What to Do when you Want to Sell your Company but you're not Ready

According to our guest on this edition of “Deal Talk,” more often than not, small business owners attempt to sell their companies before they are actually ready to sell. Regardless of the reason, if you haven’t taken the necessary steps to prepare, the buyer has the upper hand, and they’ll likely want to pay you substantially less than you’re asking. Lack of preparation results in low valuations, but even if you absolutely must sell your business right away, there may be some things you can do to help you profit as much as possible. Listen as Lance Metcalf, CPA, business attorney and owner of the Metcalf Adair Law Firm, shares his wisdom on this subject from a financial and legal perspective.  

Questions Answered For You


The very first and most important one there is letting the seller look within themselves.

- Lance Metcalf

Key Takeaways

  • Business owners frequently believe that they’re ready to sell a business when in reality they haven’t built it up sufficiently or aren’t organized enough.
  • Financial statements are the biggest factor in determining how much a buyer will be willing to pay for a business.
  • 15 – 30 percent of companies that list for sale will end up closing instead.
  • To sell a business, you need to gather a strong team that includes a CPA and an attorney.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

What happens if you want to sell your business but you're not ready? It happens out there believe or not, and some business owners may operate with the "I was born ready" attitude. I kind of take that attitude myself, but honestly what do you need to do to get ready and how long will it take, how long could it take? And how is the value of your company impacted if you attempt to sell before you are ready, if you're not fully prepared. My guest on this segment has some thoughts about this and many years of experience dealing with this subject. His name is Lance Metcalf. Mr. Metcalf is a business transactions M&A and real estate attorney in South Lake, Texas. Lance Metcalf, welcome to Deal Talk, sir.

Lance: Thank you very much. I appreciate that.

 

Jeff: We appreciate having you on today. This is a really important subject that I think a lot of business owners will really take a great amount of interest in. Whether they are thinking about selling their business now or sometime in the future, 10, 15, 20 years from now, how often have you seen, Lance, it happened where you'll get a call from a prospective client or client for that matter, owner of a business, regardless of size or industry, and they want to sell their company? They think they're ready but they're actually not ready. How often does this happen?

Lance: Unfortunately, that happens quite a bit actually. In fact I would say that it happens more often than not. Whether it be that they’re a smaller business and just not ready to go and haven't built it up or a larger business and they’re just not organized enough yet. But there's a variety of reasons why that happens, and it does happen very often.

 

Jeff: We're going to get into those reasons in just a little bit but first I'd like to kind of find out about the value of a company. How might trying to sell your business before you're ready impact the value of your company?

Lance: One of the biggest reasons why it will impact the value, and if you're not prepared then it will certainly reduce the amount of money that you will be able to sell your business for. The biggest reason is just if you haven't put the preparation in looking at your company, looking at your financials, then it's going to impact how much a buyer's going to be willing to pay you for it, which at the end of the day that's the real key, how much will a buyer pay for it and they're going to have to want business very badly to pay top dollar for. So if you haven't been showing a profit for the past year or two and you have to explain that away, you can do that. But the more things that the seller has to explain as to why it didn't show profit here or why that's not the case, the more that the buyer is going to feel like they're taking on more risk by acquiring that company. And that all goes down to it's going to reduce the amount of money they're willing to pay you. And it's not even the idea of how much the buyer's going to pay you for the kind of theme, but also the payment terms. How much money are they going to pay you down? Are they going to be able to get the financing for it? If the buyer's not comfortable with the financial statements and they very likely may say, "Mr. Seller, I want you to sell or finance half of the business." So it cannot only impact the amount of money you get for it but also the payment terms that you may get over up front at closing or later on in the coming years.

It's not even the idea of how much the buyer's going to pay you for the kind of theme, but also the payment terms.

Jeff: We're going to get back to this here in just a second, but I did want to ask you though about some other implications that might arise as a result of not being prepared to put your business up for sale. What are some of the things that could happen? It could cause some real issues or prevent the sale altogether.

