More Due Diligence – What Separates those Who are Ready to Sell from those Who aren’t

If someone walked up to you and made you an offer for your business that you couldn’t refuse, would you be ready to sell your company right away?  How about six months from now?  A year from now? Two years? How about five years from now?  The sales process takes time, but why are some business owners more prepared to sell sooner rather than later, and what do you have to do to be one of them? Listen to this edition of Deal Talk for sound advice from Jonathan Siebers, transactional business law attorney with the firm Rhoades McKee PC in Grand Rapids, Michigan.

Questions Answered For You

The first thing that you need to have is a business that can be sold and what that means is you have to have a business that has value.

- Jonathan Siebers

Key Takeaways

  • When looking to sell a business, you need to go through a step-by-step process and ask yourself is it one that can generate sales proceeds or has it made you money over the years but there's no value in it for anyone else?
  • If you have one to five years before you want to sell, now is a good time to make a switch from looking at the business as a means to generating personal wealth to looking at it as a vehicle to generate internal growth in.
  • You need a team in place to sell a business:  a CPA, an attorney, a business broker or an investment banker, the seller's financial analyst or financial adviser, and perhaps a bank. 
  • A buyer is going to place a value on a business based on their perceived ability to generate an income stream after closing, which is going to be based on the current financial statements and maybe the financial statements for the last three to five years.
  • If you bring in a consultant one to three years ahead who's going to help you figure out ways that you can grow EBITDA, not only can you grow EBITDA but you’re likely to receive a higher multiple sales price.

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.

If someone were to walked into your office and tell you that they've had their eye on your business and would be interested in talking to you about purchasing your company and maybe they'd throw out a number and say maybe two or three years down the line. “We're kind of looking at you and we want to monitor the situation.” Let's say you're interested, do you know if you'd be ready to sell in a year, or two, or three years down the line? How do you know for sure? My guest today can offer his expert's perspective on the matter of due diligence, a process you will need to be involved in if you're serious about one day selling your business. His name is Jonathan Siebers. He's a transactional attorney in business law at Rhoades McKee. John Siebers welcome to Deal Talk, sir. Thanks so much for being with us.

Jonathan: Thanks for having me.


Jeff: John, if you don't mind my calling you John, would you be able to kind of just share a little bit with us right upfront about your background, where you've been in, and your areas of specialty in the practice of business law at Rhoades McKee?

Jonathan: Yeah, absolutely. I've been practicing law for 18 years, and for the last 15 or so I've done a significant amount of work in small business M&A field. And by small business I typically work on sales of businesses that have values ranging from a million to 10 or 15 million. A lot of our work is here in Michigan but we have followed our clients and done work in states all over the country as well. And particularly in M&A deals, we've done work throughout the country.


Jeff: John, we're glad to have you. We have a lot of listeners from up in your part of the country, and more and more are tuning into Deal Talk each and every day and with every show that we do. We're going to provide you with an opportunity at the end of the program to provide your contact information for those individuals who might be interest in talking with you more about their particular situation. But to get right to it. John, what I was interested in knowing right up front, what separates in your expert's opinion those business owners who are truly ready to sell their business from those owners who think that they're ready to sell?

Jonathan: The first thing that you have to have is a business that can be sold. And what that means is you have to have a business that has value, that can be transferred from the seller to the buyer. A lot of business owners think there's a lot of value in their business because they’ve make good money from their business over the years. But if they don't have their business in a position to be sold there may not be any value to transfer. And so you need to go through a step-by-step process and ask yourself is this business one that can be sold and we can generate sales proceeds for me? Or is a business that has made me money over the years but there's no value in it for anyone else?

A lot of business owners think there's a lot of value in their business because they’ve make good money from their business over the years. 

