April 12, 2024 • 30 mins
When the time feels right to sell your business, how do you even get started? On this episode we're talking about what business owners need to know when selling their business to avoid making the mistake of a lifetime and what factors they should consider in today’s dynamic marketplace. The guest on the show is Andy Goldberg. He's an attorney with decades of experience in the field of business and the author of a new book, "THE BIG DEAL: A Practical Guide to Selling Your Business With Confidence and Clarity".
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(00:06):
Welcome to Virginia Focus. I'm RebeccaHughes of the Virginia News Network. When
the time feels right to sell yourbusiness, how do you even get started?
On this episode, we're talking aboutwhat business owners need to know when
selling their business to avoid making themistake of a lifetime and what factors they
should consider in today's dynamic marketplace.The guest on the show is Andy Goldberg.
(00:28):
He's an attorney with decades of experiencein the field of business and the
author of a new book, TheBig Deal, A Practical Guide to Selling
your Business with Confidence and Clarity.Welcome to the show, mister Goldberg.
I am very anxious to learn moreabout your book and about your experience.
Pleasure to be here, Rebecca.It's great to be with you. So
let's start by talking about your experience, just to set the tone for everyone
(00:51):
who may not know who you areand what expertise you have in this field.
So I've been practicing law and accountingfor over thirty years. I'm a
CPA as well as a lawyer whofocuses his practice exclusively on representing owners of
businesses who are in the process ofselling their business and moving on to the
(01:12):
next stage of their life. Okay, that sounds like a lot of fun.
So you've had clients from all industries, I assume all industries, whether
it's medical, manufacturing, wholesale anddistribution, retail, it runs the gamut
advertising and marketing. All industries arerepresented in my practice. Okay, all
(01:34):
sizes of businesses as well. Soif I have a business and I know
I'm interesting in selling it, whatis the most important aspect that I need
to look at to start and getprepared? Right? And that's a great
question. We always start with that, and I think, in my opinion,
the most important place to start ismaking a determination if you're emotionally ready
(01:56):
to sell and step away from yourbusiness. People are to often jump right
into the process, but they don'treally reflect on who they are and how
this is going to affect them afterthe deal closes. And this can include
several factors, Rebecca, and primarilybecause for most business owners, they have
(02:16):
spent a lifetime and it may evenbe a second generation family business, and
they've spent a lifetime building it up, working serving the community, paying employees,
and now they're stepping away and departingfrom it. So there's a big
void for many of these business ownersin their life and in what they do
(02:37):
on a daily basis, and that'ssomething that they struggle with and they need
to evaluate or they jump in rightaway. Okay, So I mean I've
heard people refer to their business astheir baby. Is it that strong of
a connection. Yes. Absolutely.When I sit down with my clients and
they're signing the papers to sell thebusiness, you can see a lot of
(03:00):
the anxiety and stress just about goingthrough that process, in giving up something
they've cared for, nurtured. That'sbeen the topic of family conversations that they've
had to run to the office whenthere's an emergency. It is that much
of a connection. And Rebecca,it's even bigger because a lot of these
(03:20):
are so invested in their employees aswell, and now all of a sudden,
they're handing off their employees to anew owner. So we have clients
that have employees who have been secondgeneration, first second, and actually I
have a couple of clients who thereare third generation family members who are working
for the company and now all ofa sudden, the company is being sold.
(03:42):
And you would not believe the emotionalimpact that this has on business owners
because they feel such a debt ofgratitude and responsibility to these employees. So
this is very It is very muchlike giving up your baby in many respects.
Well, I haven't dealt with thatmyself, but I can only imagine
(04:02):
that that really would be that stressful. How do you know as a business
owner when is the right time toeven consider selling your business. It's really
difficult, and as I say inthe book, it's kind of like the
Goldilocks syndrome, not too soon,not too late. But I think what
(04:24):
people have an innate sense. Manytimes it's when it becomes harder to just
get out of bed and go towork in the morning, or when they
don't feel they're contributing as much tothe welfare of the business or of their
of their employees. A lot oftimes it's when they start to see their
(04:44):
kids grow up and then they havekids. So now the business owner has
grandkids and they want to spend moretime with them. That's a huge motivator.
It's about where they want to spendtheir time. So family dynamics can
be very influential. Horse Rebecca,there are always the economic issues. Is
my business at the top of itsvalue. Is there no way I'm going
(05:08):
to get any more money, sothat is not at the right time.
Or unfortunately, if the business isnot doing well, do I need to
sell it before it declines even furtherand I can't get anything out of it.
So those are the economic conditions ofthe business are very strong. We've
also seen industry conditions. So theremay be some industries that are being taken
(05:31):
over by AI or tech and they'renot going to be as valuable in the
future. So there are just plainold industry conditions that will affect when you
want to sell. And frankly,for many people, they just want to
relieve themselves of the emotional burden andthe economic risks that they take on a
day to day basis and it's timeto move on. So those are some
(05:55):
of the factors that we see asemployees, as business owners decide or try
to determine when they want to selltheir business. Okay, I forgot to
ask you. As well as emotionalconsiderations, are there financial things you need
to think about before you decide toput your business up for sale. Well,
(06:16):
certainly on the financial side, wealways want to make sure that the
business owner has had conversations with heror his financial advisor, and this includes
understanding how much you may walk awayfrom the sale with. Sometimes business owners
don't realize that they sell a company, but they had loans, they have
(06:39):
bank loans they have to pay off, they have taxes they have to pay,
and we go in depth in thebook on taxes. There are probably
six or seven different layers of taxesthat might come into play. So they
need to have a full understanding ofhow much is left over, have conversations
with their financial advisor, and determinewhether that is really enough to continue living
the same life lifestyle that they've livedin the past, or live even a
(07:03):
nice, nicer lifestyle if they wantto have a second home, and they
need to determine whether that sale willallow them to enjoy those luxuries going forward.
