Jeff: I know you do, and we're going to get right into it, Jennifer, because some people listening today might consider this the most important segment of our three-part series but I'm going to put myself in the position of a business owner. I know that I want to sell my business in the next three to twelve months. Where do I start, what do I have to do?
Jennifer: You know how there's that saying that if you don't know where you're going how will you know where you get there? In business, regardless of your product or service, it's virtually impossible to actually close a sale if the seller can't define, one, what they're selling, and two, what the price of the item is for sale. It's impossible. You can't sell cars, you couldn't sell toilet paper if you couldn't say, "This is what we've got to sell and this is how much it is." And the very same methodology goes for when someone goes to sell their business. They need to determine the value of their business and what it is that they're going to sell. And it's at this very first point when I recommend the business owners that they start making their first of several lists to help them determine these two wildly important factors.
Jeff: Let's talk about the list themselves. What do we have to do to put on these lists, what goes on there? Just talk about them from start to finish.
Jennifer: Like I say, it's the first of many lists. If you're listening to this podcast right now you'll want to place pause, go and grab yourself a pen and paper because there's a lot of really good information here. The very first list, the first thing you want to do is you want to start to track a really broad overview of everything that you are selling. That might be the name of the company. You've maybe got a ground lease or you own some real estate where your business is located. You've got your domain name for your website, your logo design, social media pages, rights to any patents, trademarks, copyrights, your phone number if you own it, any transferable licenses or certifications, any warranty programs that you've purchased, the number of clients you have on contract, the total number of clients you think roughly that will continue to renew with you, which they call that goodwill, or any other service that you've prepaid for that won't end when you transfer ownership. So that's your very, very, very first list and then that helps you figure out which are actually selling with the exception of your second long list which is your inventory or equipment list.
The first thing you want to do is you want to start to track a really broad overview of everything that you are selling.
Jeff: Okay. So business owners putting together these lists. They're long, they have to be comprehensive for a reason. And I know that you think that there is one more first step though, Jennifer, before you do anything else. Can you tell us a little bit about what that is?
Jennifer: Absolutely. You've got your first couple of lists going, and now you need to figure out what your outstanding debt is, or the outstanding debt that your business has. I'm going to tell you, create another list. This one title it Outstanding Debt. Like I said, if you're going to sell your business you need to know what you are selling and how much you'll stand to net if your product, which in this case is your business, if it sells at your asking price. In this debt list you want to include any business loans, unpaid vehicle or equipment loans, personal loans, that the ownership group might have, or the owners might have that haven't been repaid. Meaning the owner made an equity loan to the business that they expected that they got paid back. Any unpaid credit card debt that's over 60 days, any outstanding obligations you have. So here's one where a lot of people miss. If they issue gift cards, or they have credits that they've made, or they have clients or customers who prepaid for items that won't ship until later in the year, these are all adjustments that need to made towards the end so that the new buyer doesn't have any surprises later. Ideally, you want to figure out what the potential sales price is and then you'll have a good, rough idea about what you'll walk away with when the business actually sells.
Jeff: Okay. We got the lists in order and completely itemized, they're as comprehensive as you can make them, they’re what we're selling, our outstanding debt. What do you do when you have all these information compiled and you look at it and maybe you're shaking your head in some cases thinking, "My goodness, I had no idea." Is this when you would get an outside consultant involved, maybe even an accountant perhaps to go over these things with you?
Jennifer: The short answer to that is a resounding yes. But since I'm not one for short answers, once you have a clear picture of what it is that you want to sell, it's at that point that you want to start doing your research. I recommend finding yourself a highly experienced busy business broker. You want to find someone who's got a great deal of experience and they're busy in today's market. And you want them to help you determine what the real life, street value is for your business, not this pie in the sky number ... I hate to say this, but if your accountant isn't regularly involved with the sales of your business the accountant can do some statistics and gather some information based on what might be average. But a busy business broker is going to give you the reality. That's when you want to reach out to them. It's not based on a guesstimate, it's based on real facts, based on their knowledge in the market, their knowledge of your business size, the knowledge of the number of businesses that are selling. And I will just say one thing, before you make that call out to the business brokers, start gathering up your real P&Ls, the real-life information for the last three to five years along with your business tax returns. And put that together with these long laundry lists that you just made of what you have to sell and what your debt is, and then make the call to the business broker.
Ideally, you want to figure out what the potential sales price is and then you'll have a good, rough idea about what you'll walk away with when the business actually sells.
