A complicated topic with a myriad of details to consider, buying and selling a business will affect nearly all business owners at some point. With so many issues to be aware of, it’s important that executives have the information necessary in order to successfully navigate the process. A panel of experts recently gathered for a breakfast seminar and responded to a host of questions related to buying and selling a business.
The panel discussion, held in April, was moderated by Connie Brennan, publisher and CEO of Nevada Business Magazine. The breakfast was hosted by the magazine along with sponsors, Holland & Hart, LP Insurance Services and Stewart Archibald & Barney. Panelists included Gian Brown, of counsel for Holland & Hart; Leland Pace, a senior partner with Stewart Archibald & Barney; Katrina Loftin-Winkel, managing director at BTI Group Mergers & Acquisitions and Joe Wyatt, chief operating officer for LP Insurance Services.
Each panelist has a unique and vital viewpoint for business owners and represents an industry that should be involved in any buying or selling transaction. Event attendees were provided an abundance of information on best practices for buying and selling a business.
Early Bird …
For some business owners, the thought of ever selling their business may be years down the road and, because of that, those owners may think they have time to wait, adopting an, “I’ll get to that later” attitude. However, the experts say that can be detrimental for a company.
“Typically, the start of a process is when an executive decides they want to go out and buy another company or the company owner decides to sell,” explains Brown. “[However], it should start far earlier than that when folks are thinking about how they’re growing their business. That exit strategy isn’t tomorrow and it isn’t next year, it’s really 10 years from now or, at a minimum five years out.”
Pace added that, “in order to maximize value and make it as profitable and as successful as possible, it takes several years. You want to be structured in a way that is going to be a smooth transition for employees, the purchaser and yourself. A Price Waterhouse study done four or five years ago said that 75 percent of business owners who sell their businesses, within one year, are very unhappy they made that decision. You’ve got to prepare.”
Loftin Winkel agreed explaining that, “it takes, on average, eight to 10 months to sell a business from listing to close. The key is really, truly to plan.” She added that a lot of issues people encounter when looking to sell their business has to do with planning. If business owners are dealing with either an expected sale or an unexpected event causes the sale, planning is an important part of dealing with each eventuality.
“If you’re a business owner, even if you’re not thinking of selling, you should be planning,” she added.
If this is an issue that all business owners will likely face at some point, what leads to a business decision to sell a company?
“More than half of the businesses are going to be transitioned because of the four “D’s” - death, disability, divorce and disaster,” explained Pace. “Preparing your business for sale and maximizing value cannot start too soon.”
“The other thing that is important is picking that future partner,” said Wyatt. “That can take quite a bit of time as well.”
Speak or Hold Your Peace
When going through a sale transition there are several considerations that must be addressed. One important issue for many sellers is the business’ employees. With, on average, one-third of their time spent at work, employees become invested in their jobs. The workplace is an important part of people’s lives. With so much investment on both sides of the employer-employee relationship, when should employees be informed of an impending sale?
“Not until the very end [of a transaction] if at all possible,” said Loftin Winkel. “Employees tend to get very nervous. I can tell you tons of horror stories of people that said, ‘Oh no, they’re like family to me. I’m going to go ahead and let them know.’ Then [the employee] started looking for another job. They start thinking about other people owning the business and what it’s going to be like to work for that person. I really advise people, as much as you think they’re like family, just hold off. Don’t tell them until the deal is done.”
However, when waiting until the last minute isn’t realistic, Brown recommends having an announcement strategy in place.
“Although you try to wait until the end or the best time, you should be thinking about how to react if you get asked or if they find out,” said Brown. “I think about messaging strategies and how to make sure you have a consistent core message. You want to make sure you’re never saying something at odds or inconsistent. Everyone is going to be comparing notes. These types of things pop up because people are scrambling as opposed to being thoughtful about a process.”
While deciding and planning to buy or sell a business is certainly the first step, the next step should be putting into place those professionals that will assist in the process. No business is an island and it’s important the team that will assist with the transition is optimum for that particular company. So, who is on that team?
“Two teams, I think we’re talking about,” said Pace. “The first team should be your transition team. Business owners should have an advisory board for their succession, people that have either been through it or people that have knowledge about it. And then, there’s the group that you’re going to consult with during the transaction. The broker, the insurance guy, the CPA, the attorney.”
In addition to those four, Wyatt also suggest two other important transitional team players to have in place; the HR representative to handle the employee side and the IT expert to handle the necessary technology transitions. The experts also suggest that, as planning is such an important aspect to buying or selling a business, those professionals be engaged as early as possible.
“You want to get them on board,” said Loftin Winkel. “You don’t want to list your business and then all of sudden tell your attorney and your accountant you’re going to sell.”
Pace added that, “You should have someone who is familiar with the process, someone who is not just preparing your tax return, but has been down that road once or twice as far as selling a business. Having someone who knows business, the sale side of it, is critical. There are some specialized things that need to be addressed. Having that specialty will be a valuable tool.”
For some, engaging a slew of professionals brings with it the worry of fees and expenses. However, Brown says, there’s more to consider in regards to the transition team than just the fees that go along with them.
