When Should I Sell My Business?

When Should I Sell My Business?

Every business owner I have ever known, has sought to sell their business at the top of the market. I think this is part of the movement where many are in a constant quest to outdo others. While conceptually I understand this desire, these owners should heed the voices of some sages.

Daniel Kahneman’, “The average investor’s return is significantly lower than the market indices due primarily to market timing.” 

Warren Buffett, “Trying to time the market is a fool’s game.”

Baron Rothschild, “You can have the top 20% and the bottom 20%; I will take the 80% in the middle.”

 

What it takes to Sell at the Top of the Market

If you are determined to sell at the top and are ready to step aside at any time, the only concern is timing. However, if you have other timing considerations, e.g., retire when my business is worth $X, step aside when I am 65, then things are far more complicated.

For the market to be at the top when you reach some predetermine criteria, you need to ensure that the entire economy collaborates with you. To do this, I expect you would need to have the ear of: 

  • the President, 
  • the majority of Congress, 
  • the Chair of the Federal Reserve, the Secretary of the Treasury,  
  • the President of the European Central Bank, 
  • the German Chancellor, 
  • the President of France, 
  • the President of Russia, 
  • the President of the People’s Republic of China, 
  • the heads of the People’s Bank of China, and
  • the leaders of all the leading investment banks and hedge funds worldwide, to name a few. 

Not only would you need their ear, but you would have to persuade them that collaborating with you is in their best interests as well. Furthermore, many of these people would want something in return for a favor, and most of the people I have spoken with would be able to afford the price Vladimir Putin would expect. Finally, I have found any scheme where only one person knows of it but requires many people to ensure its success is bound to fail.

As a result, I would say that trying to sell at the top is a fool’s errand and one that should be abandoned.

 

A Contrarian View

Some have argued that selling at the bottom of the market makes more sense. The rationale is that the business owner will reinvest those assets into other assets whenever they sell their company. Thus if you want to ensure continued wealth accumulation, one should do it at the bottom of the market rather than the top.

To examine this theory, I did a simple analysis. I reviewed four dates and the market conditions. I looked at the Russell 2000 Price Earnings Ratio for those dates and indexed them with the 2000 Price Earnings Ration as the base = 100. Assuming that enterprise value (EV) to EBITDA ratios followed the Russell 2000’s PER, the EV/EBITDA ratio in 2000 was 5x, and the company had an EBITDA of $1 million in each year before the sale, the results are as follows:

Date Market Conditions Russell 2000 PER (Indexed) EV / EBITDA Multiple Proceeds ($k)
12/31/2000 After the Top of the market 100.0 5.0 $5,000
12/31/2005 Near the top of the market 58.6 2.9      $2,929
12/31/2010 Emerging from a recession 52.6 2.6 $2,631
12/31/2015 Middle of a bull market 74.7 3.7 $3,734

I then made a few more simple assumptions:

  • Transaction costs to be 30% comprising intermediary and legal fees of 10% and taxes of 20%.
  • The proceeds are invested in two funds, VFIAX – Vanguard 500 Index Fund Admiral Shares and VBMFX – Vanguard Total Bond Market Index Fund Investor Shares as proxies for a general stock and bond market investment.
  • The allocation is 70% into VFIAX and 30% into VBMFX.
  • Any funds withdrawn and any distributions are ignored as they would be the same for both funds.

Below is a chart of the S&P 500 from December 31, 2000, to December 31, 2020 to show the market’s performance over the period.

Source: Yahoo Finance

Following the investments as described above after five, ten and fifteen years the returns were:

Date Initial Value ($k) After 5 yrs ($k) Return (%) After 10 yrs ($k) Return (%) After 15 years ($k) Return (%)
12/31/2000 5,000 4,822 -3.6 4,930 -1.4 7,027 40.5
12/31/2005 2,929 2,993 2.2 4,292 46.5 5,414 84.8
12/31/2010 2,631 3,790 44.0 4,786 81.9    
12/31/2015 3,734 4,643 24.3        

 

So as it can be seen, while selling at the top, provided the greatest wealth after fifteen years, interesting the difference over 10 years was less than 3% between selling at the top and selling just after the bottom. The other points are somewhere in between. Therefore, selling at the top is not the conclusive answer we expected.