Okay, and you talked about theadvisors. What does a person look
for in an advisor? How manyshould you have and how do you find
(07:25):
them? So I think there arereally a couple different advisors that are traditionally
involved in the sale of a business. The first is really your long standing
accountant. He is going to heis involved because the buyer is going to
look to you and your accountant tomake sure all the financial statements are up
to day inaccurate. The next advisorwill be a tax advisor. This might
(07:50):
be the same person as your accountant, but it might be someone different who
has a particular specialty in making sureand understanding all the tax implications from the
sale of the business, so that'sa very important element. The next person
that will likely be involved in thebusiness sale is a mergers and acquisition advisor
(08:13):
or sometimes referred to as a businessbroker. They will help you and they
will be a lynchpin in the processbecause they will help you understand the process,
get your business ready for sale,make sure all the business processes and
concepts and organization are properly documented soa buyer can see really what they are
(08:37):
buying. The merger and acquisition advisoralso plays an important role because they're going
to help you determine what the valueof your business is and how much the
market will likely pay for it.And then finally they're going to help you
find a buyer for business, sotheir role is really key. And then
the final advisor where I come inis the lawyer going to make sure that
(09:00):
the entire transaction is documented. Itprotects you. And by protecting, I
mean you get all the dollars thatyou anticipated receiving from the transaction, and
that there are no ways that thebuyer can try and come back and make
a request to we call it clawbackssome of the purchase price because you may
(09:22):
have misguided them about the state ofyour business or not given them the full
truth about the condition of the business. So we want to make sure that
we develop a purchase agreement that protectsyou from all those risks and make sure
that you get to retain all theproceeds you receive at the closing table when
you sign the transfer documents and thetransaction documents. Okay, And that probably
(09:46):
all plays into the time it takesthat you were talking about before on the
complexities. And you may think youcan turn around and sell your business in
sixty days or whatever like a house, and it might take you a few
years to get that business ready.Is that what you're saying. It can
take a few years depending on thecondition. We've seen that if a business,
(10:07):
even if a business is adequately preparedand has a strong organization in place,
strong management, strong employee base,once they decide to sell It can
still take nine to twelve months tosell, and that's really in order to
maximize the price, because we wantto go out and we're not interested in
(10:30):
just finding the first person who willmake an offer. There are many times
where there are four or five orsix people who want to buy your business,
so we actually try and help havethem negotiate against one another to try
and drive up the price or makesure the owner gets the best deal.
So that definitely takes some time.It will take time to gather the information
(10:52):
that a buyer will want to seeas part of the due diligence process,
which we can talk more about later, but anywhere from nine to twelve months,
and I think we're back to themost important thing about the time it's
taking out is just the demographics arechanging. A lot of younger persons are
interested in tech companies, or they'reinterested in being Instagram influencers or YouTube video
(11:16):
stars. They don't necessarily want toget into the business of managing people,
having a sales and marketing department,managing operations, understanding finances and having to
apply for a bank loan. They'rejust not interested in that. So that
really reduces the number of potential buyers. And we're seeing the baby boomers who
(11:37):
are now selling their business. It'sgoing to take them longer and longer to
sell because of this very fact.Wow, although those businesses are still very
much needed and very valuable. That'sreally interesting. Let's move on to are
there specific methods we can use forfinding out the value of our business when
(11:58):
we're getting ready to, you know, put it up for sale. Yeah,
there are, there are. Thereare four main methods that business owners
will use in the in the privatelyheld, closely held businesses obviously not public
companies, but in closely held businesses, there are four main methods that we
(12:18):
see and that we discuss more indepth in the book. One is called
the seller's discretionary earnings, and thatbasically covers it's a small business. It's
maybe it's the business owner and theyhave one or two employees or part time
employees, and they run a businessand it's really a job. It could
(12:39):
be a bake shop, for instance, and the bay the owner is there,
she's baking everything or he is bakingeverything, and they have a couple
of employees, and sellers discretionary earningswould be things like what does the baker
or the owner take home at theend of the year, let's say one
hundred thousand dollars. That person alsoprobably gets health insurance, maybe puts a
little bit of money away into afour oh one K plan, and maybe
(13:03):
puts their automobile through there. Andthose total benefits and the like amount to
one hundred and fifty thousand dollars.We'll take that number and multiply it by
what we generically call a multiplier,which can be two or three, and
that is what the selling price maybe worth. So that's one method,
so in this case, in thatcase, the bakery may be worth three
(13:24):
to four hundred and fifty thousand dollars. Another method is the earnings multiplier method.
And let's think of this another way, where it's the bakery, but
now they have five different stores,so now they have a lot more employees.
They have it's a more sophisticated operation. They have maybe some intellectual property
(13:45):
with their recipes, they maybe havea delivery service, so it's just a
more sophisticated operation. And we'll takea very similar concept, what are the
earnings for the year of that company, and will multiply that by again a
multiplier. So somewhat similar method.The discount of cash flow method is yet
(14:09):
the most sophisticated method, and thisis really used where there are larger businesses
and where there's a more a recurringrevenue and a guaranteed revenue stream of income.
You see it a lot with subscriptionbased companies because we know everybody's putting
down two ninety nine every month toget their subscription, or you're paying your
(14:30):
Netflix charge of every month. Sothat makes the company very, very valuable
because it's a guaranteed stream of income. So the discounted cash flow method says,
okay, if we earn this amountof income over the next ten years
and we discount it back, whatwould the value be. And that is
(14:52):
really where you're going to get thehighest valuation for a business. But it's
also going to be used in veryrare cases. You have a very sophisticated
business, a highly secure and stablestream of income. So the most common
as a result, the most commonare really going to be the earnings multiplier
and the seller's discretionary earnings. Thelast method in which is used less frequently
(15:16):
is the comparable sales method. Sowe have our bakery and there might be
another bakery four miles down the roadwho just sold What did that bakery sell
for? And they'll compare the twoand that would be a guide as to
what the value might be. That'sa much harder comparison because very rarely are
you ever comparing the same exactly thesame types of businesses. One bakery might
(15:41):
focus on cakes and custom orders.Another might be focused on cookies and people
who just come in off the street. So there's just so many variables even
between businesses in the same industry andeven within businesses that are four miles apart,
that it's hard to use comparable sales. But again, it's a guide.