Jeff: From time to time there's a question John that comes up and this is one of those questions, the first one today right out of the chute where we ask what separates those business owners who understand the value of their business and whether or not it has value from those that don't. And I'm wondering if you might be able to just offer me an opinion on this. Do you think that the difference between those who understand whether or not their business actually has a value and can be sold because it has value from those that don't, is simply because there are those managers, or those owners I should say, who are so hands on and are working inside their business. They're actually doing the button pushing and the knob pulling, and all of the hard work inside that their employees do. They're so working shoulder to shoulder with the employees in part of the operation that they don't really have an executive's perspective of how their business is both operating and how it should run, and what its needs are. Is there some truth to that you believe?

Jonathan: Absolutely. One of the first things you have to do in order to sell a business is be able to transfer all of the intellectual property, all the intangible value of the business from the seller to the buyer. And if all of that intangible value is knowledge that is in the owner's head, well that's not easily transferred to a buyer. And you're going to lose value if you sell the business without having a management succession plan in place. You need to make sure that key relationships are going to be transferred, that people who know the ins and outs of the business are going to be around the day after the sale. And if you don't have that, you're going to lose value in your business. I think a big part of it, Jeff, is there's nothing wrong with people who aren't focusing on building value in their business that can be transferred someday, they just have different priorities. For a lot of business owners their priorities are to generate personal wealth and to avoid taxes. And in a lot of cases generating personal wealth and avoiding taxes are contrary to some of the things you need to do in order to build value in the business. So I think if you've got that mindset that your goal is to build your personal financial statement rather than the value of your company and you're not ready to sell, you've got one, two, three, to five years before you want to sell, now is a good time to make that switch from looking at this as a means to generate personal wealth and more of a vehicle that you want to generate internal growth in.


Jeff: And the reality of it is too I think on the other side, John, is that sometimes let's face it, times can get tough out there and we saw this happen, a period of time between late 2007 and 2010, 2011, the period where we had the great recession. It took a lot of people's wealth away. We saw a lot of businesses close. And so it really becomes I think for many small business owners a matter of survival where they're just in it to get the personal bills paid. But it seems like sometimes that that mindset becomes almost permanent after a while, and they seem to be kind of locked in that bill paying mode where they're not doing the things that they need to do in order to actually grow and create a thriving business, not just one that survives but one that thrives. That's probably an entirely different show and we could probably go on and talk about theory and all of those things. But I think from what I'm hearing from you here in the very start is that a business owner needs to decide at some point. They need to take a hard look at their business and they need to begin to understand whether or not their business right now, as it is, has any value for someone who's coming in to purchase it. In other words whether or not it's worth selling, and whether this is something that they're going to be able to build their futures upon. Getting from what you're saying that if you know that you do eventually want to sell and if you're in that mindset where you're kind of just ... maybe you're operating with that kind of focus that this is just kind of my day-to-day job here, and this is what we need to do, and I got people that I need to pay, and so forth. That's one thing. But you're basically telling us, if you do want to sell one, two, three, five years from now there is still time that you can kind of refocus and you can kind of retrain your mind into that new mindset that you can build this as a business that is not only fit to sell but one that truly does have value that you're going to be able to profit on when the time comes.

Jonathan: Yes. The longer you start thinking about those things, the better off you are. But if something happens in your life and you decide, I have to get out in a year, that's better than not ever starting at all. You're making that switch from thinking about your business as an owner to thinking about it as a seller. What would a buyer look at when they're coming in and looking at my business? It's really never too late to start looking at your business in that way.

And you're going to lose value if you sell the business without having a management succession plan in place.

Jeff: Is it possible for Mr. Smith and his accountant to loan to complete a comprehensive due diligence process without the assistance of an attorney, or what would you recommend, why is it not a good idea?

