Matt Gilbert
November 25, 2019
Business owners are usually sole decision makers. What I mean by this is that they’re often the source of money to everyone in their lives, even exerting significant control over their households through financial choices. And at the helm of their business, their decisions affect the livelihoods of many employees and their families. Over the years, they’ve naturally become comfortable - and even skilled - at handling the responsibility, independence, and forethought this requires.
However, when it comes to strategizing, planning for, and actually going through the process of exiting their business, studies have shown that most owners of privately-held businesses fail to plan. This article won’t get into why they fail to plan, rather it will provide a few things to consider if you are a business owner who has foregone a thoughtful planning cycle but intend to sell your business soon.
Confidentiality is normally a big deal in the selling process. Many business owners have a few key employees that have been with them for a long time and who they rely upon to produce the business results they enjoy. We have seen time and again where a business owner is reluctant to include staff in a decision to sell the business. Some think it will cause employees to feel betrayed. Others think employees will be nervous about their future with an unknown new owner and may seek to jump to what may appear a more secure environment before the process can play out. And when it comes to vendors, customers, and competitors, the news that you’re thinking about M&A as an exit strategy can be damaging. Again, fear of the unknown is the culprit because vendors and customers will be concerned about the certainty of their relationship with your business while competitors have a way of fueling this fear by suggesting a new owner might not value them the way you have.
Surrounding yourself with a “deal team” of experienced and trusted advisors allows you to have a quarterback and supporting cast to help make sound decisions in an environment full of “best practices” you have probably never considered. Keeping confidentiality (or not) can be discussed and a strategy put in place, along with key legal instruments such as non-disclosure, non-solicit, and non-circumvention agreements. Incorporating this natural and necessary component into the process will maximize your chances for a successful, lucrative exit. At one end of the spectrum, failing to “manage” confidentiality in order to “reveal” your intentions at the right time is a cause of undue stress on all involved. At the other end, it may cause a significant decrease in market value if key vendors, managers, and customers handle the news poorly and seek security with a competitor who is viewed as more stable during this period.
Another key variable to consider is the fact that creating competition to buy and own your business is the healthiest thing you can do to improve your odds of closing a lucrative sale. Competition in the buying process forces prospective buyers to play by your rules, reduce onerous terms, and pay-up if they want to be your successor. And if you want to negotiate the best terms for your employees when they enter the buyer’s organization or perhaps compensation and benefit packages for your children or family working in your business, you have no leverage to do any of this if you negotiate with only one party.
In our practice, we routinely meet business owners who have received an unsolicited call from a vendor, competitor, or broker saying they’d like to acquire the business. Too often, when this happens with a broker you don’t know, the broker is soliciting just to get “listings.” Beware of any broker using this technique, the process will be an unpleasant and fruitless journey in most cases. However, when this offer comes from someone you know (or know by reputation), the tendency to let your guard down and open up “talks” can be equally as damaging as you naively seek to clarify what it is they have conceived.
It’s these “talks” that get you on the road to a potentially less lucrative and often time-wasting journey as one of two things is taking place. The first may simply be that two parties with grand intentions - but who don’t really understand how this works - are feeling things out as they go. Irreversible mistakes can and do take place, and we’ve heard of many a lawsuit as a result of “trusting your gut” and engaging in this activity. The second is far more concerning as experienced buyers and their advisors know the best deals (businesses purchased below fair market value) take place when a buyer and seller negotiate a “private sale” through their respective attorneys and CPAs. Every experienced buyer employs this tactic, as they should, and it baffles us in the profession to see business owners get caught in this trap so easily and so often. Any quick Google search will turn up dozens of articles, research papers, and case studies dispelling the perceived benefits of taking this path as conservative estimates put the average reduction in purchase price at 40% below fair market value.
Every aspect of managing confidentiality and introducing competition to the sale process plays in your favor. Your deal team will be able to control the process, control the pace, dictate the terms of engagement, and more. All of this results in more options for you to negotiate the things that are important to you (finances, liability transfer, timing, outcome for staff, etc.) and allows the best deal to surface as you exit and close this chapter of your career.
Successfully selling a business to a third-party buyer willing to pay the highest price and care well for your employees and customers is a highly intentional, controlled process that typically takes 7-12 months to properly execute. We recommend engaging a specialist to help you navigate this once in a lifetime opportunity.
Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle and middle market businesses – those businesses generally enjoying annual revenue of $5-$50 million – with the quality of M&A representation and value-enhancement services previously only available to middle, upper middle, and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.
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