Lance: That's a big one right there, is that it may prevent the sale altogether. If you're not prepared and you don't let your company stand out among others then the consequence may very well be you can't find a buyer. And you may turn it from a disadvantage to you and the buyer and saying, "I've got several businesses that I'm looking at. Why should I buy your business?" And as a seller you want to project your company as a premium and say, "This is a strong company. Here is why you should buy my company and show how you're prepared." And it makes the buyer not only want to buy your company but be willing to pay top dollar for it. But the primary issue there would be you very well may not find the buyer. If you look at some statistics, if you talk to some business brokers they can tell you anywhere from 15 percent - 30 percent of the companies that actually list their company for sale will actually wind up closing. And that is a direct result of how prepared is the seller to sell their business.

 

Jeff: Very good. By the way, I know that you're a real estate attorney as well. And I wanted to find out if a company that is not obviously prepared according to what you're telling us, Lance, and you've gone through and helped them understand that. They're not prepared to sell their business. Is that complicated even more if they own or lease the property where they're conducting their business? In other words are there greater complications for those companies that own their own property as opposed to lease their property?

Lance: In my opinion there's more complications if they lease their property. And the reason for that is because they're not the landlord. They don't have control over allowing the company to continue to operate in that facility. And if it's a company that relies on location that can be a major problem. And if you get a landlord in the middle of a lease, one the landlord can give you problems about even signing the lease over to the new buyer. Or two, if it's approaching the end of the lease will the landlord be willing to enter into lease agreement with a new buyer. And it just gives a hammer to the landlord which is outside the seller’s control, and it can certainly complicate a deal.

 

Jeff: Boy, that could really be a really sticky situation that people could find themselves in. Let's go ahead and talk about whether or not it's possible for someone like me to know. Maybe I operate a small manufacturing firm for example and I've got 50 employees. I come to you and I say, "Lance, I'm ready to do this. I'm ready to go ahead and pull the trigger on this and I need to sell my business." Is there a hard and fast kind of set of guidelines or criteria that I need to know or understand, and read through to evaluate whether or not I know for a fact my business is ready for sale or not? How do I know if it's ready to go?

Lance: There's various factors there that you have to consider. The very first and most important one there is letting the seller look within themselves: why do they want to sell? And that's an extremely important point. Are they burned out? Have they lost their passion for the business, which typically means the business start dropping off, if the business owner is not passionate about it anymore. Is it related to the medical issues where they have to sell? If they’re having financial problems, they may need to sell. There's a number of reasons there which you have to look at, determine am I really ready to let this go. And dovetailing into that is if a business owner is not really ready psychologically to let it go they're going to have a harder time actually pulling the trigger on the deal. So that would be the first question, is the business owner really personally ready to get outside the business. That would be the first thing. Secondly, you have to go into the financial arena. Let's take a look at the financials, how's the business done over the years? Have they been growing, have they been declining? What is the market looking like for that particular industry? You have to answer those questions to determine am I ready to sell now or is it going to be more appropriate in a year, two years, three years. If a company is not showing profits on its financial statements in the last couple of years then it's going to be hard to convince the buyer, buy my company and pay me top dollar for it. Typically what I advise my clients when they come in and they're starting to talk about that I'm going to start talking to them, "Have you been visiting with your accountant about this. Let's take a look at your financials and let's go from there." That has a big impact on whether or not if they're ready to go.

Typically what I advise my clients when they come in and they're starting to talk about that I'm going to start talking to them

Jeff: Lance Metcalf is a business transactions M&A and real estate attorney. He owns his own firm, Metcalf Law Firm in South Lake, Texas, and we're pleased to have him here on Deal Talk. We're talking about what to do when you want to sell your business but you're not ready. It's people like Lance who are available there to tell you in fact and confirm whether or not you're ready. And they'll be able to tell you, it's a good place to probably camp out for just a moment, Lance. The people who call you, business owners who call you and they're interested in selling their company, is there a common trend or theme to these calls where you go in and you'll take a kind of a cursory glance where you'll determine right off the bat that there are issues that stand out kind of like a sore thumb. That you can tell, "This thing's not ready to go and we've got a lot of work to do here." Is there kind of a common thread or common issues that occur from business-to-business where they're simply not ready and you can tell right away?