Jeff: I would probably be remiss if I didn't say that Morgan & Westfield is among those companies that are out there that could provide you with that kind of information. Jennifer, let me ask you this. How long typically has it been your experience that compiling that real valuation or estimate, appraisal of a business, how long might that take?
Jennifer: This is going to depend on your motivation and how much you as a business owner get in your own way. I have actually talked to new clients who tell me, "I've been thinking about this for six months and I just don't know where to start." And they get into a state of analysis paralysis and they're not doing anything. And then they come and have a two-hour meeting with me, or we do a half day meeting and we can plug through definitely everything that we've said so far. It's much, much easier if someone with experience asks you the question and your job is just answering it. So whether it's me or someone else, I encourage people, find someone who can just keep asking you the questions, what else are you going to be selling? And if they have more experience it's going to make it easier to fine tune. But it doesn't have to take that long to do what we talked about so far. Gather a list of your debt and gather a list of what it is that you have to sell, and then create your inventory list.
Jeff: Jennifer, there are to my knowledge a number of programs that are out there, software related types of programs that business owners can obtain for a fairly reasonable cost to give them an idea of how much their business may be worth. There are logarithms they use and all the different types of information they require for you to input, a variety of data from your company. But I'm kind of wondering how reliable are those programs and why is it important to seek the consultation or the advice of a busy business broker or a professional appraisal company as opposed to using one of these software programs that could probably give you a fairly rough idea at a fairly reasonable cost?
Jennifer: That's a great question and I'm going to preface it with saying that I have clients who tell me that I watch their expenses, I'm even more closely guarded with their expenses than they are. So I'm one who tends to not like to spend a penny more than I need to. And a lot of these softwares can be a great, affordable solution. But there might be, and I'm not going to say it's a 100 percent, but there might be a very big gap between what the real street value of your business might be and what a program is going to tell you the calculators are based on. I'll give you a couple of examples of why that might be.
If I go to sell my dry cleaners, let's say I have a chain of three dry cleaning stores and I go to sell my business at the same time within 20 miles of three or four other dry cleaners that both have something similar to sell, there's a chance that now there's three similar products to be sold at the same time. It might make it harder for me to sell my business, or for me to get that top dollar price if I have more competition and they're using other calculators to price the value of their business too. So sometimes just based on demand in the market that might affect what you have. Other times, and I'm going to share some tips later in our program today, every business owner is going to basically be selling a little something different. If I have a choice of buying business A, B, or C, they're all similar types of businesses, maybe they're not even the same types of businesses but a buyer may just say, "I've got $150,000 cash to put down on a business and I'm almost unattached to what it is as long as I personally have the capacity in my second year to make at least $50,000. That might be the only criteria for a business buyer. And they're not going to care if they buy the dry cleaners, or a logistics company that ships things from one place to another, or a retail greeting card store as long as they feel confident that it's going to meet their needs. These are nuances that some software just cannot calculate or consider.
There might be a very big gap between what the real street value of your business might be and what a program is going to tell you the calculators are based on.
Jeff: I think it bears repeating, if you're a business owner and you're looking to get maximum value for your company, obviously, you've worked at making it as much of a success you possibly can over the years, whether you've had it for 25 years, 50 years, or five years. Whatever the case maybe, you owe it to yourself, even if it costs a little bit of extra money to get that real value of your business so you have an understanding and you have a goal to shoot for. Why shortchange yourself?
Jeff: Your exit strategy three to twelve months out, what does it look like and what you should you be doing in the final months leading up to the sale of your company? I'll be back with business consultant Jennifer Martin as we continue our talk on Deal Talk when we come back after this.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Jennifer Martin, author, speaker, and founder of Zest Business Consulting. Part three of our three-part series to prepare you for selling your business. On this segment we're talking about the things you need to be doing in the three to twelve months leading up to the sale of your company. Jennifer, I know that you think it's important to consider who might be buying your business, is that correct? It's critical to know who might be out there shopping for my company. And if it is important, why is it important?
