Join Barbara Taylor as we discuss how you can effectively transfer your main street business to a new owner. In this episode you’ll learn:
- How to position your business for sale.
- Do’s and don’ts about having a successful transition.
- Why you need to commit to selling your business before you start the process.
- How to prepare to sell your business.
- The problem with due diligence
Barbara is a principle in the mergers and acquisition firm Allan Taylor and Company. She and her husband specialize in working with businesses that have less than 50 employees.
Want more information about selling your business. Get our Free Ebook on The 7 Steps of Leaving Your Business In Style.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Today’s podcast features Barbara Taylor. Barbara and her husband own Allan Taylor & Co., an M&A brokerage firm based in Bentonville, Arkansas. Barbara is one the shining lights when it comes to serving businesses that I call traditional small business. Most of the time, businesses she works with have less than 50 employees and as a result might have a challenge selling their business. Let’s visit with Barbara and find out what she thinks you should do when it comes time to leave your business by selling it to an outside buyer.
Hi Barbara, thanks for being with us today.
Barbara: Hi Josh, thanks so much for having me on the show. I’m thrilled to be here and I’ve been a huge fan of your blog post for many years now. I’m happy to be here on the show.
Josh: Well, thank you so much. Let’s start off, what would you consider the most important things to consider before you take on these traditional small businesses to market?
Barbara: Well, one of the first things that I would tell a business owner who’s contemplating the sale of their business is to really think long and hard about the decision and commit to it before you start setting the wheels in motion. I think a lot of business owners underestimate the difficulty as far as what it takes to sell your business. They underestimate how long it will take, how hard it will be, and how much help you might need with the process. It’s definitely arduous. It takes about a year. I usually tell people to mentally prepare for it to take about 12 months from the time you engage your M&A person, whether that’s a business broker, M&A advisor or an investment banker. That’s going to 12 months and it’s going to tough. So, before you get started with the process, I’d say, it’s definitely something that you want to commit to 100%.
I often tell people, based on my owned experience building a business and selling it in 2006, that I think the only phase of business ownership that was harder than the startup phase might have been selling it. I think that’s probably why you don’t see a lot of folks successfully sell their business. I mean, I think if you’re able to achieve that as a business owner you’re definitely in the minority. It’s hard to get data and statistics around how many small businesses in this traditional business bracket that you’ve defined, how many of them actually sell but from some of the research that I’ve seen in the industry, it’s about 25%. That’s definitely in the minority. And the number goes down the smaller your business is. It’s more like 20% if your business has less than half a million in sales. And it goes up if your business is larger. It’s closer to 30% or a little more than that if your business has, say, 2.5 to 10 million in sales. But regardless of where you fall on that spectrum, those odds are definitely kind of stacked against you.
With that said, I think you really need to consider your reasons for selling and get a clear idea of the valuation. I always recommend to people, “Before you go to market, definitely have someone who’s well-versed in business valuation tell you what they think your business is worth, whether it’s a certified appraiser or an M&A person.” But you definitely have to get clear on those two things really, your reasons for selling and what your business is worth.
And I guess, I’d add a third one which is to get a clear understanding of buyers before you go to market. There’s a lot of different types of buyers out there and you need to understand the difference between them and who might be interested in your business and why. So, it might be that you have the type of business that an individual would be interested in buying like a serial entrepreneur who may or may not have some partners or investors. You may have a business that would be of interest to a strategic buyer or maybe a private equity group. Those are all very different buyers. And so, I’d say, before you go to market, get an understanding of those types of buyers who would be interested in buying your business and why.
Josh: So you have at least three things that you need to ask which is: What is the value of the business and who your buyer is likely to be and why you’re going to get out. What other sort of things do you think a seller should be answering or questions they should be answering before they think about going to market?
Barbara: Well, they probably want to start thinking about what they’re going to do in terms of preparation. Most people don’t give as much thought to selling their business as they ought to. It’s just kind of they wake up one day and say, “You know, I think I’ll sell my business” and not spending enough time preparing. I would say that that’s pretty critical to a lot – some period of time, whether it’s going to be 12 months, 24 months to prepare yourself and your business for shelling.
