert to come up with a reasonable expectation of what the company will sell for. It makes it easier when the business owner has in mind that reasonable number rather than a pie in the sky number that isn’t practical.
Peter, what do you think about obtaining a business valuation?
I think a business owner needs to understand that there are ways to increase the value of the business. When you get an appraisal or a number in your head, and then you look through the financials for the last three years and the tax returns, you’re going to begin to realize the reality of your situation. If you want three times the earnings or the EBIDTA (earnings before interest, taxes, depreciation and amortization), maybe your EBIDTA is not high enough. You need to engineer your business so that you can increase its value so you can get closer to the number you’re looking for. You may think you’re your business is worth a million bucks. Maybe it isn’t worth that now, but you could increase its value by implementing changes to improve cash flow.
Matt, what should a seller include in their business prospectus?
I would call it a selling document or a sales document. It’s a document where the business broker or the investment banker would help you draft what is essentially a marketing piece. It describes your business and industry and who your customers are. It describes your sales and your geographic location(s). It’s a marketing piece. It’s sent to potential buyers to get them interested in your business. The best thing would be if that sales document started a bidding war and you had multiple suitors trying to buy your business. That would be terrific. Putting that marketing piece together is not something that I get involved with as the attorney. It’s generally the business owner in cooperation with the broker. That typically is sent out as a blind memorandum. In other words, you don’t mention the company’s name, you may have a number and then they respond to that for more information.
In this stage of your business sale, you don’t want it out there in public that such and such a business is for sale. You don’t want your key employees to get nervous. “Gee, what’s my future at this company?” You need to keep it confidential. These marketing brochures are general, they do not identify the name of the company, but they identify enough of the company and enough of the information to generate interest on the part of buyers.
Just as a point of interest, one of my companies had one who was a one pager and it got many responses and eight offers on the company. It created a bidding war, and of course that drives the price up.
Peter, let’s look at the SCORE exit strategy program, and how to get involved as a seller as it relates to the business prospectus or business selling memo. Well, we have spent time developing what we call an elevator pitch. Here’s what my business is all about, here’s what I do, here’s how I do it and this is why it’s of value. This is kind of an executive summary. It allows the customer, to tell their story in an effective and compelling way. They don’t do that the first time out. Perhaps, they’ve been working on their business for 20 or 30 years and they’ve never really had to tell their story. They need to learn to tell their story based on what a buyer might be interested in. A SCORE mentor is going to listen and make recommendations.
SCORE can help refine the story and bring it down to the basic issues that buyers will want to know. A broker is going to try to pick up on what you’ve talked about and be creative with their selling memo. If you don’t give them good information, they’re going to write a lousy listing. You want to spend time to develop that story and SCORE is a great place to have start.
As the lawyer, I generally do not get involved in this sort of thing other than to advise the client to be truthful. We certainly don’t want to have untruths in our marketing. This relates back to the first question you asked, which was why hire an intermediary? Why use a broker or an investment banker? This is why. These guys know to whom to market. You don’t take a scattershot approach when you’re selling a business. You market the business to the people who are most likely to buy it. That could be a small segment, it’s not the universe. I think part of the marketing strategy is determining who are the potential buyers and figuring out the best way to get before them.
The key to a marketing plan, of course, is to know who your target market is. Just as you’ve said, you’ve got to understand who you’re trying to sell to. And once you have that target market, you’ve got to understand your competition. You have to understand the value proposition that you’re bringing to those customers and how are you going to deliver it. How are you going to market to them and what issues do you have. A compelling statement regarding a selling brochure might be, “I have a marketing plan but I don’t have enough money to execute the whole thing. That’s one of the reasons why I’m looking to either raise money or sell my business. My business will do so much better if I’m able to institute this marketing plan. I have this target market in focus. I’m able to expand my services and for the $10,000 or $20,000 I have to invest in my marketing plan, I’m going to get back $100,000, $200,000 in sales.” That is a compelling argument. SCORE exit strategists help develop a comprehensive marketing plan.
That same principle would apply in the sale of the business itself. The broker or investment banker would use those same principles in marketing the business as the product. You’ve spent your life working on your business, marketing your products, well now you’re marketing yourself and marketing your business. It’s important to figure out how to best position your business for sale so someone will want to buy an existing business, your business.
Peter, what about advice for removing relatives, having your children on the payroll, that kind of thing?
I think it’s important to understand that SCORE is there to help stop the value leaks. And you’re leaking value if you don’t have the best possible people working for you. You’re leaking value if you’re not reengineering your balance sheet and your income statement. We see all kinds of financial statements. Small businesses don’t focus on the cost of goods sold like they should because they put everything in expenses. You should be measuring your gross margin and how it changes over time. The same thing applies with your family. Are they working full time? Are they goofing off? Are you holding them accountable? It’s a difficult issue, if you’re trying to get the most money for your business that’s going to help you pay for your retirement, you better get active making these changes. Our SCORE mentors are trying to focus on what is going to make the most valued decisions for your business before you take it to market.
Where would a seller list their company for sale?
BizBuySell.com is probably the largest online platform to list a business for sale. You may want to list some kind of little tombstone ad in an association publication that you might belong to. There are a lot of businesses for sale and there are a lot of businesses that never gets sold. You’re not going to get your business sold if you don’t step up your game.
The reason is a lot of the business owners don’t do what we’ve been talking about here. They don’t get good advice. They don’t get a good broker or intermediary. They don’t do some of the things we’ve been talking about. You mentioned a place to list the business. In addition to the things Peter was talking about, I would say, don’t forget about your competitors. I’ve had many clients who’ve been acquired by competitors. That’s one of the areas to whom they send that marketing pamphlet. Often, competitors see a strategic acquisition to expand their footprint, expand their business. So that’s a good place to look.
The next step is when someone has shown an interest in your executive summary, that’s when it comes down to signing nondisclosure agreements and hopefully receiving a letter of intent from a prospective buyer. That’s when you need an attorney to protect you. That’s when we ramp it up.
Once you’ve got a purchase and sale agreement in place, whether it’s a stock purchase agreement or an asset purchase agreement, a very important part of that is the buyer has an opportunity to kick the tires, to do what’s called a due diligence investigation. To investigate all of those things that were in that marketing piece to make sure they’re true. Due Diligence involves checking contracts, financials, product(s), intellectual property, corporate documents and that you have the proper bylaws and all that legal stuff. All of that stuff gets run through the ringer. It can be an arduous process. I often sit down with my clients before this process to prepare them for it because the business seller oftentimes, they’ll sometimes get their back up a bit. “Well, why are they asking me that? Well, why do they need to know that?” I need to prepare the client for these kinds of questions and help them understand that it’s part of the process. They’re spending good money to buy your business. They want to make sure that they know what they’re getting.
Matt, you hit the point that I wanted you to, which was relating it back to the marketing strategy. If you make representations and warranties, the buyer is going to look under the sheets and see what’s there.
That’s right. You have to put your money where your mouth is.
In our next interview we’re going to continue with steps six through 10.
This is a complicated topic. We’ve gone through these first five steps and to me, what runs through all of them is planning. This is not something that you should expect to do immediately. You should think ahead about when you want to exit your business and plan for it.
Peter, your final comment.
Don’t sign anything. That’s my first statement to you. Until you plan, until you know what you’re doing, the sharpies will pick your bones. Don’t sign anything. Get a SCORE mentor to help you with this to get through this pothole road that you have to walk on. If I didn’t say it emphatically enough, I’ll say it again, don’t sign anything.
If you have questions or would like to discuss Buying a Business, please contact me at [email protected]