Jonathan: I don't think it's a good idea because you really need a team in place in order to sell a business. And that team typically involves a CPA, as you said it typically involves an attorney, it typically involves a business broker or an investment banker, someone who's going to be an intermediary. It includes the seller's financial analyst or financial adviser. It may include the bank, it may include any number of other folks around the team. But everybody brings to that process their own set of skills and CPAs are very good at looking at financial matters and crunching numbers, but they may not have the same eye for legal risks and compliance issues that an attorney would have. And they may not have the same sense of what the market is for a company like Mr. Smith's that a business broker would have. So if you try and go with just one of the team members, you don't put the whole team together, you're going to suffer. Not only because you could miss things and it could make it more difficult to get a deal done but you could also miss out on opportunities that would generate additional value and sales price for the business.


Jeff: Jonathan Siebers is a transactional attorney in business law with the firm Rhoades McKee in Michigan and you're listening to him on Deal Talk with me, Jeff Allen. Thanks so much again for tuning in. So who should I call first, John? Who should my first call be if I should decide or if Mr. Smith should decide to go ahead that he wants to begin the process of due diligence and move forward?

Jonathan: I think the best place to start is either with a business broker or a valuation company, or with your personal financial adviser. And the goal is to figure out, number one, what is my business worth today? If I were to sell it today what am I likely to net out of that? And that's a value and a tax question, the value of how much is the business going to fetch on the market and that gets you your sales proceeds. But then you need to look at it from a tax perspective and say, "All right, how much is the government going to take out of that?" And figure out what you're going to be left with after you pay taxes. So that's really the first question. The second question with your financial adviser is: what do I need to live on if I sell my business today? How much do I need in order to survive? If I want to live the same lifestyle that I currently live, how much do I need to net out of my business when I sell it? And if those numbers match today you may be in pretty good shape to sell your business immediately or in the near future. If there's a gap which we find there often is in small businesses, a gap between what the company is worth and what the seller needs to retire on, then you have to figure out where's the low hanging fruit? How can we close that gap and what is the cause of the gap? Is it because of customer concentration issues, is it because we don't have a management team in place, is it policies and procedures that we lack or that we're behind on? How can we turn that around and generate growth? And depending on the size of that gap that kind of dictates how long it's going to take you to get ready to sell your business. You either need to close the gap by building the value of the business or by decreasing your standard of living after you close. Either of those ways will close the gap.


Jeff: What other types of things John will due diligence reveal that above and beyond those types of issues? And you talked about the gaps and whether or not you've actually got something tangible here with some value or something that you can build upon. What are the types of things that need fixing that due diligence might reveal?

Jonathan: Keep in mind, there's two types of due diligence. One is seller due diligence. That's really what we're talking today is due diligence that a seller of a business is going to do before they ever take the business to market. And the goal is to figure out what other issues are there with my company that a buyer is going to spot. And you try and determine those issues and resolve them before you ever take it to market. The thing you want to avoid is taking it to market and then the buyer is doing their due diligence, and they come to you and say, "Hey, we found this issue with your company.” And if you haven't found that before, if you don't know about it and they surprise you, that's a bad sign. That’s going to impact the value of your business and the negotiations during the sale. You're trying to spot issues and solve them before they even become a red flag for a buyer. Typical issues for a seller that you can find in due diligence are liens for unpaid taxes. The best of businesses run into issues where they forgot to submit unemployment withholding at some point and therefore they got a tax lien. If those are still out there in existence, that's going to be a red flag for a buyer. Another type of an issue is you've got key employees who the buyers absolutely going to want to keep on after the deal who don't have employment agreements and don't have non-compete agreements. And so they could turn around and go down the street to a competitor when you close the deal and compete against the buyer. The buyer's not going to like to see that, either. Those are a couple of issues. We see a lot of issues with if there's value in intellectual property. You want to make sure you have your intellectual property tied up in copyrights, and trademarks, and patents, things like that

 And the goal is to figure out what other issues are there with my company that a buyer is going to spot. And you try and determine those issues and resolve them before you ever take it to market.