Jennifer: Thanks so much for asking that question. When we are in our regular course of our business we really get to know our ideal client or ideal customer. That helps us in actually finding more people like them, and it helps us in delivering a product that they want to buy, and in essence helping us stay in business. We want to give the sales process of our business the similar type of consideration. Knowing what the most likely outcome might be can also help you understand why someone, one buyer might value something a little bit differently than either you imagine the value to be, or they wanted it. I thought I would share what some of the most common scenarios are, and I'll say those would be for what I'm going to call a small business sale. And for the sake of today, a small business will be a company that has an annual gross of under $10 million. There's going to be variations for larger businesses that are publicly traded and things like that because you're going to have different organizations and groups that are going to take them. But for today we'll talk about small business owners.
There's generally a few types of buyers, and I narrow it down to three or four. The first one is someone who's already in your business, not within your business but somebody who's in a similar operation. They look at your business as an opportunity to expand their territory, or capture more of the market. And generally you'll find that this buyer is very price conscious and they're going to be interested in the facts. So get your P&Ls ready for this guy or gal. The second kind of buyer is what I call a serial entrepreneur. This person or a group of people may or may not have experience in your industry but they're very business savvy. They will want to see everything that you have to offer and they'll most likely be interested in price and how the operation is working. They'll want to make sure that you've got your systems in place and your systems documented, so that when you leave your business the whole thing isn't going to crumble. So they're very interested in how well your business can operate without you so that they can jump in. And then the third buyer is what I refer to as a dreamer. And usually this is an individual or a couple of people venturing out into business ownership - many times for the first time. Sometimes they might be good at doing whatever it is that they've been doing up until now. They might be a great accountant or a fine landscaper, whatever it is, but they aren't necessarily great business people. They're going to have X amount of dollars to spend and they will think that they can do anything, and they're going to be ready to jump right in. These people will absolutely be interested in coming into what's called a turnkey operation. The more you provide to them the easier it will be for them to say yes to you and get the sale done right away. So out of these three, Jeff, which one do you think is the most common scenario buyer for a small business?
They look at your business as an opportunity to expand their territory, or capture more of the market.
Jeff: I'm going to say probably be number three.
Jennifer: Yeah, 100 percent. Usually it's that person or group of people I call the dreamers. They are many times and they're taking their first venture into business ownership. They're going with their heart, and their gut, and their mind isn't always getting into it. A lot of times they don't look before they leap, and they're making a gut decision. That's really, really valuable for a small business owner to know. Because the more you can do as a business owner to really impress this buyer that just has some money and they're looking for something really wonderful to jump into, the easier you can make it for them to think that your business is a good fit for them and it's going to be easy to run, the more quickly you're going to sell the business. And the more likely you are to get the higher dollar volume, especially if they're comparing your business as a possibility to one or two others.
Jeff: Which begs the question really, Jennifer, given all that, do you think that buyer number three really does represent the easiest sale of the three buyers, as long as the seller has done everything that they're supposed to do on their side in order to make the sale easy?
Jennifer: Sometimes yes, sometimes no, and that purely depends what you think is easy. A very seasoned business owner, just because somebody wants to expand ... Let's say that they have either a similar business or a complementary business, because that happens too where somebody might have ... Let me see if I can give a good example. You have somebody who owns a few hair salons and there is a health spa for sale that does nails, hair, waxing, massage, and whatever else that they do at their spa. And that might be a good addition to their family of business. That person again is definitely looking at the dollars and cents. They want to make a good investment. There's obviously something alluring about that. So in some ways it could be easier to close a deal with that type of savvy negotiator. They're more clear about what they want and what it will take to make something work for them. They also tend to negotiate a little bit more because they are more savvy, so they have a better sense of what they think your business is worth. There tends to be a little bit more going back and forth about the final dollar amount. They're less likely to want you to stick around and tell them how to work your business for the next six months. Whereas a newer business owner might say, "We want to incorporate into the contract three, six, nine, or twelve months of the business owner being a consultant for us, or the business owner helping us have a smooth transition so that we don't lose any clients or things like that."
What I find is that the dreamers, those number threes, they tend to pay a little more, they tend to jump a little bit more quickly into a purchase, but again, they also are the ones that come around on the back side. They feel like maybe you weren't honest with them. You didn't share with them everything you told them you were going to share. You sometimes have more problems with them in the long run because they don't understand what they're doing in the first place.
Because the more you can do as a business owner to really impress this buyer that just has some money and they're looking for something really wonderful to jump into
Jeff: Before we jumped away to our break a few minutes ago you talked about some other lists. Are we getting closer to those? Is this where those lists materialize and where they're used?
