Deal Junkies Always Need a Fix!

I’ve helped lots of clients sell their businesses, but before we got started many of those clients felt too overwhelmed to even begin the process. Many business owners are stretched by the normal, day-to-day demands of running a business, and adding a major project like an exit or succession transaction can be too much to even consider. Some of these clients didn’t have a realistic idea about what their business was worth or how to negotiate a fair price. The business was typically among the most important parts of their lives and their biggest asset, and uncertainty about the effort it would take, the cost of selling, and whether they’d attract a good price created lots of anxiety and stress.

For some calm, sober reflection about the process of selling or transitioning a business, I turned to my good friend Ken Galecki, owner of Galecki & Associates Business Brokers, LLC. Ken has owned and sold several businesses, and he says he liked selling them better than he liked owning them. Ken may be a “deal junkie” because of his passion for helping clients sell their businesses, and he says that communication is the key to a successful deal and transition because selling a business is disruptive.

Start by Taking a Vacation?

Business sellers are typically at a turning point in their lives and careers – they may be retiring, ready to spend more time with their families, ready for a change in lifestyle, passing the family business on to their children, or just tired of managing employees. Ken suggests starting the process by taking a month off. While a vacation might be a welcome treat, the point is to test whether the business continues to operate without suffering losses in operational or financial performance while the owner is absent.

Ken asks prospective sellers about their last vacation as soon as he meets them. He also asks how many hours per week they typically work. The answers to these questions give Ken lots of information whether their business is ready to go to market. Ken says, “I have the best job because I get to learn about all these different businesses,” and, “I know a little about a lot.” “There’s nothing more gratifying than helping people take this step into the next stage of their lives.”

If a business isn’t quite ready for market, Ken helps identify the areas that need attention to make the business sellable. In many cases, having well-performing, key personnel in place is a starting point. Prospective buyers should easily conclude that you’re not needed for the business to succeed. Next, being precise about recording only income and expenses received or incurred exclusively for the business is also a focus. Most buyers grow apprehensive about, or even suspicious of, sellers who can’t demonstrate solid, bottom-line results without add-backs and excuses.

When he takes a business to market, Ken interviews the owner about the company’s history and what the owner’s average day looks like. He assembles a presentation package for use with prospective buyers, and he insists that the seller approve the package before its release. One of the ways Ken attracts the best offers is by being very intentional about the prospects to whom he markets the business. He personally sends email and follows-up, preferring to focus on a few pre-vetted buyers with whom he typically connects through online inquiries, word-of-mouth, and maintaining an established-buyer database. Depending on the response, Ken may market the business more actively by advertising on four different websites or direct mail to industry buyers.

Ken does homework on prospective buyers. He pre-clears all prospects with the seller, being cautious to counsel the seller about the pros and cons of marketing the business to competitors, and he’s well aware that some business owners have strong ideas or preferences about who they are willing to sell their business to. If they’re qualified and if the seller approves, Ken gets a confidentiality agreement from the buyer and starts serious discussions about the transaction. The prospect may receive general financial information at this stage.

When a buyer is serious, Ken helps negotiate a letter of intent or a term sheet. Many intermediaries will tell the buyer and seller that due diligence can start at this point, but Ken counsels that due diligence should not start until the buyer and seller have signed a definitive, binding agreement. Many deals never make it to the definitive agreement stage, and many prospective sellers have devoted a lot of effort and money, some even having disclosed sensitive information, prematurely by not waiting for a buyer who is ready to sign a binding agreement.

Don’t Book the Cruise Yet!

What surprises will there be before the transaction closes? Ken start and ends with thorough communication, letting the owner know what’s going on and why. Ken says that the owner’s initial excitement about the sale is often extinguished by the effort the seller has to devote to the process or by something going wrong during the process. He cautions that most sellers experience “process exhaustion” and that things go wrong in lots of transactions.

Ken stresses that part of an intermediary’s function is to handle the issues and keep the process on track. Perhaps the most sensitive part of the process involves introducing the buyer to key employees. Ken says it’s also the intermediary’s job to manage the process so that the buyer gains confidence that the business will continue to succeed after the closing while not destroying the business before that happens.

After the sale is closed, you, as the seller, should expect to help the buyer transition and help the business continue to succeed. Many of Ken’s clients provide thirty to sixty days of “familiarization” services after the sale to show the buyer the ropes. Many, if not most, transactions include seller-financing of ten to twenty percent of the sales price in form of a “seller-carry” note that will be paid, usually in monthly installments, after the closing. You will want to help the buyer get off to a good start and position them for continued success so that you receive all these payments. The buyer is also likely to ask you to promise not to compete with the business you’re selling for a period of time and not to woo any employees away from the business.

Why hire an intermediary like Ken? Intermediaries help maintain confidentiality and minimize disruption. Employees, vendors, and competitors should learn about a pending, or completed, transaction only at the right times. An intermediary should help you appropriately value the company to attract serious interest at the highest price. An intermediary should be equipped to negotiate a sale for more cash at closing and minimize the risk that the buyer won’t be able to completely pay a seller-carry note. A good intermediary can help you avoid disruption, continue to grow your business during the process, and attract a good sale price – all of which can add up to more than the fee, which is typically around ten percent of the sale price.

Ken credits among his biggest successes some transactions that didn’t result in immediate sales. For example, Ken was asked to list a landscaping business that would sell immediately for about $700,000.  When Ken helped the owner clarify that the business was capable of generating $350,000 cash every year, was an easy to run business with little stress, and that the owner felt energetic about holding the business, they agreed to delay the listing for up to five years. The delay should allow the owner to accumulate about $1.75 million from the business and then sell it in several years for an additional $700,000-$1 million.

Another of Ken’s “success by not selling” examples involves a plumbing company whose owner was so central to its success that an immediate sale would be difficult or impossible. Ken advised this owner to, among other things, hire a general manager, delegate tasks, and focus on customer service. After only a few short months, the owner decided not to list the business for sale, telling Ken, “I did all the things you suggested and now I love my business! I don’t want to sell!”

This may seem like I’m suggesting that an intermediary shouldn’t be focused on selling your business. While this isn’t true, examples like these may show that the intermediary has your interests, and not only a success fee, at heart.

So, what should you look for in a business intermediary? When choosing an intermediary, Ken recommends that you ask for references. Call them and discuss their experience having gone through the process. Ask about feedback they’ve gotten from their attorneys, accountants, and other advisors who interacted with the intermediary. You should hear good feedback about communication the intermediary provided, trust that the intermediary generated, and the intermediary’s persistence. Be sure to ask whether the intermediary charges up-front advisory fees.

A profitable business with clean financial records is the best candidate for an immediate sale. An owner who is motivated to sell is a plus, but to Ken “motivated” doesn’t mean “burnt-out.” It means someone who has a sense of urgency. Ken will consider listing less-than-optimal businesses for sale if he concludes he can help the owner, but Ken won’t list a business he doesn’t think he can sell. Ken says he focusses on these transactions because they let him act more like a consultant instead of a transaction broker.

If you’d like to meet Ken, or if you’d like some ideas about candidates with these skills to serve on your advisory team, please feel free to call me at 303-831-1411.