There’s a guy named Chris Mercer who’s an evaluation expert. He has a book called – I think it’s called Unlocking Private Company Wealth but he had an interesting comment that business owners tend to think about business ownership in kind of in one of two ways, either I own my business or I don’t own my business, and they don’t think a lot about what happens in between those two states. That’s really what’s going to dictate how successful your sale is, it’s what you’re doing as a business owner who’s thinking about selling or preparing for a sale.
A lot of people have a tendency to just wait for a trigger event as well before they start thinking about selling. The trigger event, for some people, it’s a negative like maybe a healthcare that makes them re-prioritize their life and think about getting away from all the responsibility associated with business ownership and having more freedom to do what they want with their life. And sometimes the trigger event is something really good like the birth of a first grandchild. It’s another moment when people kind of stop and say, “Yeah, maybe I don’t want to own this business forever.” But, what I would say is, “Not to wait for that trigger event to dictate this process of getting prepared to sell your business.”
There’s probably a lot of things that you could be doing now, even if your exit or your sale, if you think is ten year from now. There’s probably still a lot of things that you could be doing to prepare for that day. And, again, this is another area where there’s not a lot of data around this but if you’ve been working with business owners and people who sell their business or exit their business for any length of time, you notice that there’s really a direct correlation between how much time you spend preparing your business for sale and how successful the outcome is and how satisfied you are with the outcome.
Josh: So, my guess is, to get to be part of that 20% or 30%, there’s some work you need to be doing before you even think about going to market. What kind of work do you like to see clients have done before they walk in your office?
Barbara: Well, I would say, spending a lot of time making sure that your financial statements are accurate would be probably the number one thing. I mean, when you’re talking about the things that will impede getting a deal done, I would say, from the standpoint of the business, the strength of your financials would be the number one thing. So you’re really going to want to want to focus on that. If financials, they need to tell the story of your business and are going to be the foundation of the valuation and basically the purchase by a buyer.
I see a lot of deals fall apart once you get to the more exhaustive due diligence phase of a transaction. We spend a lot of time with a client before hand, going over their P&L’s and balance sheets and looking at them in the way that a buyer would before we go to market. I would say, that’s something that you’re definitely going to want to do prior to meeting with me or in conjunction with working with an M&A person. There’s no reason why you wouldn’t want to involve them early in the process so they can help you analyze your financials in the way that a buyer would and make sure they’re going to hold up to that scrutiny.
There are certainly a lot of housekeeping items that need to be done prior to thinking about selling your business, making sure you have a lot of good documentation around your systems and your processes. Make sure you have things that seem sort of mundane but are really important like an org chart and employee manual, all that kind of thing. It’s great to have all that stuff ready. Basically, everything that you might potentially have to produce in due diligence before you come to meet with an M&A person but certainly they’re probably going to help you gather a lot of that stuff in advance of going to market so there aren’t any surprises or glitches during due diligence.
Josh: That’s some really good advice, is you want to focus on financials. I’m going to assume if you’re financials aren’t very good, it’s probably not a great time to market your business. What about – and this is a challenge for many business of size, that they don’t report all their sales. How important is it for you to be honest with your books, in a way that a buyer can understand that you’re being honest?
Barbara: It’s very important. And there’s a lot tension around that, a lot of discussion around that that we have with clients and that we end up having to have with buyers sometimes but it’s a tough one because as a business owner you’ve probably been looking at your financials in a particular way for many years and it seems fine with you to understate certain things or overstate certain things. It’s typically in the name of lowering your taxable net income. Everybody understands that that’s sort of a typical small business mindset. I like to sort of remind people that you can have your cake and eat it too. I mean, if you’ve been running your business in that way so that you can save on taxes, understand that a lot of those things that you’ve done in terms of the way you’re presenting your business on your financials could come back and affect the value of your business and in turn give you a lower purchase price. I think that people just have to be realistic about that. If you have the benefit of tax savings by doing that in the past and assuming it’s up to an acceptable point then that’s great but understand that it may hurt the value when you go to market. I mean, ideally, if that’s the way you’re running your business I would stay, stop for the two or three years before you sell and get with an M&A person or somebody who can help you , you know, again, look at those financials like a buyer’s going to look at them and say, “These are the things you’re going to want to change if you’re going to want to show two or three years’ worth of financials to a buyer.
