Whether you are religious or not, most everyone has heard about the seven deadly sins. We are not going to get into what the sins are here but rather take a look at how a business and its ownership may make small but consequential mistakes when getting ready to or when in the middle of a business sale. In this series we will introduce all of the deadly sins, then each week take a deeper look into what that means for the business and how to avoid it, one by one.
The Seven Deadly Sins:
- Not recasting the numbers to include all of the income and remove all of the owner’s discretionary earning (the amount of expenses unique to the current ownership) current, correct, and plausible EBITDA;
- Not identifying the current and future potential of the business;
- Thinking of the business as their “baby” and not looking at the sale objectively or in concert with the next phase of their life;
- Little or no thought in transition or what the correct team would look like in order to transition to a new owner;
- Value the business by a multiple that is not realistic or sustainable;
- Activities that the old ownership will do after closing in their “new” life; and
- Marketing the business in a way to attract the correct buyer.
Taken individually each of these can be overcome, however, if the current ownership and business is not careful, it can fall prey to each one of these and can fall prey to all of them at the same time. Of these, there are some that are more important than others, however, they all have an impact on the amount the ownership will get for the sale and the way the sale will proceed. Most of the small business (businesses that are generating from $500,000 to $35,000,000 in revenue) owners believe that when they are ready to retire (move on to another stage I life) that they will do one of several things: (a) Close the doors and sell off any equipment they have, (b) transition the company to a capable child, sibling, or other family member, or (c) sell the business for more than it is worth (unrealistic ideas on valuation). All of these can be overcome with some coaching, realistic discussions, and some dose of reality.
The idea of a business sale needs to be thought of and approached well before the sale actually occurs. It takes on average 2 to 5 years to sell a company for the correct value (one that the buyer is happy with and one that the seller is happy with). Happiness in the sale of the business is a little bit of a misnomer as neither party is ever “really” happy with the purchase price or the sale price (that is how you know you sold or bought at the right price). The best we strive for is to be happy enough to walk away from the company that you have put your heart and soul into for the past number of years (whether that is 5, 10, 20, 30, or 50).
Here at Regan Law, we have attorneys that focus on business sales and preparing for the business sale as well as partners we work with to ensure the books are in order and the finances look as attractive as possible. If you or someone you know is thinking that they may want to look at a sale in the near future (2 to 5 years – or sooner), now is the time to talk and determine what steps are necessary to prepare ownership and the company for sale.
