Forbes: Selling A Business Is More Than A Transaction, It’s A Transformation

This is a great post/article in Forbes contributed by Ryan Hauber and the original is available here, and I’ve added my own [comments] in the text…

Selling a company is serious business. For most sellers, it’s the single most important, complex and substantial transaction ever entered into. It can be overwhelming, particularly if the seller hasn’t engaged a solid, experienced advisory team to support them throughout their preparations and the transaction itself. Most sellers new to this process don’t know where to start and turn to their advisors — inside and outside the company — for help.

[Far too many vendors only turn to an advisor when they want or need to sell their business. Working with a good advisor before the sale, ideally from as much as 3-5 years, can allow them to set their business up for sale and significantly improve their outcome – often doubling their expected yield from the deal.]

Traditionally, selling a business focuses on the transaction: Let’s get it to market, make the deal and get it closed. For the seller, there is a 50% chance that a crisis prompted the sale before the seller actually wanted to exit, such as death, divorce, disability, owner disputes and distress. Decisions, which have a long-term impact, need to be made fast. It’s stressful.

[The dreaded ‘fire sale’ is the worst way to sell a business, but if it’s been properly managed and prepared, a good deal can often be executed quickly and preserve far more of the value of the business for the vendor.]

Nearly half of all started transactions fail to close due to:

  • Value gap: This is the difference between what the market is willing to pay for the company and what the seller is willing to accept. The seller’s mindset is key. The more he knows about how the market looks at risk and value, the better. Knowing his realistic financial needs and personal goals post-sale is crucial. Emotions run high around money and one’s life work. Without awareness, there is a high risk that emotions will rationalize the deal away.
  • Owner readiness: Is the seller ready from a financial, operational and structural perspective? Is the business? Is he/she emotionally ready for this change of control? The first element is grounded in fact and can be proven. Emotional readiness is less tangible yet more likely to derail even the most extraordinary deals if the seller has not prepared.
  • Expectations: The structure of a deal involves other financial and non-financial aspects. For example: Will the seller be involved post-close? Is there agreement on continued employment, earnouts or seller financing? How will employees and customers be treated after the sale?
  • Inexperienced team: Sellers often rely on their long-term advisors (lawyers, bankers and finance executives) to exclusively support them through the deal, although these individuals may lack experience selling or structuring transitions. Confusing complications arise. Experience matters.

How To Better Prepare

Time kills all deals. The longer it takes to complete a transaction, the less likely it’ll happen. Once the process is started, it’s hard to pause and adequately consider the long-term implications of the deal. Yet, these implications have the greatest impact on whether the seller looks back on the deal with pride or regret.

[The critical time is that between the first approach to prospective buyers and the deal closing. Being prepared for the process on a technical level, with the right documentation and analysis, can remove a lot of the delays at this point – but not all of them. Managing buyers, particularly when there are many, can be difficult, but a competitive buyer landscape is another significant driver of value to the vendor.]

A paradigm shift is needed for sellers and their advisors to better prepare for this change. According to my colleague Martha Sullivan, a partner with Honkamp Krueger & Co.’s business transition strategies team, the transfer of company ownership is much more than a transaction. The seller’s life changes forever. It’s a transformative turning point. If you are an advisor to the seller, as their CFO or external accountant, attorney, banker or wealth manager, you directly impact whether the seller envisions, creates and achieves their goals in this transformation or not. You have a critical role to play.

We need to expand the transaction process beyond its traditional steps:

  • Profiling the company
  • Identifying potential buyers and alternatives
  • Preparing a summary teaser and more comprehensive confidential information memorandum
  • Contacting potential buyers
  • Evaluating letters of intent and its binding and non-binding terms for a deal
  • Due diligence reviews
  • Negotiating the deal structure and agreements
  • Closing the transaction

These traditional steps meet the needs of the transaction. Scott Bushkie, president of the investment banking firm Cornerstone Business Services (with which we have a mutual referral relationship), concurs. “They don’t meet the needs of the seller. A more holistic approach is warranted to help the seller prepare.”

[This is also the most efficient process for advisors or brokers focused on ‘deal flow’ to move transactions through their books quickly. Like a real estate agent, they seldom advocate delay for improvements or preparation, because their time will be more productively spent getting the next deal through the pipeline, rather than maximising this vendor’s result.]

To envision and plan their transformation, the seller must answer:

  • What do I want? Of course, there’s the money. However, it’s more important to go beyond financial outcomes and dig deeper on a personal level. What do I want for my family or for myself? What am I willing (and not willing) to sacrifice to achieve that? What’s important to me to be able to do after I sell the company?
  • What do I need? What do I need to live my life and happily die with a dollar in my pocket? How much is enough? Is, or will, there be enough? How much of it depends on getting a certain amount for the business? What do I have to do to improve my chances of getting that money?
  • Is there a potential gap? Do I have an estimate from a reliable, experienced professional of what the market might pay compared to the amount needed? The excess or gap shines light on the seller’s alternatives.
  • What will I do next? Many sellers regret selling their business because they haven’t seriously considered what comes next. What will replace the social, intellectual and psychological fabric of their daily life? If they can visualize this transformation and what they’re going to do, post-sale satisfaction vastly improves.

[These key questions will vary depending on the vendor’s situation. Selling to retire, because you are forced, or because it is an optimal time in the market all bring different questions. The emotional key in the short term is in thinking through your position. In the longer term is is preparing the business itself well ahead of time, over the course of its development.]

This holistic approach takes time upfront to analyze and consider these broader, personal implications. However, this investment provides a big return in the form of a better deal, smoother and faster process, and transformative outcome for the seller. For example, say the seller learns, in advance, which options for sale are affordable and worthy of consideration. This helps her vet potential buyers’ offers.

If the value gap is too big, she can step back and work on improving the business toward an objective target. She knows her bottom line and can make quick decisions when negotiating trade-offs they may or may not be willing to make. Deals close faster. The risk of a seller taking their eye off the ball in running the business and losing value is lowered. The seller knows where they are headed rather than wondering “what now?”

The savvy seller seeks out the experienced support they need to do this legwork. The wise adviser recognizes that a collaborative and holistic approach better serves their client and creates a win for all stakeholders in the transition of a business. Together, they recognize that a change in ownership is not just a transaction. They create the transformation.

[A truly savvy business operator should recognise the likelihood that their business will at some point have the opportunity or need to sell, and begin preparing for that event long before the time comes to start the process. Seeking advice about how to structure and operate your business while you have time to make changes can smooth the transition as well as significantly increasing the ultimate return. That’s why we do what we do!]

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