Lesson #366: How to Sell Your Business--A Step-By-Step Guide

 

I am in the middle of a sale process for one of our portfolio companies, and I wanted to share some useful tips to ensure your sale process goes as smoothly as possible.  This article will focus on the actual “process” of selling, so you can better understand what levers you can pull to your advantage in getting the quickest sale at the highest price. 

When Should You Sell Your Business?

The first part of answering when to sell your business is related to your business condition.  If you cannot clearly show growth in revenues and profits over the last couple years, it will be really hard to sell your business at an attractive price.  And, if there is anything negative going on in your industry (e.g., COVID impacting restaurant demand), it would be best to wait until those external factors are no longer an issue.

The second part of answering when to sell is related to the business prospects.  Are you bullish or bearish on the future?  If bullish, why sell now, wait to capture additional revenues and profits first, before selling.  But, if bearish, and you see the company ready to run into a wall, you may want to time your exit at the peak before the revenues collapse.  But in a typical scenario, a buyer will be doing due diligence on your industry and business, and they need to see a reasonable path forward to revenues continuing to grow under their ownership.  So, in all cases, make sure you can easily answer the question on how revenues will grow for them in the coming years.  Because if you cannot credibly sell that story of future growth, they will most likely not be interested.

The third part of answering when to sell is your personal psyche.  Are you tired, bored or burned out?  Maybe it is time to move on.  Are you no longer enjoying working with your team and you need a change?  Maybe it is time to sell.  Do you want to spend more time with your family, or need cash for another project?  Time to think about selling.  So, assess where you are personally, and that will help point you in one direction or the other.

Who Should Manage the Sale Process?

How you sell your business is really a function of how large your business is.  I would say selling a business under $500K in profits is typically more “do it yourself”, as it will not be large enough to get the attention of the normal business brokers.  There are plenty of websites you can list your business for sale to help get your business discovered by potential buyers (e.g., BizQuest, BizBuySell, BusinessesForSale.com) for a minimal listing fee.  If you go that route, look at examples of other business listings to figure out the best content and information to share in your listing.  Make sure you have a good lawyer lined up to help you with the negotiations and documentation of the sale agreement.

But, if you are a bigger in size, it is always best to engage a licensed and trusted business broker to assist you with the sale process and do all the “heavy lifting” for you, including drafting the sale brochure, creating target buyer lists, doing outreach to such buyers, negotiating the deal and helping you get to the finish line.  Business brokers come in all shapes and sizes, typically with a focus on certain geographical regions, certain industries or certain company sizes.  So do some research with your professional network or online for the best business broker for your exact situation.  Business brokers do typically come with a monthly retainer (e.g., $10,000 per month) plus a success fee from the sale (e.g, 3%-8%) depending on how large the expected sale proceeds will be.

Who Should Buy My Business?

There are typically three types of buyers: (i) strategic buyers already operating in your industry; (ii) financial buyers that are simply looking for investment opportunities; or (iii) other entrepreneurs looking for new companies to operate.  The valuations typically are ranked in that same order of categories listed, where a strategic buyer can typically see more ways for “one plus one to equal three”, getting synergies out of the business.  And financial buyers and entrepreneurs are typically looking for the “best deals” they can get.  So, start with strategics and go from there. Also think about things like: (i) do I trust this buyer to run the company (especially if any earn-out payments to you are involved); (ii) will they keep my team in place or treat them fairly if severed; and (iii) do they have the purchase proceeds, for both their equity and any needed loans, in hand.  As you will learn, not all buyers are created equal, so do your due diligence on them, the same time they are doing their due diligence on you.

How Quickly Should the Process Go

A normal sale process is typically around a 6 month process. The first month you are preparing your marketing materials and target buyer lists, the second month you are doing outreach to those buyers, the third month you are fielding questions and calls with the interested parties, the fourth month you are negotiating best terms, the fifth month the buyer is completing their due diligence and the sixth month you are getting the sale documents drafted and signed.  Depending on market conditions, it could take much longer than that.  If buyers are worried about the economy or interest rates, that will decrease the pool of investors that will be interested in moving forward until those issues are resolved.

