Don’t go down that road alone! You could make a terrible mistake.
There are thousands of businesses in America right now with owners who want to sell out and either retire or move on to another opportunity. Opposite that, there are thousands of businesses who are actively looking for other businesses to purchase. They are looking because they believe the acquisition will bring a new customer list into the fold or put the business into new markets or even make the business better than all of their competitors. So you might imagine these deals happen all of the time. You are correct, they do happen all of the time. However, many times the deal never gets close to a signature because the selling company is not ready to be sold. Maybe it doesn’t have its finances in order or its inventory is a mess or there is something that is just flaky.
Get It Ready
So you have made the decision to actively pursue a sale of your baby, your business that you started in your garage or a spare bedroom. You have grown it into something important, providing a living for you, your family, and maybe several employees. Maybe you are just burnt out or you’ve hit a plateau. Maybe you see another opportunity right around the corner and you just need the cash to make it happen. Whatever the reason, it is almost never a good idea to attempt the purchase or sale of a business without the help of a consultant who deals with mergers and acquisitions, often called M & A.
Wait a second. You don’t want to merge or acquire another company, right? You just want to sell. Don’t worry, the label M & A is just what is used in the industry for any type of change in ownership of a business. The consultant should be someone who has experience in “sprucing up” the business to make it more attractive to a purchaser. By bringing in an outsider to help get everything ready for a sale, you will have saved yourself from a disaster in the making.
A Consultant is Not a Lawyer nor an Accountant
Let me repeat that; a consultant is neither a lawyer nor an accountant. They might be an attorney or accountant by training, but the role of a consultant is to help structure the business side of things to ensure you will get the full value for the business. We certainly need the attorneys to make it legal and hopefully avoid lawsuits but a standard business attorney is usually more concerned with getting things like contracts, letters of intent, and non-disclosure agreements written properly and signed appropriately. Their usefulness usually comes towards the end of the process, not at the beginning. You should not rely on them to ensure your accounts receivables are in order or your inventory is straight or your perceived position in your industry is at its highest.
Your accountant is your accountant. You obviously have to trust them and rely on them for their accountancy expertise but they are not in the consulting business. Today the very largest accounting firms all have divisions that specialize in M & A and can often help. And if your business is measured in the hundreds of millions of dollars, you might consider using them and their army of MBAs. But, in my experience, to an accountant everything is about keeping the books straight. Not about improving the sales process, making you an industry leader, or ensuring you are getting the full value of the business.
The Consultants Role
An outside consultant can come into your business and once they understand it, get it ready for a sale by suggesting improvements in many areas of the business. For example, are your sales processes getting the job done or do you have to personally intervene in every order that comes through? Do you have a Customer Relationship Management (or “CRM”) software package in your business? Good. Is it being used? Is it patched with the latest updates so we can trust what it tells us about the customers and their order histories? Do you have a reliable software backup process in place that has been tested? Where is your business plan and when was it last updated? Where are your expenses in relation to last year’s expenses? What percentage of your business comes from the top three customers? What are the growth vectors for the business? These and a thousand other questions need to be asked and answered.
A Guide to Selling
Consider what you will do after the sale. You probably didn’t think about this little nugget but there will almost certainly be a non-compete agreement or clause in the contract. What will you do for the next 12 months, 18 months, or more where you can’t start another business in the same line as the current one? Remember, most new ventures fail. Success with the first company does not ensure success with another. Unless your name is Ross Perot. He started two businesses from scratch that both were sold for billions of dollars. Not too bad. Sure, you will probably want a vacation, but at some point you will want to get off the sofa and do…something. This means…
Sell only if it will change your life. Whatever profit you make from the sale should be so impressive that you don’t need to start another business right away. Or you may be so driven that you can’t imagine doing nothing for a year. A vacation is nice, but a year of doing nothing for a type “A” person is just not going to happen. The consultant can even help you brainstorm and start another business before you sell the first one.
Maximize your company’s value. You want to sell it, right? You want to get the most money from the sale, right? Then you should use a consultant to cover all of the bases and ensure your business is running at a high performance level. My consultancy has a mission statement that reads: “We help businesses create such high levels of economic value that together we redefine their respective industries.” The consultant’s job is to maximize the company’s value. Even if you are not trying to sell out, you certainly should maximize the value of the business. Even more so if you are considering a sale. Otherwise, you are leaving money on the table. Also note a consultant’s fee is always recovered many times over at the sale. This leads us to this…
“I’d rather buy a great company at a fair price that a fair company at a great price” according to Warren Buffett. That is an excellent rule for anyone buying or selling a business or a stock. Buying a bad company at a discount or paying up a little for a great company is a no brainer. The bad company is bad for a reason, or perhaps dozens of reasons. You may not have the time, desire, cash or whatever you will need to turn around the bad business. If you are the seller of an awful business, you may not even get any offers if things are going south. Who knows, the acquirer might have a consultant on board to do the due diligence and when he uncovers your mess, the deal evaporates.
So get your house in order before putting it up for sale. Use a consultant!
Tidewater Capital Services is an international private investment firm based in Charlotte, North Carolina. We believe that the true economic value of every asset is realized over the long term. Often that means holding an investment for years. To capture the true economic value, we seek to invest our own capital where there is a high-growth potential business, run by intelligent, trustworthy founders. Our capital, along with our many decades of experience, will often be the difference between success and failure. We encourage you to review our equity investment criteria page for more information.
Lee West - Founder & C.E.O.,
Tidewater Capital Services.