It can be a guide, right, yeah, because I think of
(16:03):
real estate when you talk about thatlast model, you know, and you
compare bedrooms and bathrooms, and youcan kind of do the same, you
know what I'm saying. You cando that, But with businesses, like
you said, it's so much morecomplicated because there's so many different nuances that
really can't be done that way.Are there tax things we need to be
thinking about if we're looking to sell. There's tax, tax and more tax
(16:26):
issues that you should be aware of. The First tax issue that I would
focus on is just understanding the overalltransaction and how how will impact the taxation
of the transaction. Without going intotoo much detail. They're typically lined up
into two segments. One is aasset sale, where you're selling the assets
(16:48):
of the business, and the otherwould be the stock sale, where you're
selling your ownership interest in the business. Let's not get too involved in there,
but those will be the two andthey will field significantly different tax results.
And this is where your accountant andtax advisor are going to come in
and help you plan that. Interestinglyand really importantly, Rebecca, and I'm
(17:11):
so glad you asked that great question. Is that if the buyer wants an
asset sale, the seller usually wantsa stock sale. So the buyer and
seller usually want different things. Numberone, because there's some there's some business
issues and liability risks, and alsobecause the tax issues are different for the
buyer and the seller depending on howthat transaction is structured. Okay, so
(17:37):
that's really a super important and alsoa super often a strongly and heatedly negotiated
area of the transaction, whether it'san asset or stock sale. So let's
talk a little bit more dive ina little bit more about the different types
of taxes you'll pay federal income taxwhen you sell it. You might have
a state income tax. You mighthave a local income You might have taxes
(18:03):
if you're selling real estate or otherthings. There might be transfer taxes.
If your state has what's called abulk sales tax, there might be a
bulk sales tax. There might bewhat we call recapture tax, again a
tax concept. So I think Ilisted probably five or six different taxes right
there that the seller should be awareof. Right, so we've gotten you
(18:29):
know, LESA, I'm the businessowner. We've consulted with everybody, everything,
financial, user go. I'm emotionallyready. We've done the valuation.
We know we're going to ask.We've made all these steps. How in
the world do we find a buyer? It's a great question. We already
talked. We already talked earlier abouthow hard it is to find a buyer.
(18:51):
So there, let's let's focus on. I'll start with many business owners
think that they're best suited to findthe buyer, and I'll be kind and
I will say we always try anddissuade them from that first, because finding
a buyer and finding the right buyerand finding the right buyer who will pay
the most money is a full timejob. That's why there are business brokers
(19:15):
and mergers and acquisition advisors because ownerscan't do that. The other important thing
about why people will hire a mergerand acquisition advisor is because it will keep
the sale process confidential. Imagine,Rebecca, you owned a business and you
wanted to sell it. Are yougoing to go all of a sudden go
around to all your friends and familyand say, hey, hey, my
bakery is up for sale, now, do you know anybody who wants to
(19:36):
buy it? People don't want todo that because they're afraid employees might leave,
their suppliers might leave, the landlordis worried about they're going to they're
no longer going to be there.So the sale process is really kept confidential,
and that's where a merger and acquisitionadvisor can come in and help you
with that as well. So likenon disclosure agreements, that kind of confidential.
(20:00):
So yes, absolutely, whenever we'retalking to a potential buyer, they
must sign a non disclosure agreement aboutthe terms and information they're going to learn
about the business, and even thatthe business is for sale. That's step
one. There are really three differenttypes of buyers that we see out there.
The first, in which many ofyour listeners may be familiar with,
(20:23):
is just the individual buyer. Igo back again to the bakery, where
a person is selling their bakery andanother person has always wanted to own a
bake shop, so they're going tobuy it. And a lot of these
cases they don't necessarily have a lotof financial resources to just pay the current
owner cash. They're not going topay them three hundred thousand dollars in cash,
(20:47):
so the seller may have to financeit essentially be the bank or take
back a seller note for the buyeroh wo, and the seller will receive
payments over time. The buyer inthis type of scenario also really likes to
focus on operations. They're heavily integratedinto the business. That person might be
(21:07):
the baker, might be running thecash register, is ordering all the sugar
and flour and the like from suppliers. They look at this as a job
that they're going to have. Anothertype of buyer is what we call a
financial buyer, and people may thinkof that similar to that as a private
equity group who wants to come in, and a private equity group may want
(21:30):
to come in. And if youhad ten bake shops ten bank stores,
they're going to want to come inbecause it's something bigger and more substantial.
Interestingly, about a private equity groupor a financial buyer, when they come
and buy you, they're already thinkingabout how they're going to exit. They
will usually want to buy, they'llstay there and they'll own it for five
to seven years, and then they'regoing to want to sell it to try
(21:53):
and get a very big return ontheir investment. Usually their focus for private
equity is on a detailed understanding ofthe finances and accounting. They don't always
have sophisticated expertise in the industry,although sometimes they do. Rather, they'll
bring in and hire expertise experts inthe industry. So if they're buying a
(22:15):
widget company, or if private equityis buying a widget company, they may
think there's a room to make abig profit in five to seven years,
but they don't know much about theindustry. They'll go bring in maybe a
retired CEO who ran another widget companyto help run it and get it up
and more profitable and even expand itand buy other companies to grow a revenue.