How Should You Approach Negotiating

At the end of the day, “the market is the market”.  You may think you are worth one thing, but buyers could be telling you something completely different.  So, be flexible here.  And if there are 10 key points you are trying to negotiate through, pick the most important ones that you are going to “dig in on”, and be flexible on the others.  Negotiation is a two-way street and both parties have to be happy to get to the finish line.  But, in all cases, there are a couple rules of thumb that I live by: (i) your first offers are typically your most interested buyers and highest odds of getting to the finish line; and (ii) time kills all deals—the longer the negotiating process takes, the higher odds the buyer gets frustrated or disinterested and moves on.  Don’t sabotage your own odds of success by being inflexible, unreasonable or moving too slowly.

How Much Should I Expect for Valuation

Valuation is directly proportional to your: (i) industry; (ii) revenue/profit size; and (iii) growth rate.  Are you in a hot industry, like artificial intelligence, or a boring industry, like car washes?  Are you selling a $50MM revenue business or a $5MM revenue business?  Are you growing at 50% per year or 5% a year?   All these questions matter and dictate valuation.  So be realistic on what you can reasonably expect to receive by learning what similar businesses have sold for in the past.  As a ballpark, expect your EBITDA sale multiplier, which dictates valuation, to be in the 3x to 10x EBITDA range for revenues between $1MM to $50MM, depending on your answers to these types of questions.

Closing Thoughts

Selling your business can be an exciting time, but it can also be a daunting process.  So be sure to surround yourself with experts that have “been there and done that” to help you through the process.  That includes hiring a good business broker, an experienced M&A lawyer and seeking mentorship from others that successfully sold their businesses.   If you need any help here, don’t hesitate to reach out.  Good luck!

Also, don’t forget to check out these other articles I wrote on How to Find Buyers for Your Business and How to Structure the Sale of Your Business for additional details.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #365: The First 100 Days With New Employees Will Dictate Success

 

You probably have heard the importance of the action plans of the “first 100 days” after a new President takes office or after you begin integrating two companies after a big merger, but I am guessing you haven’t heard it applied to your recruiting and onboarding efforts with each of your new staff members.  Unlike in most marriages, where you have been dating for years prior to “tying the knot”.  Often times in recruitment, you have someone joining your “family” after only a couple hours of “dating”, which means you are typically “living with each other” for the first time, in the first months of their employment (after the fact). It is in these “first 100 days” that will dictate if this “marriage” will work or not, and how you handle these first few months, is critical both ways.

What You Need to Do to “Romance” the Employee

This is no different than when you are dating someone prior to getting married, only you are doing it after the “wedding ring is already on their finger”.  You as the employer need to be on your “best behavior”.  These are the formative days of the employee deciding whether or not they are going to “love you” for life or not.  During these times, you are going to want to ensure:

The Employee is Properly Welcomed.  The rest of your staff needs to stop what they are doing and take the time to properly welcome the new staff member to the team.  This may include taking them to lunch on their first day on the job, taking them out to happy hour in the weeks after they have started (yes this is an ongoing welcoming process, not just “one and done” on their first day) and assigning them a “mentor” that can help them navigate the organization.   It is critical during this period that what you promised them during the recruitment phase actually materializes in their day-to-day job.  So, ensure their expectations are properly set upon hiring, and properly met during this welcoming period.  It’s very hard to change a first impression once it is set, so don’t allow yourself to get any “egg on your face” out of the gate, or they will soon be looking for the door towards a new employer.  And, the last thing you want is a revolving door with talent.

The Employee is Properly Onboarded.  Employees aren’t just going to step into a role and know exactly what to do on day one.  They need to be properly trained, duh!  But you would be surprised how many companies don’t have a formal training plan in place for every one of the positions they are hiring for.  That is the equivalent of throwing the new staff member to the wolves, and hoping they learn how to survive.  Prior to the start date, you need to have documented: (i) the full job description and key expectations of the job, including any KPIs they will be managed by; (ii) the curriculum and materials for which they will be trained to be successful in the job; and (iii) the training calendar of key people within the organization they will meet in their first weeks on the job, who are in charge of training the various aspects of the company and the role.  The more comfortable they feel with their training, the more confident and “loved” they will feel.