Lance: There are, and most of them will go back to what is their profit and loss statement look like? Have they been taking all the profits out of the business and using for personal reasons and not investing back into the business? Is their taxable income showing at roughly zero or even a loss? Those are major indications as to whether or not if they're really ready to sell. That's one of the biggest things that I see. And it comes up in different aspects. I will get some clients that'll call me and say, "Hey, I'm tired of this" or "I'm having problems. I need to get out. That's one aspect that'll show up, which means they're kind of getting forced into it, and many times they're not prepared financially to show a perspective buyer as to why should you buy me? The other aspect I'll get a call from and say, "Hey, I just got a phone call from somebody and they're interested in buying my business." And they weren't even thinking along that way at all. They're just operating business as usual. I see that, and many times there the financials may look good or something like that, but they're not very organized in terms of their paper trails, their documents, their contracts. They're not organizing that and it takes time to get those things ready so that they can present to the buyer an organized front. I see that is a problem quite often that they may be financially ready to sell, but in terms of getting ready for the process to sell there's a lot of work to do to get ready for that.

 

Jeff: When you want to sell but you're not ready to sell. I'm Jeff Allen and I'll be back with business attorney Lance Metcalf when Deal Talk gets back after this.


At Morgan & Westfield, we believe in simplicity.  That’s why we have one simple goal:  to help you sell your business.  To do that, we use a proven, simplified process that allows you to save up to 90 percent off standard broker fees.  The Morgan & Westfield team can help you put together a package to present your business to buyers; advertise your business for sale; screen buyers; prepare an offer on your business; manage the due diligence process, and close the transaction.  You’ll have access to the same resources and methods that brokers use for their large market clients, and all this without a long term contract, so you can even bring your own buyers without paying a commission. A complicated process that is simplified and executed well gets results.  If you’re interested in selling your company or having it appraised, contact Morgan & Westfield for a free consultation -- 888-693-7834.   888-693-7834.  Or visit morganandwestfield.com.


Jeff: Welcome back to Deal Talk I'm Jeff Allen with my guest Lance Metcalf, business transactions M&A and real estate attorney at Metcalf Law Firm, PLLC in South Lake, Texas. Lance again, thank you so much for joining us today, it's good to have you. We've talked a little bit so far about how to know if my business is ready for sale or not. We've talked about some of the implications of not being ready and we've also talked about too the fact that your company's value can really be diminished and quite strongly by not being ready. The fact that you can even sell your business or not, the difficulty of finding a buyer if you're not ready for selling your business. Let's get down to how we can start to prepare ourselves, to prepare our company for sale. What is the first thing Lance Metcalf  that you would recommend we do in order to get ready and in order to prepare ourselves? And maybe this is something that you would advise your own clients.

Lance: That's a great question. The very first thing that a client should do is to get their team assembled around them. And by team I'm talking about one of the main ones you want to involve is your CPA. The one who is doing all of your financial accounting for you and taxes. You want to include them from the very beginning. That goes to the problems I alluded to before about how do you know if you're ready or not, well, you need to know if your financials show a strong package for you to sell. Your accountant's going to help you, number one, determine that, and number two, help you get your financials in order. So they're the one, the top team members you're going to need there. You may need your banker involved. Talk to him where you are at financially. Your attorney, the main thing there is what you're looking for in an attorney, I found that many times the clients will have a very good attorney that's helped them along in operations and that's good. You want to make sure that the attorney that you have on your team for actually selling your company is one that has strong experience in merging and acquisitions, or just the buying and selling of companies. That doesn't replace your everyday corporate attorney but you want to make sure that they have very specific experience in that field. That's the main thing I'd say is get your team assembled around you first then you could go in and attack the issues that will take you from not being prepared to being ready to go to market to sell your company.

You want to make sure that the attorney that you have on your team for actually selling your company is one that has strong experience in merging and acquisitions, or just the buying and selling of companies

Jeff: At what point Lance Metcalf would you advise someone to get in touch with a professional business appraiser to provide that valuation? Is this something that comes down the line? Let us know at what point we should start to think about doing that?