Josh: So, with the folks that you work with, what do you see as a couple of the biggest roadblocks or impediments to getting a deal done?
Barbara: Well, again, I tend to look at this hot topic really from two different angles. One is what’s the roadblock in terms of the business and what’s the roadblock in terms of the owner? So, in terms of the business, a lot of the common impediments are, again, the strength of the financial statements, the dependence on the owner being there for running daily operations. I always tell business owners, if there’s two things you should not be doing, you shouldn’t be doing the doing in your business or the selling. Those are two things you’ll want to delegate. Usually, there’s not a strong layer of upper management, that can be an issue with getting a deal done. Sometimes, there’s customer concentration. That can be another issue with the business that would impede a sale or prevent it.
And from the owner’s standpoint, I would say that the biggest obstacle to getting deals done for a business owner is, again, this coming into the process with assumptions that are either unrealistic or incorrect. So, again, if you’re going to go to the top of the list of why deals don’t get done from an owner’s standpoint, it’s typically unrealistic expectations around the value of the business. But it really goes beyond that to having unrealistic expectations about the entire process.
So, again, it tends to take longer. It tends to be more difficult and people get what’s called “deal fatigue” and sort of give up. So, I think, from an owner standpoint, do the best you can to get educated on what this is going to be like and what can you expect. Work with an M&A person early in the process so they can kind of role play with you and help you understand what is the buyer going to do? What are they going to say? What are they going to think when it comes to analyzing your business as an acquisition target? So we work very hard to basically try and do what we can to eliminate this number one obstacle by setting expectations about what the process is going to be like.
Josh: So, before you take a business on as a client, what do you require of them?
Barbara: Well, we require a lot of those items that I’ve just mentioned. We’re going to want to go through kind of a pre-due diligence process with them. So we’re going to want to see typically at least three years’ worth of P&L’s and balance sheets as well as corporate tax returns. There may be other data and reporting associated with your business that we’re going to want to see.
Basically, we want to understand the value ourselves as we go through our own market-based valuation process. Prior to taking a client to market, we ask a ton of questions about the operations so that we can get an understanding of what’s going to drive value in the eyes of a buyer and what could potentially be an issue and either lower the value or just flat out prevent a sale from happening, in our opinion. So, we’re going to get all the information that we can to make those types of judgments about how sellable the business is and we want to have some really open discussions with business owners about their reasons for selling and try and get a feel if this is the right decision for them.
I think a lot of people think that selling the business is a decision that they want to make or should make. Maybe it isn’t, maybe there are other options based on what it is that they’re thinking that would be better than selling. So, we really try and get a lot of those issues. And we want to have some really honest conversations with them and sometimes with family members about why they’re selling the business and what kind of outcome they’re hoping for.
We also look for a good fit. I think that, for business owners who are looking for an M&A person to help them, this is important. Again, you’re going to be going through about a 12-month process. It’s going to be pretty tough and certainly you want to work with somebody that you don’t have to like them a lot but you do have to respect them and their abilities. It really helps if there’s a good fit between you and the folks that are helping you sell. That’s really something that we look for with a client as fit.
Josh: So, Barbara, if people want to get a hold of you, how would they go about doing so?
Barbara: They’re welcome to visit my website which is allantaylor.co and I’m also very active on Twitter. So, they’re welcome to follow me there at ballantaylor.
Josh: Barbara, thank you so much. I really appreciate your time this afternoon and we’ll speak soon.
Barbara: Okay, thanks so much, Josh. Bye.
Josh: You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at email@example.com.
This is Josh Patrick. Thanks for listening. I hope to see you soon for another edition of The Sustainable Business.