 

So what to do?

What I have always advised clients is to build a business that is attractive to buyers and can be sold. The key is to create your own redundancy, so that you can sell it, stay in a non-executive capacity and effectively “coupon clip,” or pass it on to your children or employees. You have many options and if someone comes along and offers you “silly” money, take it. But don’t worry about the “Top of the Market.”

If you want to know if your business is sellable, complete this questionnaire, and if you want help building a sellable business, contact me.

Copyright (c) 2021, Marc A. Borrelli

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Your Business needs to be Sell Ready, all the time!

Your Business needs to be Sell Ready, all the time!

I believe that being “Sell Ready” is the only way for business owners to maximize value on exit, and all companies need to be “Sell Ready” even if their owners don’t intend to sell because life is Uncertain.

  • There is a common belief that we control our lives and destiny; however, if we are objective, we can see that luck is an important determinant, and life is Uncertain. Recently, the uncertainty of life was brought home to me twice. A high school friend of mine, Marty Davis, owned a scrap metal business, and we had recently reconnected after 35 years through Facebook. We planned to get together soon as he was now living in North Carolina. A week later, I learned that a palette of copper had fallen off a forklift truck, killing Marty instantly.

  • A month ago, a member of my Vistage group, Mike, an ex-marine and fit in his 40s, pulled over on I-75, not feeling well. He suffered a major heart attack and was dead by nightfall.

Life is Uncertain, but are we ready for it? In most cases not, even Prince wasn’t, dying with no will, albeit a plethora of advisors surrounded him. However, Uncertainty is more than death; it includes Disability, Divorce, Partner Disputes, Running out of Energy, etc. There is no excuse for not being preparing for Uncertainty! Also, the disregard it shows to your family and employees is undoubtedly not the legacy one wishes to leave. If you are “Sell Ready,” it doesn’t matter in what form Uncertainty arrives, you will be positioned to survive.

So what is Sell Ready? I define Sell Ready as those companies that realize a price higher than their value. As Warren Buffett said, “Price is what you pay, Value is what you get” so for a seller I take that to mean, Price is what you get, and Value is what you give up, i.e. in 2008 at the height of the crises, Ford debt was selling for 35 cents on the dollar – price definitely less than value. On the other hand, HP’s acquisition of Autonomy for $11.1 billion, 79% premium over market price – price exceeding value. If you are Sell Ready, you want to be like the Autonomy shareholders.

I will expand on “Sell Ready” and what that means in future posts, what it is, how to be “Sell Ready,” and the benefits. Stay Tuned.

 

© 2016 Marc Borrelli All Rights Reserved

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When Selling Your Business – Planning is Critical

When Selling Your Business – Planning is Critical

We have all heard Alan Lakein’s quote “Failing to plan is planning to fail”. However, the problem today is that many middle market entrepreneurs sell their businesses without proper planning for the sale event and thus leave millions on the table.

I am sure that many of these entrepreneurs would say that they did plan to sell, hired an investment banker, and went through a process. However, this is the end part of the process and planning needs to start 3+ years in advance to be truly effective. In the sub $100MM market, to maximize the value of a business is not hoping some banker knows a buyer that will pay substantially more, but rather properly preparing the company for sale.

The lack of planning I believe is due to two issues: (i) entrepreneurs don’t fully realize the benefits of planning, and (ii) they don’t look at their business with external objectivity.

Proper planning will:

  • Allow your tax and wealth advisors to minimize your taxes and maximize wealth transfers;

  • Enable you to implement profit improvement measures and show the effect of those to a potential buyer;

  • Ensure that the company has a strategic plan that it is executing, and that the management team knows it, breathes it and lives it;

  • Ensure that your customer base is diverse, and you have developed recurring revenue lines, if possible;

  • Provide the opportunity to ensure that your contracts will allow for a sale and that they are relatively similar; and

  • Allow you to improve the company’s performance, to ensure it is performing in the top quartile of similar businesses.