The Employee is Properly Cultured.  When working with a new staff member, they need to learn and feel the culture you are trying to promote within the organization.  For example, in one of my businesses, we aspire to have a S.P.I.R.I.T. culture, where all employees strive for Service-First, Positive-Minded, Innovating, Respectful, Intrapreneurial and Team-Oriented behaviors while on the job.  You can’t simply slap that on a slide in your strategy deck; you need to live those behaviors in your everyday job, and that starts from the top.  If you want the new staff members to live by those rules, it is important they see it manifested in their interactions with the rest of the staff.  So, make sure the entire team is demonstrating those desired workplace behaviors, which they naturally should be if they are “living the culture” of the organization.

What the Employee Needs to Do to “Romance” You

This is not a one-way street; the employee needs to be “dating you”, the same time you are “dating them”.  In the first 100 days, you are looking for the new employee to be living up to the expectations they set during their recruitment process.  Do they really have the skills they said they have?  Are they behaving in the way you want new employees to behave, culturally? Are they hitting the goals you have set for each other?  If so, full steam ahead.  If not, you may have a problem on your hands.

What to Do If The Magic Wears Off

If things are not going to plan after the first 100 days, you really have one of two options. First, you feel the relationship is salvageable and there is a clear long-term path forward together, most likely with additional training or whatever.  Or, second, you need to pull the “ripcord” and mutually decide this isn’t working out as planned, and both parties need to agree to part ways.  Hopefully, in your offer letters, you incorporated some type of “first 100 days” probation period language, that will legally enable you to exercise these rights if things are not working out.  But, in no scenario, should you keep the employee if you do not see a reasonable path forward together.  Like in any marriage built on an unsolid foundation, they will most likely end in a divorce anyway, so you might as well get it over, sooner than later, before the problems fully fester into “cancerous breakups” over time.

Closing Thoughts

Many good entrepreneurs put a lot of energy into recruiting great staff members to join the team.  But many of those same entrepreneurs, don’t put enough energy into what to do with those same new employees once the actually get started.  That is where the “rubber really hits the road”.  Your long-term success, both as a hiring manager and as a company (depending on good employees), will be decided in those first 100 days after a new employee gets started.  So, don’t blow it, remembering you only have one chance to make a good first impression, both ways.

 

 For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #364: Do Major Holiday Discounts Help or Hurt Your Business?

 

What is it about Memorial Day, July 4^th, Labor Day and the Christmas season?  They bring out all the big discounts, which gets shoppers flooding to the malls to save money, especially on big ticket items like cars and mattresses, as examples.  And the sellers of those products bring out their best prices during these holiday seasons, trying to capture has much market share against their competitors as they can.  But the question I ask is: why?  Yes, you are driving more revenues, with the holidays often representing 30% of their total annual volume.  But, if you are sacrificing material bottom-line profits by slashing prices in the process, why play that game?  This post will dive deeper into whether you should or should not deeply discount your products, during the holiday season or in general.

The Psyche of the Typical Consumer

 Before trying to address this topic, it is important to understand the psyche of the typical consumer.  Throughout the generations of shopping, retailers have trained consumers to expect certain behaviors, including when to expect discounts.  One example worth calling out is J.C. Penney.  J.C. Penney was one of the most successful retailers in history, commanding a dominant market share at their peak.  But retailers like Kohl’s and Target starting to take market share away, through better quality products and better prices.  Kohl’s was particularly effective with their Kohl’s Cash, that would give the consumer a credit on their next order at the same time they were checking out on their current order, giving the customer a reason to return to the store for another purchase before losing their cash.

J.C. Penney tried to combat this, and save their company, with an “everyday low prices” approach, getting rid of discounts altogether.  But that strategy did not work.  Consumers were simply too trained by the other retailers to look for discounts, that they only shopped from the stores offering them, even if the net prices of the products were exactly the same.  This “no discounting” strategy may work well for a high-end brand like Nordstrom, serving an affluent demographic that is less price conscious.  But it does not work well for penny-pinching, mainstream consumers.  So, the point here is:  discounts definitely play a major role in the psyche of the mainstream consumer, and you need to decide when and how best to use them.