(22:37):
The last type of buyer is astrategic buyer, and that strategic buyer
would be let's say they have it'sa widget company, it's an existing widget
company, and they want to increasemarket share, or they want to increase
a product scope or geographic area wherethey're selling. They might buy a related
(23:00):
widget company it's already in the industryto expand their reach for these main purposes
market share, product growth, orgeographic share. They often come to the
table with money, so they canpay cash, as does private equity,
and they have a ton of industryexpertise, a little bit different than financial
or private equity buyer who sometimes doesnot have as much industry expertise. So
(23:23):
they're coming in for a different reason, and they will often hold the business
for a longer period of time.They're interested in growing it larger and larger,
as opposed to holding it for ashort period of time and selling it.
What's really interesting, Rebecca and Iwant to point out, and I
think it's great that you raised thisissue, is that a lot of sellers
will prefer a strategic buyer because theyknow that their business is going to have
(23:47):
a legacy and it's going to bearound a long time. There might be
changes in how the operations are doneor how works plant shifts are structured,
but in general, the business isgoing to be there. With a private
equity there can be so many changesto the business because they're just plain and
simple. They're interested in purely andmaximizing the return on their investment, and
(24:11):
a lot of times sellers just kindof look at it and say, a
I think my legacy's going to begone. I think this company could be
gone in five years when a privateequity group decides to sell it again.
So business owners are worried about thatand they'll they'll take a hard look at
who's buying them. Right. Yeah. I was thinking it goes back to
that whole emotional thing you were talkingabout at the beginning, because you know
(24:34):
equity companies like you're talking about beingthat they're thinking short term. There are
things you can do to maximize profitshort term, but that also may or
may not have the company existing formuch longer after that short term, and
that could be I guess one ofthe dangers of that is they get their
money out, they sell to someoneelse, that person, you know,
(24:56):
for whatever reason, can't sustain whatwas what changes were made and then fold.
And you don't want to see thathappen when it's your baby. But
somebody who a private party or youknow, like your bakery analogy, the
baker, he's gonna, you know, love that the way you loved it.
And so the emotional connection seems tobe there more so, I guess
(25:17):
right spot on, And I thinkwhat's what's even more interesting, and it's
a really interesting point that you raiseabout relating the type of buyer back to
the emotional part. And that's agreat, great and thoughtful point is that
we counsel our clients. We tellour clients, while sellers are going to
do due diligence on you, youshould be evaluating the buyer as well.
(25:41):
What's what's their history, what havethey done historically with businesses that they've bought,
What is their personality like, whatis their name and reputation in the
community, what trade groups do theybelong to, How serious are they about
keeping the business around. Those areall things that we tell our clients the
soul to evaluate about the buyer,and that's something that I think too many
(26:04):
business owners and sellers don't take thetime to do. And I really think
it's it's important, especially for thebusiness owner who is willing to sell the
company but also wants to secure thelegacy of what has been built up over
their lifetime or even over their familiesgenerations, right because I mean businesses,
(26:26):
especially smaller businesses, you can tella lot about the character and the integrity
and the personality even of the creator, the business owner, the starter or
whoever, and the family that continuethe legacy based on the way they do
business. And so to turn thatover to somebody who may turn it into
(26:47):
something that doesn't represent you, thatwould be really hard. Oh, spot
on. I'll leave it at do. I could not have said it better
myself. I feel like we've coveredthis pretty thoroughly, do you think so?
Yeah, there's we've Obviously we didn'tget into all the blood and goods
as I call it, of thesale and purchase agreement. I discuss them
(27:10):
in length in the book. Andthen the really the one thing I want
to also make sure of. Wetalked about the emotions before the sale,
Rebecca, but I also want tomake sure business owners understand what's going to
happen after the sale. Yes,there will be some legal follow ups,
but I really want to make surethe business owner keeps clear on on or
understands how they're going to spend theirtime. Do they have hobbies that they
(27:30):
want to take up, how arethey going to be involved in the community.
Do they want to mentor younger entrepreneurs. That's really something that I think
is important for business owners to recognizeand to understand what post sale life will
look like as they go into thisprocess. It's almost the idea of beginning
with the end in mind and understandingwhat it's going to look like once you
(27:53):
close the deal. Yeah, definitely, because if nothing else, it protects
your mental health. You don't wantto go into a depression. We've literally
seen people who are lost. Theydon't know. They get up the next
morning and they don't know what todo, and that's understandable, but at
least have a process. Have Maybeyou have you're going to go to a
coffee with some friends every morning,or you're going to go to the corner
(28:15):
and pick up a newspaper if you'renot reading it online, or you're gonna
work out in the morning, getyourself into a new routine, sign up
for some new hobbies, but makesure you're using your time productively so you
don't fall into a rut. Yeah, definitely, I think we're at the
end of our time. But wouldyou like to promote your website for us
(28:37):
and let us know where we canbuy your book? Thanks so much,
Rebecca. You can get the bookon Amazon, Candle, paperback and hardcover
versions. You can also find itand find more information about the book and
my practice and the process of sellingyour business at the www dot the Big
Deal book dot com. Awesome.That is great. Thank you so much
(29:00):
for spending this time with us todayand helping us navigate this really complex and
emotional subject matter that sometimes we don'tthink about it being as big as it
is. It's the largest transaction abusiness owner will undertake in their lifetime,
and my goal with the book isto make sure they have confidence and clarity
(29:22):
throughout the process and they can doit with the least amount of emotional upheaval
that we can. I love it. I love it. Thank you for
writing it, and thank you foryour time. Thanks a lot, Rebecca.
Have a great day. I hopeyou've enjoyed today's show. Thanks for
tuning into the show on your favoritelocal radio station. You can now listen
to this show or past shows throughthe iheartapp or on iHeart dot com.
