Want to Sell Your Business? Exit Strategies to Consider
by Stephen Lett
Selling a catalog business can be a very emotional decision. The business is a way of life for most catalog entrepreneurs. That’s why, for a variety of reasons, catalog owners often have an inflated view of what their businesses are worth. Arriving at a realistic price tag is difficult. The old adage, for every seller there is a buyer certainly holds true. But, finding the “right” buyer for your business willing to pay your asking price is not always easy. While we are not investment bankers or business brokers, I want to share with you what we have learned over the years from working with catalog business owners wanting to sell their businesses.
While many struggle with their businesses, most mature catalogers live pretty well! So, why would they want to sell? They drive a nice company car. Enjoy many perks. Go and come as they please. Take nice vacations and trips. But, many times, this might not be enough. Burnout sets in or the owner simply feels they have reached a point where their heart is no longer in the business.
Deciding to sell your business is a big decision. Here are a few points to consider when doing so.
Point #1 – Timing.
Timing is everything. Knowing when to sell your business is directly related to the amount you will ultimately receive for it. From my experience, most entrepreneurs wait too long to sell. The emotional part kicks-in and the “best” time to sell passes. Economic conditions change. Or, the profit picture may have changed decreasing what the business is worth. A good time to sell is when the business can report three solid years of profitability. It is not necessarily the dollar amount of profit or percent of net income from one year to the next that’s important but rather the consistency of the numbers over time. For example, is business trending up or down and is the financial performance consistent from one year to the next?
Point #2 – Prospective Buyer Type.
Finding the “right” buyer is critical to the sale of any business. Buyers fall into two categories: Strategic and Financial. Strategic buyers will generally pay more for a business because they can recast the income statement by leveraging their existing overhead structure, i.e., one building to rent, not two and so on. Financial buyers only care about one thing, growth and profit so that they can flip the business in 3 to 5 years for a nice gain on their investment. If you are a small catalog business with limited or no profits to report, finding a strategic buyer is the way to go. You will be wasting your time looking for a financial buyer.
Point #3 – Price; Be Realistic.
Arriving at a price is extremely difficult for most business owners. They tend to feel the business is worth more than it truly is. Part of this is emotional. And, part is due to the fact that the owner has lived pretty well off the business over the years. Therefore when they calculate the “true” value they realize what the business means to them personally (this gets back to the question, why sell). Often, I see entrepreneurs putting a price tag on their business which is totally unrealistic. It is important to base the selling price on sound financial criteria as your prospective buyer will do. Be realistic about your expectations or don’t sell. Test your assumptions about value with people you trust and who you would expect to know (your accountant or other financial advisor, for example). Business owners like to price a business based on past financial results, not making money on what they feel it can do in the future. Unfortunately past performance often determines the future. What’s more, it is up to the prospective buyer to determine what they can do with the business going forward.
Point #4 – The leverage.
As a standalone business, it might not be worth much to a financial buyer. However, a strategic buyer might be willing to pay a nice price and to continue to employ you for a few years. They see the opportunity to leverage their existing overhead structure. They can also leverage their housefiles providing there is synergy between the two. Do your homework and know where you stand in terms of leverage before you negotiate the price. Regardless of your lack of profits in the past, a strategic buyer who can leverage your business to their benefit might be willing to pay top dollar.
Point #5 – The Deal; Finding someone to represent you.
Unless your business fetches at least $5 million, it will be difficult to find an investment banker specializing in the sale of catalog businesses to represent you. This will limit your alternatives. You will need to rely on catalog consultants who are often aware of businesses for sale and/or entrepreneurs wanting to purchase another company. Your personal networking is also important and you will have to play a larger role in this process than you might really want to. A smaller business may not be as attractive to a larger one. It takes almost the same amount of due diligence to acquire a large firm as it does a small one. Again, rely on your industry friends and business partners to find just the right buyer for you.
Point #6 – Negotiations – How to play your cards.
Keep your cards close to your chest. A card laid is a card played. Don’t play your cards too fast. It is not always good to tell a prospective buyer how much you want for your business. Let them make the first offer. On the other hand, the prospective buyer wants to know how much you want for your business before they will even talk with you. This can be a real catch-22! If you set a price in the beginning you run the risk of setting it too low (remember, a strategic buyer might be willing to pay more).
Point #7 – Asset vs. Stock Sale.
It is important to understand the difference between an asset sale and a sale of stock. While you might prefer to sell your stock, the buyer will want to purchase assets. The buyer will not want to purchase your debt. They may be willing to assume responsibility for the accounts payables as long as they are current and supported by current inventory. This will be a negotiable item. A buyer also wants to purchase assets so that they can be re-valued on the balance sheet helping to avoid as much goodwill. The new owner my elect to establish a value for the housefile which is typically an off balance sheet asset. The point of this is to understand what you are selling and why. Here is where you will want to consult with your accounting firm.
Point #8 – Non-Compete Agreement.
The buyer will want you to sign a non-complete agreement to keep you from starting a competitive business or working for a competitor. But, as part of this, assuming you like and respect the buyer, you might want to negotiate an employment agreement. Most likely, the new owner will see an advantage keeping you on the team for a period of time (one to three years). This can be an important part of any sale assuming both parties are compatible and get though the sale process amiably.
Point #9 – Do I want to work for these people?
Despite all the polite talk prior to closing, you are an employee (not the owner) the day after (if you continue working for the company). As best you can tell make sure you trust the people you are selling to if you want to continue working there. Discuss the acquirer's plans for your business in detail prior to the sale and find out what their track record with other acquisitions has been. You need to know what it has meant to management and the balance of the employees to sell out and work for the new owners. And remember, after the closing, it will never be the same.
Point #10 – Alternative – Find an Angel Investor.
Smaller catalog companies often say that they would prefer to find an “angel investor” as opposed to selling out. Well, that is easier said than done. It is extremely difficult to find an outside financial investor who is going to be willing to invest in your company. Angel investors are generally family and/or friends who like and trust you. An individual outside your core group of family and friends might be willing to invest providing they have either a vested interest in your company or a passion for your mission. If you are lucky enough to find an angel investor, you will have to be willing to give up a considerable amount of equity in exchange. Is this something you would be willing to do?
Don’t talk to a prospective buyer until you both sign a confidentiality agreement. And even then, take things in order so that you don’t give out sensitive information before you have to. The agreement you sign is only as good as the people who signed it. Neither party wants to end up in court debating whether or not someone violated the confidentiality agreement.
The most important point is to know why you are selling and to whom. Make sure you are comfortable not working both personally and financially. Or, if you desire to continue working, make certain you are compatible with the new owners. When it comes to selling your business or finding an investor be realistic. Define your expectations and consider the most likely scenarios in order to avoid disappointment.