The Typical Economics of a Holiday Sale

Let’s look at the mattress industry, as an example, that runs heavily discounted promotions during each of the major holiday seasons.  Let’s say the average mattress costs $1,000 at regular prices.  And, that price drops to $750 (25% off) during the holiday sales.   And let’s say a mattress seller is doing $100MM in revenues per year, with 30% of their annual sales happening during the holiday periods.  That means their typical gross profit margin of 50%, may drop to 25% during the holiday sales.  And their bottom line net income margin may drop from 20% to -5% during the holiday sales.  What that suggests is that $70MM of their revenues at full price are driving $14MM in bottom line profit, and $30MM of their revenues at the discounted price are driving a $1.5MM loss, for a total net income for the year of $12.5MM (a 12.5% blended profit margin).

My Initial Reaction

I feel we, as businesspersons, are so focused on scaling revenues and market share, that we don’t put enough thought behind, “at what cost” did those revenues come.  To me, I could be perfectly happy, not participating in the discounting seasons.  Yes, I would end up with a much smaller revenue business, leaving 30% of potential revenues “off the table”.  But my bottom-line net income and profits margin would actually have been $1.5MM higher, by not “giving the product away” at deeply discount prices.  The point here is:  just because everyone else is doing it, doesn’t mean you have to do it too, as profits may be a much better metric to maximize than revenues, depending on your goals.

What You Risk By Not Discounting

Profits is not the only metric you need to concern yourself with.  There may be some downside risks of not participating in the holiday discounting seasons.  That includes: (i) there are certain individuals that cannot afford your full price, and can only afford your discounted price, so you are consciously leaving that demographic unserved; (ii) by not getting your brand name front-and-center during the holiday sales, your competitors are getting more “mind share” of leading brands in the industry, potentially leaving your future brand awareness in the rear-view mirror; and (iii) you are not taking into consideration the lifetime value of the consumer—yes you lost money on the first sale, but you will make it back with their customer loyalty on the second, third and fourth sales.  Many of the major retailers just swallow the bitter discounting pill for reasons like these.

Concluding Thoughts

So, the real question here is: should you or should you not be heavily discounting your products during the holiday seasons?  I think the answer to that question largely depends on the market you are serving and what your competitors are doing.  If you are a high-ticket product, discounts can be very helpful to acquiring customers that would otherwise have been lost.  But if you are a high-end brand where customers are less price-sensitive, they most likely would have still purchased at the higher price.  To me, discounting is a tool you can use to clear out distressed inventory.  But it should not be a tool you use to capture market share at all costs.  Sometimes it is better to stay out of that battle and live to fight another day, at much higher profits.  That said, if you are a high repeat purchase product, acquiring customers at a deeply discounted price can be a great way to accelerate longer-term revenues and profits through repeat sales from those customers.  Good luck making the right decision for your business.  It will come down to which metric is most important to your business—near term revenues or profits, or long-term revenues or profits.

For future posts, please follow me on Twitter at: @georgedeeb.

 

[VIDEO] How Strategic Partnerships Can Propel Your Business

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how how strategic partnerships can help propel your business to new heights.  As you will learn, piggybacking on a big established brand and distribution partner can be a very smart way to affordably grow your revenues.  I thought this video turned out great, and I wanted to share it with all of you to make sure you consider partnerships like these in your growth plans. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

What to Know About Selling Your Business

I am in the middle of a sale process for one of our portfolio companies, and I wanted to share some useful tips to ensure your sale process goes as smoothly as possible. This article will focus on the actual "process" of selling so you can better understand what levers you can use to get the quickest sale at the highest price.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] Smart Leaders Hire Smarter People Than Themselves

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how smart leaders need to hire team members that are smarter than themselves.  As you will learn, you never want to be the smartest person in the room.  I thought this video turned out great, and I wanted to share it with all of you to make sure you helping to take your recruiting and management game to the next level. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.