(29:44):
Just search for Virginia Focus under podcasts. I'm Rebecca Hughes with the Virginia News
Network, and I'll be here nextweek on Virginia Focus.
Welcome to Virginia Focus. I'm RebeccaHughes of the Virginia News Network. When
the time feels right to sell yourbusiness, how do you even get started?
On this episode, we're talking aboutwhat business owners need to know when
selling their business to avoid making themistake of a lifetime and what factors they
should consider in today's dynamic marketplace.The guest on the show is Andy Goldberg.
(00:28):
He's an attorney with decades of experiencein the field of business and the
author of a new book, TheBig Deal, A Practical Guide to Selling
your Business with Confidence and Clarity.Welcome to the show, mister Goldberg.
I am very anxious to learn moreabout your book and about your experience.
Pleasure to be here, Rebecca.It's great to be with you. So
let's start by talking about your experience, just to set the tone for everyone
(00:51):
who may not know who you areand what expertise you have in this field.
So I've been practicing law and accountingfor over thirty years. I'm a
CPA as well as a lawyer whofocuses his practice exclusively on representing owners of
businesses who are in the process ofselling their business and moving on to the
(01:12):
next stage of their life. Okay, that sounds like a lot of fun.
So you've had clients from all industries, I assume all industries, whether
it's medical, manufacturing, wholesale anddistribution, retail, it runs the gamut
advertising and marketing. All industries arerepresented in my practice. Okay, all
(01:34):
sizes of businesses as well. Soif I have a business and I know
I'm interesting in selling it, whatis the most important aspect that I need
to look at to start and getprepared? Right? And that's a great
question. We always start with that, and I think, in my opinion,
the most important place to start ismaking a determination if you're emotionally ready
(01:56):
to sell and step away from yourbusiness. People are to often jump right
into the process, but they don'treally reflect on who they are and how
this is going to affect them afterthe deal closes. And this can include
several factors, Rebecca, and primarilybecause for most business owners, they have
(02:16):
spent a lifetime and it may evenbe a second generation family business, and
they've spent a lifetime building it up, working serving the community, paying employees,
and now they're stepping away and departingfrom it. So there's a big
void for many of these business ownersin their life and in what they do
(02:37):
on a daily basis, and that'ssomething that they struggle with and they need
to evaluate or they jump in rightaway. Okay, So I mean I've
heard people refer to their business astheir baby. Is it that strong of
a connection. Yes. Absolutely.When I sit down with my clients and
they're signing the papers to sell thebusiness, you can see a lot of
(03:00):
the anxiety and stress just about goingthrough that process, in giving up something
they've cared for, nurtured. That'sbeen the topic of family conversations that they've
had to run to the office whenthere's an emergency. It is that much
of a connection. And Rebecca,it's even bigger because a lot of these
(03:20):
are so invested in their employees aswell, and now all of a sudden,
they're handing off their employees to anew owner. So we have clients
that have employees who have been secondgeneration, first second, and actually I
have a couple of clients who thereare third generation family members who are working
for the company and now all ofa sudden, the company is being sold.
(03:42):
And you would not believe the emotionalimpact that this has on business owners
because they feel such a debt ofgratitude and responsibility to these employees. So
this is very It is very muchlike giving up your baby in many respects.
Well, I haven't dealt with thatmyself, but I can only imagine
(04:02):
that that really would be that stressful. How do you know as a business
owner when is the right time toeven consider selling your business. It's really
difficult, and as I say inthe book, it's kind of like the
Goldilocks syndrome, not too soon,not too late. But I think what
(04:24):
people have an innate sense. Manytimes it's when it becomes harder to just
get out of bed and go towork in the morning, or when they
don't feel they're contributing as much tothe welfare of the business or of their
of their employees. A lot oftimes it's when they start to see their
(04:44):
kids grow up and then they havekids. So now the business owner has
grandkids and they want to spend moretime with them. That's a huge motivator.
It's about where they want to spendtheir time. So family dynamics can
be very influential. Horse Rebecca,there are always the economic issues. Is
my business at the top of itsvalue. Is there no way I'm going
(05:08):
to get any more money, sothat is not at the right time.
Or unfortunately, if the business isnot doing well, do I need to
sell it before it declines even furtherand I can't get anything out of it.
So those are the economic conditions ofthe business are very strong. We've
also seen industry conditions. So theremay be some industries that are being taken
(05:31):
over by AI or tech and they'renot going to be as valuable in the
future. So there are just plainold industry conditions that will affect when you
want to sell. And frankly,for many people, they just want to
relieve themselves of the emotional burden andthe economic risks that they take on a
day to day basis and it's timeto move on. So those are some
(05:55):
of the factors that we see asemployees, as business owners decide or try
to determine when they want to selltheir business. Okay, I forgot to
ask you. As well as emotionalconsiderations, are there financial things you need
to think about before you decide toput your business up for sale. Well,
(06:16):
certainly on the financial side, wealways want to make sure that the
business owner has had conversations with heror his financial advisor, and this includes
understanding how much you may walk awayfrom the sale with. Sometimes business owners
don't realize that they sell a company, but they had loans, they have
(06:39):
bank loans they have to pay off, they have taxes they have to pay,
and we go in depth in thebook on taxes. There are probably
six or seven different layers of taxesthat might come into play. So they
need to have a full understanding ofhow much is left over, have conversations
with their financial advisor, and determinewhether that is really enough to continue living
the same life lifestyle that they've livedin the past, or live even a
(07:03):
nice, nicer lifestyle if they wantto have a second home, and they
need to determine whether that sale willallow them to enjoy those luxuries going forward.