Jennifer: Yup, absolutely. Grab those pens again because I'm going to share what else you can do to give yourself a leg up on the other businesses that are for sale when you list yours. Since this is a really long list I'm just going to take it through a shortened version and at the end I will invite anyone to contact me directly, shoot me a quick email, and I will send you a printed out list of what we're talking about. We already talked about a few other lists you're making and now we want to get into kind of the straightforward stuff. If you haven't already gathered three to five years of financial reports, do that now. And please do yourself the greatest favor, use accurate, real numbers. People will sue if you lie to them. I say this, it's really important. People are basing their interest in purchasing your business based on what you're sharing with them. Give them the real facts, even if it's not impressive.
You also want to gather a copy of your building lease. At this point if you haven't already gathered you'll probably want to get a big, fat binder that you're going to put all these things in with tabs that help separate things out. Because what you're creating in essence is the new business owner's bible for a resource guide, encyclopedia, whatever you want to call it, for your business. That's what we're putting together. We've got the three to five years of financial reports. Now we're putting in a copy of your building lease. Obviously, if you own the building or buildings, whatever the case is, you'll want to have some kind of verification of your deeds, and that will get transferred in escrow during your sale. You want to go back and grab that inventory or equipment list that you've already made.
If you have a business plan or a written vision, grab that now. You want to have a tab called utilities, and you want to have a list for all of the service businesses that you routinely hire out. So you're thinking about gardeners, cleaning services, pest control, your utilities. It's a new list and a new section, you want to include the names of the businesses that you use, the contact name if you have a rep or you're dealing directly with someone, if you have that person. Also, their phone number and their email. Again, you want to make it as easy as possible for this new buyer to see that they can just step right in, turnkey, and take right over where you are. So you want to give them all the facts. The next list is a list of passwords. If you're going to sell your business there's probably a number of passwords, a number of things that you signed up for on behalf of the business that you'll probably be passing through to the next person. So give them that long list of passwords.
Now you want to start thinking about how you get more business. I start from the sales and marketing standpoint. If you have found that there are some sales scripts that work 60 percent of the time, whatever the lowest common denominator is, give them the sales scripts. If you have digital files or recordings of successful sales calls for training, provide them those. And if you don't, you can make this stuff. If you don't have all of these things that I'm talking about, this can go on your to-do list of what you can do so that, again, you're going to look as delicious as possible to that hungry buyer. You want to have an outline of how to overcome your most common objections, and a price list of all your services or products offered. So that's on the sales side.
On the marketing side, again, this another folder or little mini binder. You want to gather digital copies of your logo in all applications, your business card, your letterhead, anything that's been prepped for your website, or other business collateral. You want a hard copy, and if possible, an original of everything with your logo on it. So this is probably not just going to be a folder. This might be a box. You want order forms, cap or t-shirt that you had at one time. If it's a menu, if it's a giveaway, a squishy ball, anything that you still have that you have created with your logo on it. If you're selling your logo in the name of your business give it to the new owners. You'll also want to include in this big marketing file your graphic designers’ names, anybody you've used in the last couple of years, their contact information, and a list of what they've prepared for you.
Next you want to do a list of vendors you've used to produce your finished products, which include your logo design. And you also want to have a printout. So the next is a printout of each page on your website. This is really good in case something goes sideways or someone needs to recreate the wheel somewhere with the website. A page outlining your investment in your website, what you actually paid to create it initially and who you paid it to. As well as what you continue to pay to who to make updates. Include where it's hosted, when your domain name comes up for registration, for renewal, and where the payments get paid to. So we're really giving them very, very detailed information. And I'm still just on marketing, and there's a lot of other sections to cover but I'm going to finish marketing and then do a quick check-in with you on time. So you also want to include anything that you're spending money on now to create leads. Do you have Google Ads, print advertisement, listing in directories, flyers? You want to give them information so they know what you're doing now to generate leads, and you want to actually give them an estimation of their effectiveness. And if you're not tracking that now, start tracking it now. This would be a great time to actually find out what's working. And then the last things are a list of any future marketing opportunities that you have either explored in the past or you might want to explore down the line. I'm just going to check-in really quick because I've got probably at least five things from where we are now. Should we wrap up here and I'll just invite people to send an email to get the long list? What are your thoughts, Jeff?
Jeff: The best way to do it is to go ahead and offer them maybe that list through an email or something like that that they can get. That way they got the whole enchilada and they can go through it in great detail, and kind of work through that.
Jennifer: Absolutely, my pleasure.