Sell!? Maybe It’s Time to Think About It
Here we all are, back from ASR and boy are we excited. More brands, more excitement, hype, orders, deals, three page ads in Skate Biz. People can’t get enough of skateboarding There’s nowhere for business to go but up, and it’s got to be even better next year.
Unless, of course, it’s not.
As a business owner, you have (or you ought to have) some goals that go beyond running your business every day. They may include spending more time with your family, buying an island in the Caribbean, working less hours, diversifying your financial position, or just getting off the damn personal guarantee for the bank loan. Clearly, these aren’t all financial goals, but they have a big financial component to them. Someday, it’s going to be time to sell your business, though it may not be now. If you were to decide that this was the time, when, why and how do you do it?
It was August 1996 when I wrote a column for Snowboarding Business on selling your company. Given how long it takes to sell a company, and the timing of the snowboard industry consolidation, I was probably about a year late writing it. As I write this article, I have a high level of confidence that nobody (but me) has an issue of SnowBiz from August 1996 lying around, so I figure I can plagiarize the hell out of that article.
A Cautionary Tale of Success
Doug Griffith left K2 in the early 90s to start American Snowboard Manufacturing (ASC). Len Hall joined him a little later. ASC grew and prospered. Scott came and offered to buy the company. For a bunch of money. They were going to make snowboards and be cool and would need their own factory.
But Doug and Len hesitated. “If it’s worth this much money now,” they thought, “How much more will it be worth after another year of growth?”
Doug and Len had been around a while and knew something about business cycles. They knew enough to realize that their crystal ball was just the slightest bit cloudy. One of them, and I don’t know which one, had the acumen and perspective to step away from the euphoria of running a profitable, exciting, fast growing business and say, “Well, the truth is I’m not exactly certain how long this ride is going to last.”
They sold. They took the money and ran. Skedaddled. Laughed all the way to the bank. Now, I’m sure they had a little seller’s remorse initially as they worried about how much money they might have left on the negotiating table. But their remorse no doubt went away as the snowboard industry went into the depths of consolidation hell. Scott stopped producing boards for the US. They sold the factory to A Sport. I have no idea if it’s still operating.
Their timing of the sale was prescient. If they could buy and sell stocks like that, they’d own the world. If they hadn’t sold when they did, they would probably have had some hard times before they sold the place for not much, or just had to close it down. There are a lot of people who are (or were) in the snowboard business who weren’t as insightful/lucky as Doug and Len. They either got a lot less money (or just got debt assumed) or they went out of business with nothing to show for a lot of hard work, except maybe some creditors chasing them around.
I’m not claiming that skateboarding is like snowboarding and is going to go through the same cycle. Nor am I saying that everybody who owns a skateboard, or skateboard related business, should try and sell now. What am I saying?
- Business cycles happen. Someday, skateboarding won’t be as hot as it is now and your company, even if it’s exactly the same, will be harder to sell and worth less.
- Getting a business ready to sell, and selling it, takes time. Want to have a deal done in a year and get the best deal you can? Start now. Anybody can sell a good company fast if they are willing to sell it cheap.
- Figure out what you want to do and what you are trying to accomplish. Then decide if and when you should explore selling. It’s true that you can just wait for a buyer to show up. But you won’t be in control of the process and probably won’t get the best deal.
- Business is a risk. Money in your pocket today is worth more than money in your pocket tomorrow. That’s why we have interest rates, a measure of time and risk. Given that time and risk, and the difference between what you can sell for today compared to tomorrow, it might not make sense to wait. Especially if you expect valuations to decline. That is, a company might be worth more today than tomorrow even if tomorrow’s company was bigger and more profitable.
- Supply and demand matters. If times should get hard, there will be lots of sellers and fewer buyers. If you sell, you want to do it when you’re the only one for sale.
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help.
Get Real
It’s as predictable as the sun coming up in the morning. The owner believes in his business so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. A sophisticated buyer won’t ignore your projections, but he will discount them. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. He will value your business in ways that are standard for valuing companies in this or similar industries.
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand-alone basis, all the overhead expense you currently have. Value it, in other words, as the potential buyer would to get insight into his thought process.
This knowledge is a powerful negotiating tool. Make sure you have it.
Get A Goal
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept?
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like.
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
Get Ready
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes that her best long-term strategy is a sale of the business.
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals.
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
You can’t put your best foot forward if it’s stuck in the mud.
Get Agreement
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
Get Help
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kinds of issues.
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
Right now, there are some skateboard industry companies that are a lot more valuable today than they will be in a year or two. I don’t know who they are, or whether their decline in value will be due to industry changes, competitive pressures, or operational mistakes. But right now, I’m not aware of a single successful skateboard, or skateboard related, company that is for sale. One that was might command a lot of attention and an attractive price. I’m not saying, “sell” but I do suggest you think about it. If you decide this is the right time, make sure you do it right. You may only get one chance.
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