Jeff: Due diligence is not just an option, this is something that everyone needs to, everyone who owns a business is going to need to take part and be part of the process, and that is if you want to eventually sell your business at some point. My name is Jeff Allen and I'm talking with Jonathan Siebers. He is an attorney with Rhoades McKee. Due diligence, how to get your business ready for sale, and we're going to have more when Deal Talk returns in 60 seconds. 

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

Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest today, Atty. Jonathan Siebers from Rhoades McKee, business attorney and really specializing in transactions. His firm is located in Michigan. Helps a lot of people there, mid-sized firm, a number of attorneys there and they do great work. And we're going to provide some contact information later in the show should you wish to get in touch with John or another member of his team. But what we want to go ahead and kind of talk about now, John, in this segment of the program is kind of the difference between financial and legal due diligence if in fact there really is a difference, and you have to draw a line between those two in the due diligence process. Is this something that your attorney that they'll work on for you, it's going to both happen at the same time? Or is it really just kind of we have to focus on one or the other? How does that work? Legal and financial due diligence so that the two go hand in hand?

Jonathan: Absolutely. And when you're dealing with due diligence the attorney and the CPA should be working together hand in hand as well. What you got to keep in mind is that a buyer is going to place the value on a company based on their perceived ability to generate an income stream after closing. And they determine what that income stream is going to be based on the current financial statements of the company and maybe the financial statements for the last three to five years. I rely heavily on any CPA I'm working with to figure out if the financial statements and the tax returns that a buyer is going to look at are accurate, if they accurately portray the value and the financial status of the business. Where I get involved heavily is in negotiating the representations and warranties in a purchase agreement whether it's an asset sale or a stock sale. You spend a lot of time looking at reps and warranties. And basically those are statements in the purchase agreement that give the buyer assurances that things that the seller has provided to them are true and accurate. So the seller is going to usually be giving a rep and warranty that it's the financial statements for some period of time, meet certain standards. And I get with the CPA to figure out what's the best way to word this? How can we avoid exposing the seller for a liability for a breach of a rep or warranty, dealing with the financial statement, same with the tax returns. The other way that the CPA and the attorney work hand in hand is in figuring out are there going to be any working capital adjustments at closing. And if so how should those be structured and how is the process going to take place to determine what the working capital adjustment is. I rely again, I rely heavily on the CPA to figure out the mechanics of it and then we work together on awarding it so that it satisfies the seller’s needs.


Jeff: What are some areas of potential overlap, legal and financial overlap, that you can talk to us about?

Jonathan: That's probably the biggest area, the reps and warranties on financial statements, reps and warranties on tax returns. The working capital adjustment. Another area is the allocation of the purchase price in an asset purchase agreement where you're determining how much of the purchase price goes to which class of assets. That determines for the seller whether they get taxed at a capital gains rate or ordinary income rate. And for the buyer it determines how quickly they can depreciate. So usually the buyer wants all of the purchase price allocated assets that they can depreciate quickly. Whereas the seller wants them all, all the purchase price allocated to assets that are taxed at capital gains. And so there's usually a lot of go between or go back and forth on the allocation of purchase price. Another area where there's a lot of overlap is in negotiating earn-outs. If you've got a company where the buyer thinks it's worth $1 and the seller thinks it's worth more, it could enter into an earn-out arrangement where the buyer pays additional purchase price essentially after closing if the business attains certain financial goals. And that usually is an area where the attorney and the CPA work very closely together. 

What you got to keep in mind is that a buyer is going to place the value on a company based on their perceived ability to generate an income stream after closing.

Jeff: Stepping aside for just a moment, I'd like to talk about something that's very important to a lot of people. Business owners are really concerned that confidentiality be kept throughout the process. They don't want employees bailing out. They don't want clients, customers to get wind that the situation may be underway that may result in possibly transaction of a business. And the business may be going away. That's always kind of an unfounded myth I think really when you get right down to it, unless everything comes out in the wash I suppose at some point in time. But if I'm concerned about keeping things quiet throughout the process, what can I do to ensure the confidentiality throughout the due diligence process and really throughout the sales process, John?