Okay, and you talked about theadvisors. What does a person look
for in an advisor? How manyshould you have and how do you find
(07:25):
them? So I think there arereally a couple different advisors that are traditionally
involved in the sale of a business. The first is really your long standing
accountant. He is going to heis involved because the buyer is going to
look to you and your accountant tomake sure all the financial statements are up
to day inaccurate. The next advisorwill be a tax advisor. This might
(07:50):
be the same person as your accountant, but it might be someone different who
has a particular specialty in making sureand understanding all the tax implications from the
sale of the business, so that'sa very important element. The next person
that will likely be involved in thebusiness sale is a mergers and acquisition advisor
(08:13):
or sometimes referred to as a businessbroker. They will help you and they
will be a lynchpin in the processbecause they will help you understand the process,
get your business ready for sale,make sure all the business processes and
concepts and organization are properly documented soa buyer can see really what they are
(08:37):
buying. The merger and acquisition advisoralso plays an important role because they're going
to help you determine what the valueof your business is and how much the
market will likely pay for it.And then finally they're going to help you
find a buyer for business, sotheir role is really key. And then
the final advisor where I come inis the lawyer going to make sure that
(09:00):
the entire transaction is documented. Itprotects you. And by protecting, I
mean you get all the dollars thatyou anticipated receiving from the transaction, and
that there are no ways that thebuyer can try and come back and make
a request to we call it clawbackssome of the purchase price because you may
(09:22):
have misguided them about the state ofyour business or not given them the full
truth about the condition of the business. So we want to make sure that
we develop a purchase agreement that protectsyou from all those risks and make sure
that you get to retain all theproceeds you receive at the closing table when
you sign the transfer documents and thetransaction documents. Okay, And that probably
(09:46):
all plays into the time it takesthat you were talking about before on the
complexities. And you may think youcan turn around and sell your business in
sixty days or whatever like a house, and it might take you a few
years to get that business ready.Is that what you're saying. It can
take a few years depending on thecondition. We've seen that if a business,
(10:07):
even if a business is adequately preparedand has a strong organization in place,
strong management, strong employee base,once they decide to sell It can
still take nine to twelve months tosell, and that's really in order to
maximize the price, because we wantto go out and we're not interested in
(10:30):
just finding the first person who willmake an offer. There are many times
where there are four or five orsix people who want to buy your business,
so we actually try and help havethem negotiate against one another to try
and drive up the price or makesure the owner gets the best deal.
So that definitely takes some time.It will take time to gather the information
(10:52):
that a buyer will want to seeas part of the due diligence process,
which we can talk more about later, but anywhere from nine to twelve months,
and I think we're back to themost important thing about the time it's
taking out is just the demographics arechanging. A lot of younger persons are
interested in tech companies, or they'reinterested in being Instagram influencers or YouTube video
(11:16):
stars. They don't necessarily want toget into the business of managing people,
having a sales and marketing department,managing operations, understanding finances and having to
apply for a bank loan. They'rejust not interested in that. So that
really reduces the number of potential buyers. And we're seeing the baby boomers who
(11:37):
are now selling their business. It'sgoing to take them longer and longer to
sell because of this very fact.Wow, although those businesses are still very
much needed and very valuable. That'sreally interesting. Let's move on to are
there specific methods we can use forfinding out the value of our business when
(11:58):
we're getting ready to, you know, put it up for sale. Yeah,
there are, there are. Thereare four main methods that business owners
will use in the in the privatelyheld, closely held businesses obviously not public
companies, but in closely held businesses, there are four main methods that we
(12:18):
see and that we discuss more indepth in the book. One is called
the seller's discretionary earnings, and thatbasically covers it's a small business. It's
maybe it's the business owner and theyhave one or two employees or part time
employees, and they run a businessand it's really a job. It could
(12:39):
be a bake shop, for instance, and the bay the owner is there,
she's baking everything or he is bakingeverything, and they have a couple
of employees, and sellers discretionary earningswould be things like what does the baker
or the owner take home at theend of the year, let's say one
hundred thousand dollars. That person alsoprobably gets health insurance, maybe puts a
little bit of money away into afour oh one K plan, and maybe
(13:03):
puts their automobile through there. Andthose total benefits and the like amount to
one hundred and fifty thousand dollars.We'll take that number and multiply it by
what we generically call a multiplier,which can be two or three, and
that is what the selling price maybe worth. So that's one method,
so in this case, in thatcase, the bakery may be worth three
(13:24):
to four hundred and fifty thousand dollars. Another method is the earnings multiplier method.
And let's think of this another way, where it's the bakery, but
now they have five different stores,so now they have a lot more employees.
They have it's a more sophisticated operation. They have maybe some intellectual property
(13:45):
with their recipes, they maybe havea delivery service, so it's just a
more sophisticated operation. And we'll takea very similar concept, what are the
earnings for the year of that company, and will multiply that by again a
multiplier. So somewhat similar method.The discount of cash flow method is yet
(14:09):
the most sophisticated method, and thisis really used where there are larger businesses
and where there's a more a recurringrevenue and a guaranteed revenue stream of income.
You see it a lot with subscriptionbased companies because we know everybody's putting
down two ninety nine every month toget their subscription, or you're paying your
(14:30):
Netflix charge of every month. Sothat makes the company very, very valuable
because it's a guaranteed stream of income. So the discounted cash flow method says,
okay, if we earn this amountof income over the next ten years
and we discount it back, whatwould the value be. And that is
(14:52):
really where you're going to get thehighest valuation for a business. But it's
also going to be used in veryrare cases. You have a very sophisticated
business, a highly secure and stablestream of income. So the most common
as a result, the most commonare really going to be the earnings multiplier
and the seller's discretionary earnings. Thelast method in which is used less frequently
(15:16):
is the comparable sales method. Sowe have our bakery and there might be
another bakery four miles down the roadwho just sold What did that bakery sell
for? And they'll compare the twoand that would be a guide as to
what the value might be. That'sa much harder comparison because very rarely are
you ever comparing the same exactly thesame types of businesses. One bakery might
(15:41):
focus on cakes and custom orders.Another might be focused on cookies and people
who just come in off the street. So there's just so many variables even
between businesses in the same industry andeven within businesses that are four miles apart,
that it's hard to use comparable sales. But again, it's a guide.