All of these steps will increase the value to a buyer and increase the net proceeds to the seller. However, they take time to develop, implement and show results. They cannot be done overnight. This is like running a marathon, you can go out and run one, but if you train and work on it, you will do much better, but that takes time. Thus, the planning needs to start well in advance.

Finally, markets operate in cycles, which may not coincide with your plans. As inconvenient as this is, you have no control over market timing and must deal with the market conditions as they occur. Therefore, if the market window closes before the sale is complete, you can either sell at a lower price or wait 6 – 8 years for market conditions to return. To minimize this risk, always run your business as though you are going sell it “tomorrow.” Doing so will allow you to take advantage of market conditions when they occur and maximize your proceeds.

 

© 2015 Marc Borrelli All Rights Reserved

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The Achilles Heel of NonDisclosure Agreements

The Achilles Heel of NonDisclosure Agreements

Having represented many clients with selling their businesses, raising capital, or entering into joint ventures, the issue of Non-Disclosure Agreements (“NDA”) always arises. The primary focus of clients is on ensuring that the NDA is as secure as possible and often such that no reasonable party would agree to it. Thus, I find my job is to help them understand what is commercially reasonable, and more importantly, to work with them to understand who is the other party executing the NDA.

Most sales of small companies these days in the US are to Private Equity Groups, and so many people become complacent about understanding who the other party is. If the other party is not someone that is known, far more work needs to be done to understand:

  • Who is the other party is;

  • Where are they located;

  • What you each have; and

  • How much you share.

Failure to do this potentially exposes you to the “Achilles Heel” of the NDA.

First of all, if there is a breach of the NDA, most NDAs allow for injunctive relief, which is obtainable in the US, so damage within the US may be limited. However, if you want more than injunctive relief in the US, the areas of concerns are:

 

Who?

Who is the company? A Fortune 500 Company, some sizeable foreign company that you have never heard of, but there is information on or some company that for which there is no information? Many people don’t look at who is executing the agreement if they believe the person they are dealing with is with XYZ Corporation that they know.

However, if the entity executing the NDA is a single purpose subsidiary of XYZ, does it have any capital? Is XYZ a party to the transaction? Finally, there are cases in some developing markets, especially China, where government entities own many companies, i.e., the People’s Liberation Army owns many Chinese businesses, and thus for all practical purposes, these are immune from any claims.

Recently I came across a situation where ABC, a US company, found that their confidential information was being used against them by Z, a subsidiary of Company Y in China. ABC had executed an NDA with X, a Singaporean special purpose subsidiary of Y with no assets. Also, there was a Letter of Intent with T, a US subsidiary of Y, which also had no assets. As a result, there were no identifiable assets to go against, and to win in China would be hard.

 

Where?

If the NDA is with a non-US company, you may have issues in bringing a claim. While the NDA may provide that the venue and choice of law are your home state, the other party has to be served and appeared in federal or that state’s court. If the other party is not in the US, it may be challenging to serve even them because they may not exist, or the address/agent provided doesn’t exist. If you can’t serve them, a proceeding may be complicated.

Assuming you serve them, and they fail to appear, you should win in court. However, even if you do, you may not be able to enforce any claims because their courts will not recognize the US court’s decision. In some countries I have dealt with, judges have not recognized contractual agreements because “times have changed.” Not all countries have a judicial system like ours with precedent and some predictability.

Even if governmental agencies don’t own these companies, in some countries, if well-connected business people and politicians do, that may have the same result. Bringing any claims against a company owned by such a businessman or politician may result in you, your company, or employees being harassed or imprisoned on some charge in these countries, i.e., China and Russia.

 

How Much Has Each Party?

1. What Assets do They Have?

If it is a single purpose entity with no assets, even if you bring the claim and win, there are no assets to pay monetary damages. Injunctive relief is all you have. That may not fix any damage done to your brand or pay for all the litigation. Even if they have assets, if there are superior claims on those assets, i.e., bank liens, that can rank above your claim, you could win but still receive no monetary damages.