Jonathan: Jeff, the first thing you need to do is have a standard non-disclosure agreement that any prospective buyer is going to sign. And depending on who that buyer is you may need to tweak that non-disclosure agreement. If it's a direct competitor who is going to learn things through their due diligence that could put you out of business you're going to want to very careful and very cautious, and you might want to be a bit more aggressive in what kind of provisions you go for in your non-disclosure agreement. But that's an absolute must in every deal, is for a seller to enter into a non-disclosure agreement with anyone that they may be disclosing any information to. The other step you need to take is figure out early on who in the organization has to know about the prospective sale and who doesn't. So for instance most companies, they're going to have one or two people at a minimum at the executive level who are going to lead from the seller’s perspective lead the transaction. And so you need to identify those people fairly quickly and figure out can you trust them. If you can't trust them then you're going to need to figure out a workaround. Either you get their trust by entering into some sort of an agreement with them that gives them incentive to be trusted, or you find someone else to work with internally. But clearly you don't want to walk into your company and tell everybody, “Hey, I'm thinking about selling the businesses. So you're going to see people walking through from time to time now who are looking at it, those are the prospective buyers.” You want to avoid that and keep it to as small number as possible, the people with knowledge of the prospective deal. 


Jeff: I guess at the end of the day we're talking about the things on Deal Talk that we normally deal with on a regular basis here, ways to maintain and improve the value of our company. Would you suggest then working with an attorney and working with a team, not just an attorney but you're talking about a CPA, a business advisor, your banker, and also maybe your personal finance guy for the purposes of putting together a succession plan? By working with all of these individuals as a team, is there the suggestion here that one could really work toward improving the value of their business prior to selling it as long as they can get out in front and begin the process as early as possible?

Jonathan: Absolutely. That's the nice thing about the sale of a business, typically a lot of times the purchase price is negotiated as being some multiple of some number. So oftentimes it's a multiple of EBITDA. And if you bring in a consultant maybe three years ahead or a year ahead who's going to help you figure out ways that you can grow EBITDA, not only can you grow EBITDA but big companies that have higher EBITDA tend to fetch a higher multiple. So maybe today you would get an EBITDA for a multiple of 3.5 times your EBITDA. If you can grow your EBITDA by 50 percent you may get up to 4.5 times EBITDA. And you're going to do a lot better on sale you're going to make back all of the money and then some that you spent on consultants. That doesn't always happen but that's the goal, and that happens a good part of the time.

That's the nice thing about the sale of a business, typically a lot of times the purchase price is negotiated as being some multiple of some number. 

Jeff: I think that's a very, very encouraging note and some encouraging remarks. And that just goes to show that if you've got a game plan, and if you’ve got people in place to help you put that game plan into action you can affect the outcome in a very positive way by increasing the value of your business and fetching more than you probably would have otherwise. John, if we have questions about our own business, and this might be a particular interest for those folks in Michigan near your home base there. They have questions about their businesses, they're interested in selling, they're interested in getting the due diligence process started, or they have some other kinds of questions you might be able to help them with respect to their business, legal or financial, how can they reach you?

Jonathan: Well, they can call me at 616-233-5226, or they're welcome to email me at


Jeff: And of course you can check out the website for more information as well to learn more about Jonathan Siebers. You can find out more about his bio and kind of where he's been, and all of the experience that he and his colleagues there have. With that Jonathan Siebers, I want to thank you so much for joining us today on Deal Talk. It's been a pleasure having you, sir.

Jonathan: Thank you Jeff.


Jeff: Jonathan Siebers, transactional attorney in business law with the firm  Rhoades McKee has been my guest today. 

Deal Talk has been presented by Morgan & Westfield, a 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 you can visit And for more valuable information and insight from our growing list of allied small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we're going to talk to you again soon.