Lance: My advice there would be is first communicate with your accountant, make sure that you’ve got your financials about where you want them to and then go get your valuation. And that also will depend on what size of company you're talking about. For example if you're talking about a company that's going to probably sell for $200,000 or $300,000 something like that, the process of getting a real professional valuation on that type of company is probably going to be cost prohibitive. On the other hand if you’ve got a company that's going to be selling for several million dollars then that investment will probably pay dividends. As far as when to involve that valuation expert to give you that report you want to make sure that you're really ready to go first in order to frankly just to optimize the value that you're looking for with your business.

 

Jeff: Do all these individuals that we're talking about get together, can they work together or should they work together? How closely are they involved with one another? And I'm talking about the outside resources, your banker, your accountant, your CPA, your attorney. How closely should they be working together? Are they going to be on conference calls with you, all of them at the same time? Is it a matter of taking and getting documentation or information emails from one and passing them along to the other? How does that typically work?

Lance: Most of the time you don't sit down and have a conversation with all of them at the same time, although there are occasions where that is a good idea. One of the things in my experience in the past as a practicing CPA before I became a practicing attorney, I've seen this from both sides from the CPA attorney relationship, is one of the worst things that can happen to your client is for the CPA and the attorney to not be on the same page. To answer your question it's vital in my opinion to make sure that your team members do have a working relationship with one another just to make sure that they work together and all have the same goal. While you can have professionals on your team that never worked together before that's okay, but you want to make sure that they play well with others. But ideally if you can get a team around you that they worked together before, it generally works that much better for the client.

Ideally if you can get a team around you that they worked together before, it generally works that much better for the client.

Jeff: Of course we've noticed, or at least I've noted here in the introduction and we've talked about it here during the program. You just talked about a previously CPA but you still have that CPA designation. Is there an advantage in working, because you talked about not having an attorney or CPA, the problem with not having them be on the same page. Does that mean that there is definitely an advantage working with someone who may have both the legal and CPA designation when you're working with someone to sell your business?

Lance: I think it is definitely a plus. And one thing I will say though, you don't really want one person to hold both roles. For example when I'm working with a client I'm working with them as an attorney. My CPA background and experience there certainly helps me advise a client move them along but in no means am I looking to replace the role of the CPA. But it does mean that I relate usually pretty well with the CPA, for one we're speaking the same language. From that standpoint I think there's definitely a plus if you can get that when your team members having experience in different roles in the transaction. It tends to allow them to give you more varied and well-rounded advice.

 

Jeff: We're talking with Lance Metcalf. He's the owner of Metcalf Law Firm PLLC in South Lake, Texas. This is Deal Talk, my name is Jeff Allen and we're talking about what to do now to help you get your business ready for sale, when really at the end of the day, right now today you may not in fact be ready to sell but it's something that you feel like you need to do or that you want to do. Let's talk a little bit about the documentation leading up to the sale, Lance. What are some of the legal pieces of documentation that I need to have on file or I need to start putting together in order to get my business ready?

Lance: Great question, and that's all part of preparing yourself for the actual sale process. Once you've made that decision that, "Okay, yes, I'm ready to sell" now you need to start preparing before you go to marketing, start preparing for the process that's coming. And by the process I'm talking about the due diligence process that the perspective buyers ultimately are going to want to complete with you. So some of things you want to get together, you want to have anywhere from three to five years of your financial statements, put together, ready, and in good form. That's organized, formatted well, and ready to show to perspective buyer. You also want to have probably about three years of tax returns, maybe up to five years of tax returns depending on the business. You want to have your corporate book assuming that you are organized in some form of an entity. You want to have your corporate book ready, and by that I'm talking about whatever state you may be in. In Texas it’s a certificate of filing, and certificate of formation, it's used to actually startup your company. You want to have evidence of that in your records. If you have a partnership agreement it’s referred to as a number of things. It could be your by-laws if you're a corporation. It could be your operating agreement or company agreement if you're an LLC, whatever the case may be you want to have that handy as well, because there could be some things in that document that might impact how the sale is going to move forward. 

Your lease agreement, we touched on that earlier that if you do lease your property you're going to have to have a lease agreement and be ready for, review it, make sure you know what it says about possible assigning or subleasing the lease to another party. You also want to look at your contracts. If your business has or you're party to a contract, that's usually a positive thing in your favor when you're trying to sell your business because it reduces risk for the buyer. But you do need to take a look at those contracts beforehand and know whether or not if you can actually assign those contracts to another buyer. Those were all very important points and those are ones that your CPA may be able to help you with the financial parts. There's another where you want your M&A attorney to help you looking over contracts and make sure that you can actually sell the business.