Finally, if they are a large company with deep pockets, they may fight you in court with a full army of in-house and third-party lawyers. Besides, even if they lose, they may be willing to fight through many appeals. The purpose is to wear down a smaller company just by having more resources.

2.  What Assets do You Have?

While many client’s businesses are profitable and have value, the company may not have the financial wherewithal to fund litigation, especially international litigation. To fight a company in the US that is determined to protect its image on an NDA could cost $0.5MM and more. Many small companies don’t have that amount of excess cash to put towards litigation. Besides, not only is there the cost of the lawsuit but the disruption to the business. Discovery, depositions, etc. can absorb large amounts of time and resources from a small company causing it to lose its way or position and thus value.

3.  What Loss have You Experienced?

Raising this issue causes an angry response from many clients? The value of the business, which they may think, is very high, has now suffered a loss in value. As with all litigation, you must demonstrate the damage. If there is a $XMM offer from a buyer who immediately reduces the offer to $YMM quickly on finding out about the breach, then the loss is $(X – Y)MM. However, in all other situations proving the quantum of the damage is much more complicated. Experts are required to determine your loss, which also increases the costs of litigation. The other side will also have their experts to prove no loss in value and show where your experts are wrong. Finally, the winner and amount of the win are never guaranteed when walking into a court, no matter what you think.

 

How Much Information Do You Share

While you are going to discuss your business, the products, customers, and opportunities, I think it is advisable to be economical with some of that information. Give the other party enough for them to make a decision and be interested. However, many owners are so proud and excited about their business, with good reason; they cannot help themselves from disclosing how they do everything. While some of this information may be a trade secret, it may not have been protected as such or may be more difficult to claim such in litigation. If the other party knows how you do everything, they may decide they can duplicate your business using your processes but not using your technology or approaching your customers. They do this; it may be much hard to identify and protect.

Thus, be careful with your NDAs by knowing:

  • Who you are dealing with;

  • Where are they located;

  • What they have;

  • Know what you can do if they breach; and

  • Let your advisor help you control the information flow.

 

© 2015 Marc Borrelli All Rights Reserved

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What Potential Buyers Look for in a Management Team

What Potential Buyers Look for in a Management Team

A couple of weeks ago, CEO Exclusive Radio had me as a guest, and I was asked, among other things, about what buyers look for in a management team. So, if you’re a CEO/Owner getting ready to sell your business, here are four key points.

1. Make sure that your team knows your business strategy and everything about it. Strategies cannot live in the CEO’s mind, where, unfortunately, many reside in smaller companies. Your team needs to all speak to it as “one” and understand how to execute it. Provide a clear strategy everyone can understand. It will be better than an overreaching complex set of impossible goals.

2. Is your team “navy seal” trained to cover any gaps if you’re not around? If the team has been taking direction a majority of the time, how will they be of value to a new owner? Buyers are willing to take “economic” risk but not “operational” risk and thus are looking at a team that can deal effectively with adversity. Make sure everyone on the team can explain their critical role, as well as those of others on the management team to any potential buyer. They should be comfortable with the buyer’s discovery team discussing how your business is growing and how it’s profitable.

3. The company mission must be a goal your management team understands. Communicate to all regardless of their role and ensure they know their responsibility for the bottom line so they can make it happen at every turn, whether you are there or not. If they are salesmen, do they only know how to sell? Be aware that a killer sales team may not hold the same value to a potential buyer. A new owner will need a business with a complete and diverse management team that runs like a well-oiled machine. Having to replace the management team reduces the value to the buyer.

4. Inform your team early in the decision process, so they have a reason to stay through the merger or sale. Give them a reason to stay. Clean out any staff that doesn’t meld with the idea of a transaction and how they can contribute to the growth and profit possibilities. Every team member must be on board and be able to act as a spokesperson for the company in a positive way. New owners want to come into an environment where HR doesn’t have to solve problems from the get-go.

Listen to a quick clip: Soundcloud

Listen to the whole show: Wholeshow

If you would like a copy of my Due Diligence List, please contact me at marc@marcborrelli.com.

 

© 2015 Marc Borrelli All Rights Reserved

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