It can be a guide, right, yeah, because I think of
(16:03):
real estate when you talk about thatlast model, you know, and you
compare bedrooms and bathrooms, and youcan kind of do the same, you
know what I'm saying. You cando that, But with businesses, like
you said, it's so much morecomplicated because there's so many different nuances that
really can't be done that way.Are there tax things we need to be
thinking about if we're looking to sell. There's tax, tax and more tax
(16:26):
issues that you should be aware of. The First tax issue that I would
focus on is just understanding the overalltransaction and how how will impact the taxation
of the transaction. Without going intotoo much detail. They're typically lined up
into two segments. One is aasset sale, where you're selling the assets
(16:48):
of the business, and the otherwould be the stock sale, where you're
selling your ownership interest in the business. Let's not get too involved in there,
but those will be the two andthey will field significantly different tax results.
And this is where your accountant andtax advisor are going to come in
and help you plan that. Interestinglyand really importantly, Rebecca, and I'm
(17:11):
so glad you asked that great question. Is that if the buyer wants an
asset sale, the seller usually wantsa stock sale. So the buyer and
seller usually want different things. Numberone, because there's some there's some business
issues and liability risks, and alsobecause the tax issues are different for the
buyer and the seller depending on howthat transaction is structured. Okay, so
(17:37):
that's really a super important and alsoa super often a strongly and heatedly negotiated
area of the transaction, whether it'san asset or stock sale. So let's
talk a little bit more dive ina little bit more about the different types
of taxes you'll pay federal income taxwhen you sell it. You might have
a state income tax. You mighthave a local income You might have taxes
(18:03):
if you're selling real estate or otherthings. There might be transfer taxes.
If your state has what's called abulk sales tax, there might be a
bulk sales tax. There might bewhat we call recapture tax, again a
tax concept. So I think Ilisted probably five or six different taxes right
there that the seller should be awareof. Right, so we've gotten you
(18:29):
know, LESA, I'm the businessowner. We've consulted with everybody, everything,
financial, user go. I'm emotionallyready. We've done the valuation.
We know we're going to ask.We've made all these steps. How in
the world do we find a buyer? It's a great question. We already
talked. We already talked earlier abouthow hard it is to find a buyer.
(18:51):
So there, let's let's focus on. I'll start with many business owners
think that they're best suited to findthe buyer, and I'll be kind and
I will say we always try anddissuade them from that first, because finding
a buyer and finding the right buyerand finding the right buyer who will pay
the most money is a full timejob. That's why there are business brokers
(19:15):
and mergers and acquisition advisors because ownerscan't do that. The other important thing
about why people will hire a mergerand acquisition advisor is because it will keep
the sale process confidential. Imagine,Rebecca, you owned a business and you
wanted to sell it. Are yougoing to go all of a sudden go
around to all your friends and familyand say, hey, hey, my
bakery is up for sale, now, do you know anybody who wants to
(19:36):
buy it? People don't want todo that because they're afraid employees might leave,
their suppliers might leave, the landlordis worried about they're going to they're
no longer going to be there.So the sale process is really kept confidential,
and that's where a merger and acquisitionadvisor can come in and help you
with that as well. So likenon disclosure agreements, that kind of confidential.
(20:00):
So yes, absolutely, whenever we'retalking to a potential buyer, they
must sign a non disclosure agreement aboutthe terms and information they're going to learn
about the business, and even thatthe business is for sale. That's step
one. There are really three differenttypes of buyers that we see out there.
The first, in which many ofyour listeners may be familiar with,
(20:23):
is just the individual buyer. Igo back again to the bakery, where
a person is selling their bakery andanother person has always wanted to own a
bake shop, so they're going tobuy it. And a lot of these
cases they don't necessarily have a lotof financial resources to just pay the current
owner cash. They're not going topay them three hundred thousand dollars in cash,
(20:47):
so the seller may have to financeit essentially be the bank or take
back a seller note for the buyeroh wo, and the seller will receive
payments over time. The buyer inthis type of scenario also really likes to
focus on operations. They're heavily integratedinto the business. That person might be
(21:07):
the baker, might be running thecash register, is ordering all the sugar
and flour and the like from suppliers. They look at this as a job
that they're going to have. Anothertype of buyer is what we call a
financial buyer, and people may thinkof that similar to that as a private
equity group who wants to come in, and a private equity group may want
(21:30):
to come in. And if youhad ten bake shops ten bank stores,
they're going to want to come inbecause it's something bigger and more substantial.
Interestingly, about a private equity groupor a financial buyer, when they come
and buy you, they're already thinkingabout how they're going to exit. They
will usually want to buy, they'llstay there and they'll own it for five
to seven years, and then they'regoing to want to sell it to try
(21:53):
and get a very big return ontheir investment. Usually their focus for private
equity is on a detailed understanding ofthe finances and accounting. They don't always
have sophisticated expertise in the industry,although sometimes they do. Rather, they'll
bring in and hire expertise experts inthe industry. So if they're buying a
(22:15):
widget company, or if private equityis buying a widget company, they may
think there's a room to make abig profit in five to seven years,
but they don't know much about theindustry. They'll go bring in maybe a
retired CEO who ran another widget companyto help run it and get it up
and more profitable and even expand itand buy other companies to grow a revenue.