 

Jeff: Okay, let's just pretend that for whatever reason, maybe I'm just not into it. I just can't do this anymore, I need to be out of this, and I'm willing to give this another year. Is it possible to get ready in that period of time, Lance, or should we give ourselves the benefit of taking as long as it takes to get ready in order to get the best value for our company? 

Lance: It really depends on what shape is your business in when you decide that I'm ready to start the process of selling. And all these things that we're talking about, these are all designed to maximize the amount you're going to get for your business, ultimately that's your goal. And if you can be patient enough and you can take as much time as needed, if you're already a pretty strong company you could be ready in six months to a year, something like that, ideally to get everything together, get your financials showing the right numbers, and moving from there. If your financials are not in very good shape it may take more like two to three, maybe even four years to get the track record that you're looking for. But all that again is designed to maximize your value. If  the seller needs to sell now and they understand that, well, I just want to get as much for my company but like you said, I have to get out of here. So you have to understand that by not being prepared there are going to be those consequences too. But you can still move forward with the sale. 

 It really depends on what shape is your business in when you decide that I'm ready to start the process of selling

Jeff: Should I make my first call, once I'm ready, once I’ve made this decision, and it's going to be a life-changing decision, I'm going to sell my business. Is the first call that I make, should I make that to my business attorney, or should I contact a CPA? Who's the first person I need to call on this?

Lance: Well, you can't call the same person at the exact same time, but really the very first person you should call would be your CPA, and right after that would be your attorney. First of all you want to find out, "Do you have experience with actually selling, telling to sell or the acquisition of a company" just to find out if they're the appropriate team member.  Once you determine that you’ve got that then the CPA and attorney are the ones you want to start with to determine how close are you to being prepared to sell.

 

Jeff: Lance, after I've contacted my attorney and I've contacted a CPA who should I get in touch with after that?

Lance: Once you talk with your team, as we talked about putting together and you decided, it's time to move forward with the sale, then your next decision is to decide how you're going to move forward with taking your business and putting it on the market. And you decide that's something you want to try to do yourself or do you want to incorporate the help of a professional, whether it be you're starting with a professional appraiser or finding a business broker to help you list and sell your business. There's a number of reasons why business owners would benefit from that because most of which would be it allows the business owner to continue to concentrate on operating the company, keeping the profits up, moving strong in that way and letting somebody else handle the details of selling the business. But once you're ready to go with the sale then you want to find the right person to actually sell the business for you.

 Then your next decision is to decide how you're going to move forward with taking your business and putting it on the market

Jeff: There you go, business attorney Lance Metcalf of Metcalf Law Firm PLLC. Thank you so much for joining us. We're out of time. We need to leave it here but we'd like to have you back on again soon.

Lance: That sounds great. Thank you very much for the opportunity. I enjoyed it.

 

Jeff: Deal Talk is presented by Morgan & Westfield, the nationwide leader in business sales and appraisals.

If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen. Thanks again for listening. We'll talk to you again soon.

Jeff: Really, really important I think, Lance, that you mentioned that. We are out of time. I'd like to go ahead though and give those listeners a chance to get your contact information if they've got any questions based on what they’ve heard here today, or maybe they're ready to sell their business, they've got all their ducks in a row and they'd like to talk with you, how can they reach you?

Lance: You can reach by phone or by email. My phone number is area code 817-527-5200. You can also reach me by email. Email address is lmetcalf@metcalflegal.com. Also, you can visit my website at www.metcalflegal.com. Any way they'd like to communicate would be perfect.

Jeff: There you go, business attorney Lance Metcalf of Metcalf Law Firm PLLC. Thank you so much for joining us. We're out of time. We need to leave it here but we'd like to have you back on again soon.

Lance: That sounds great. Thank you very much for the opportunity. I enjoyed it.

Deal Talk is presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen. Thanks again for listening. We'll talk to you again soon.