Selling a Business: Getting What You Need

We received this wonderful white paper from Bernstein Global Wealth. With their permission we are reprinting a portion. You can download their full paper here.

Selling a private business is best thought of as an ongoing planning process that begins well before the deal is consummated and ends well afterward. But at every point along this continuum, the owner and their professional team are grappling with and resolving both financial and personal issues. Bernstein’s proprietary modeling capabilities can quantify the likelihood that a sale will meet an owner’s critical financial objectives and help evaluate the trade-offs across different deal terms.

You Can Get Satisfaction.

Sir Michael Jagger, better known as Mick, led The Rolling Stones in proclaiming that “You can’t always get what you want…but you just might find you get what you need.” This trade-off applies to all things in life, including investments, and it has special validity when selling a private business. Although an owner’s focus may be on getting their “magic number” for the business up front, they may find that other alternatives offer acceptable, or even superior, trade-offs.

We begin with the premise that business sales are typically complicated, and laden with emotional issues. The owner is selling their means of livelihood, and more—the configuration of their financial portfolio: They’ll have to make the transition from relying on business earnings to living off the pool of liquid investments generated by the sale. The good news is that sellers are not in the process alone, but generally represented by teams of advisors, usually quarterbacked by a Business Broker and including a portfolio-management professional such as Bernstein. The role of the investment manager is not to pass judgment on one or another term sheet, but to place each in the context of the seller’s overall financial objectives. This can be done at any point in the deal—but the sooner the better.

A Thicket of Questions

Financial:
How much is my business worth?
What’s the best deal structure for me?
Will I get enough to meet my needs?
Is all-cash-now better than staged/contingent payments?

Emotional:
Do I want to stay involved in the business?
Do I have a plan for my life after the sale?
What effect will the sale have on my family and employees?
Do I have the risk tolerance to accept contingent deal terms?

These questions parse some of the interconnected financial and emotional issues that arise when selling a business. For example, whether the owner receives “enough” for their business depends on how much it generates in earnings and how much the market is willing to pay for those earnings. But directly connected are issues like whether now is a good time to sell, whether the owner wants to retain an interest in the business for a while longer— often a negotiable point—and how the sale will impact the owner’s family and employees. All of these issues affect owners’ personal lives as deeply as their financial wherewithal—and on both sides of that equation professional planning can identify opportunities and help solve problems.

Further, each of these questions leads to additional questions. Arriving at answers is made none the easier by the blizzard of alternatives often available, and frequently buyers and sellers find themselves in disagreement about deal terms, legalities, and tax-related matters.  The job of the professional teams—the seller’s and the buyer’s—is to satisfy their respective clients, resolve as many issues as possible before the consummation of the deal, and monitor the transaction as it moves forward.  And there are never one-size-fits-all answers.  One seller may justifiably be anxious to consummate the deal before taxes go up in 2011; another may be willing to pay the higher levy if they expect their earnings to increase significantly in the near future, raising the value of the offers they’ll receive. The question is whether the risk of waiting will pay off.

What about the environment? Is this a good time to sell? Evidence of an economic recovery is mounting, but financing is still tight, and there are no assurances about what the future will bring. In addition, the profit dynamics of every industry—and, more important, for every company—are different. That last criterion is the one that truly counts for a business seller: It’s their company and their livelihood that are at issue. The job of their professional team is to keep them from falling into one of two traps: rushing headlong into selling now because the “landscape” looks good, or refusing to budge because it was better several years ago and good times may be around the corner again.

Still, owners need a touchstone for deciding whether to sell, and one metric might be if the proceeds—whether all up front or parceled out over time—are at least enough to provide for the owner’s lifetime spending needs.

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