“One of the ways to engage is to start forming relationships. You form relationships with the folks in your team already, your CPA, attorney. But, also start getting from them, and from others, ideas about who would be the right types of professionals to be involved in terms of brokers and bankers that may or may not be appropriate in any given situation. There are plenty of ways to start cultivating relationships with people ahead of time. The notion of forming relationships as a step towards engagement is something that is free and easy to do,” he said.
A business owner has started planning, began looking at their transitional team and now has to decide what type of sale to consider. The two primary types are asset purchase sales and stock purchase sales.
Wyatt explained that, “if it’s an asset sale, the buyer is buying the assets of the company and there are different tax treatments for that versus a stock sale. There is also a different liability attached. If it’s a stock sale, you’re actually buying that entity so you have the liability for that entity.”
To simplify a somewhat complex issue, in a stock sale, a buyer assumes liabilities and in an asset sale, just the asset is purchased. In most cases, then, a buyer would prefer an asset sale while a seller, looking to transfer liabilities, would prefer a stock sale.
“Depending on which of those are chosen, that’s going to affect the price. The buyer is going to be willing to pay a higher price for an asset purchase and a lower price for a stock purchase because he’s assuming those liabilities,” added Wyatt.
Pace said that it also, “depends on the type of entity being sold. If you’re selling the stock of the corporation, the buyer has to assume all of the internal assets at the same basis the seller held them at. So, if you’re selling stock, the buyer gets no additional deductions for the value of the assets. If you buy the assets and the assets are worth, say, a million dollars, now you get to reset depreciation. You can re-depreciate those assets and that’s a pretty big tax write off. From a buyer’s perspective, he wants that deduction. From a seller’s perspective, it’s a negative tax impact. That’s why the seller wants to sell stock; it’s all long-term capital gain.”
“Another consideration too, in addition to tax, is that sometimes there is a particular set of licenses that a company may have for its business or certain types of contracts or related relationships that are held by the legal entity,” explained Brown. “If you’re just buying assets, you may need to get permission from the other party to transfer those licenses.”
Brown also suggested that employees are an important consideration when it comes to determining the type of sale of a business.
He said, “When you do an asset sale, you can have tremendous complications with respect to employee benefits because, conceptually, what’s happening is your employees are working with the seller one day, are literally terminated and hired by a new employer the next day. There’s a decent amount of complexity when you start selling assets as opposed to just buying an entity.”
One type of sale with another, separate set of considerations is a management buyout. These types of sales are quite different from external sales.
“A lot of businesses do an internal transition,” said Pace. “The internal transitions are divided into two pieces. Either they are a management buyout or, sometimes, it’s a true family succession.”
Pace explained that both are similiar in structure, but are often handled in vastly different ways. The special considerations for each have to do with how much the business will sell for, the types of tax impacts involved for both the buyer and seller as well as the consideration of where that money will come from or financing. When it comes to these types of sales preparation is, again, key.
“The biggest mistake I see is not preparing the successor generation,” said Pace.
Dollars and Cents
While many business owners, especially those that founded their companies, consider their business to be priceless, that unfortunately isn’t the case. So, how much is a business worth?
“Most brokers will give you the market value of your business at no charge,” said Loftin WInkel. “This all sounds expensive but most brokers will sit down and tell you the market value at any time.”
Pace explains that a good rule of thumb is five times E.B.I.T.D.A., which stands for, earnings before interest, taxes, depreciation and amortization. “If you can look at your financial statements and add back depreciation, interest and taxes, you get to that cash flow before debt service. If you multiply that times five, it’s the general rule of thumb. It’s not applicable to all businesses but it’s standard across the board.”
Another consideration are business appraisals. The panel suggested those be considered on a case-by-case basis.
“They are pretty expensive,” said Loftin Winkel of appraisals. “If you’re just looking for the market value of your business, it may actually be different than what you’re getting on an appraisal. You want to make sure, for your business, you’re at the right price.” She added that, for the buyer, an appraisal can help make a business’ price more palatable.
Planning, a consistent team, the sale types and pricing models are all worthless if a business has no curb appeal. In order to make a business desirable for a buyer, many things should be considered from consistent profits, accurate financials and key employees.
“The people component is something that is very important,” said Wyatt. “The culture of a business, is it compatible? If you’re acquiring employees, what types of benefits do they have and are they compatible? I think those are pretty important.”
“One deal killer for me is hiding drama,” added Brown. “Every company has drama, there’s always an embarrassing moment or two. The easier deals to get done are the ones that are really clear and transparent.”
Another issue to consider is the length of the transaction explains Loftin WInkel. “Buyers get buyer’s remorse. You want to keep things moving; keep the transaction flowing as quickly and smoothly as possible. Time is your enemy.”
According to the experts the most successful transactions are those in which both parties have trust, preparations have been done and the teams involved know the nuts and bolts of the deal.
“It’s a relationship type of transaction,” said Wyatt. “Seldom do you have a buyer and seller who don’t like each other. You’re looking for someone that you can trust on both sides of the transaction.”