(22:37):
The last type of buyer is astrategic buyer, and that strategic buyer
would be let's say they have it'sa widget company, it's an existing widget
company, and they want to increasemarket share, or they want to increase
a product scope or geographic area wherethey're selling. They might buy a related
(23:00):
widget company it's already in the industryto expand their reach for these main purposes
market share, product growth, orgeographic share. They often come to the
table with money, so they canpay cash, as does private equity,
and they have a ton of industryexpertise, a little bit different than financial
or private equity buyer who sometimes doesnot have as much industry expertise. So
(23:23):
they're coming in for a different reason, and they will often hold the business
for a longer period of time.They're interested in growing it larger and larger,
as opposed to holding it for ashort period of time and selling it.
What's really interesting, Rebecca and Iwant to point out, and I
think it's great that you raised thisissue, is that a lot of sellers
will prefer a strategic buyer because theyknow that their business is going to have
(23:47):
a legacy and it's going to bearound a long time. There might be
changes in how the operations are doneor how works plant shifts are structured,
but in general, the business isgoing to be there. With a private
equity there can be so many changesto the business because they're just plain and
simple. They're interested in purely andmaximizing the return on their investment, and
(24:11):
a lot of times sellers just kindof look at it and say, a
I think my legacy's going to begone. I think this company could be
gone in five years when a privateequity group decides to sell it again.
So business owners are worried about thatand they'll they'll take a hard look at
who's buying them. Right. Yeah. I was thinking it goes back to
that whole emotional thing you were talkingabout at the beginning, because you know
(24:34):
equity companies like you're talking about beingthat they're thinking short term. There are
things you can do to maximize profitshort term, but that also may or
may not have the company existing formuch longer after that short term, and
that could be I guess one ofthe dangers of that is they get their
money out, they sell to someoneelse, that person, you know,
(24:56):
for whatever reason, can't sustain whatwas what changes were made and then fold.
And you don't want to see thathappen when it's your baby. But
somebody who a private party or youknow, like your bakery analogy, the
baker, he's gonna, you know, love that the way you loved it.
And so the emotional connection seems tobe there more so, I guess
(25:17):
right spot on, And I thinkwhat's what's even more interesting, and it's
a really interesting point that you raiseabout relating the type of buyer back to
the emotional part. And that's agreat, great and thoughtful point is that
we counsel our clients. We tellour clients, while sellers are going to
do due diligence on you, youshould be evaluating the buyer as well.
(25:41):
What's what's their history, what havethey done historically with businesses that they've bought,
What is their personality like, whatis their name and reputation in the
community, what trade groups do theybelong to, How serious are they about
keeping the business around. Those areall things that we tell our clients the
soul to evaluate about the buyer,and that's something that I think too many
(26:04):
business owners and sellers don't take thetime to do. And I really think
it's it's important, especially for thebusiness owner who is willing to sell the
company but also wants to secure thelegacy of what has been built up over
their lifetime or even over their familiesgenerations, right because I mean businesses,
(26:26):
especially smaller businesses, you can tella lot about the character and the integrity
and the personality even of the creator, the business owner, the starter or
whoever, and the family that continuethe legacy based on the way they do
business. And so to turn thatover to somebody who may turn it into
(26:47):
something that doesn't represent you, thatwould be really hard. Oh, spot
on. I'll leave it at do. I could not have said it better
myself. I feel like we've coveredthis pretty thoroughly, do you think so?
Yeah, there's we've Obviously we didn'tget into all the blood and goods
as I call it, of thesale and purchase agreement. I discuss them
(27:10):
in length in the book. Andthen the really the one thing I want
to also make sure of. Wetalked about the emotions before the sale,
Rebecca, but I also want tomake sure business owners understand what's going to
happen after the sale. Yes,there will be some legal follow ups,
but I really want to make surethe business owner keeps clear on on or
understands how they're going to spend theirtime. Do they have hobbies that they
(27:30):
want to take up, how arethey going to be involved in the community.
Do they want to mentor younger entrepreneurs. That's really something that I think
is important for business owners to recognizeand to understand what post sale life will
look like as they go into thisprocess. It's almost the idea of beginning
with the end in mind and understandingwhat it's going to look like once you
(27:53):
close the deal. Yeah, definitely, because if nothing else, it protects
your mental health. You don't wantto go into a depression. We've literally
seen people who are lost. Theydon't know. They get up the next
morning and they don't know what todo, and that's understandable, but at
least have a process. Have Maybeyou have you're going to go to a
coffee with some friends every morning,or you're going to go to the corner
(28:15):
and pick up a newspaper if you'renot reading it online, or you're gonna
work out in the morning, getyourself into a new routine, sign up
for some new hobbies, but makesure you're using your time productively so you
don't fall into a rut. Yeah, definitely, I think we're at the
end of our time. But wouldyou like to promote your website for us
(28:37):
and let us know where we canbuy your book? Thanks so much,
Rebecca. You can get the bookon Amazon, Candle, paperback and hardcover
versions. You can also find itand find more information about the book and
my practice and the process of sellingyour business at the www dot the Big
Deal book dot com. Awesome.That is great. Thank you so much
(29:00):
for spending this time with us todayand helping us navigate this really complex and
emotional subject matter that sometimes we don'tthink about it being as big as it
is. It's the largest transaction abusiness owner will undertake in their lifetime,
and my goal with the book isto make sure they have confidence and clarity
(29:22):
throughout the process and they can doit with the least amount of emotional upheaval
that we can. I love it. I love it. Thank you for
writing it, and thank you foryour time. Thanks a lot, Rebecca.
Have a great day. I hopeyou've enjoyed today's show. Thanks for
tuning into the show on your favoritelocal radio station. You can now listen
to this show or past shows throughthe iheartapp or on iHeart dot com.
(29:44):
Just search for Virginia Focus under podcasts. I'm Rebecca Hughes with the Virginia News
Network, and I'll be here nextweek on Virginia Focus.
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