In this time of economic hardship, many small businesses want to sell out. But smart business owners are holding on, say brokers and other experts in the field. The experts recommend that business owners looking to sell should develop an exit strategy to take advantage of the next economic upswing.
An exit strategy can have as much impact on the after-tax settlement you end up with as the majority of your working life, said David A. Humphrey, president of Beacon Capital Group, a business brokerage firm based in Norwood, Mass. There are many things to consider: how quickly you withdraw, whether you have an earn-out clause, how the markets will view your departure, and many of these require that you give considerable attention to succession planning.
There are several things a business owner should do to get a better price in six months or a year from now, say brokers.
“The most common reason people sell is that they’re exhausted. Owning your own business is very rewarding, but it’s an awful lot of work. It gets to you after a while,” said Humphrey. “They hit the wall and they want out now. They’re not thinking strategically. A lot come to the marketplace sort of in a panic. A panic is not the best state of mind with which to sell. Do some prep-work and you’ll get a much better price,” said Humphrey.
Business brokers like Humphrey routinely offer four pieces of advice – things a business can do to get the best sale price for the company.
• Be a leader in something.
“Jack Welch wanted General Electric to be number one or two in everything they were in. Figure out one thing you’re in position to be: the number one Rhode Island pear grower or imported wine distributor, the number one something. Because being number one gets a premium,” he said.
• Slowly transition out key people.
“The problem is that the brother-in-law is making too much money. He wouldn’t get the same in new business. If you’re overpaying him $50,000, from the buyer’s standpoint that’s a lot of risk,” Humphrey asserted.
• Buy your competitor – even if you plan to sell.
“When you have less competition, you become a more dominant player. Even if you paid a very fair price for somebody else, inside your company it’s worth even more,” he said.
• Be willing to stay on for as long as a year after the sale.
“In small businesses you often have family members in top positions. When somebody sells, if a lot of people leave with the sale, that’s an awful lot of brain drain,” said Humphrey. “If I just took over your company and you’re the president, you’ve got the contacts I need right away. I want you to stay for six months or a year, depending on industry.”
As an example, he pointed to People in the Woods, a Portsmouth, Rhode Island-based custom cabinetmaking and high-end woodwork shop that he brokered the final sale on a couple of weeks ago.
The sale was a case study in how to get the most for a business, said Humphrey. The cabinetmaking and high-end woodwork design shop has done the bulk of its business doing custom woodwork for mansions in Newport since 1992. Over the years, he built it into a multimillion-dollar corporation. At one point there were 34 employees. They had 22 at sale time at their 17,400-square-foot facility in Portsmouth.
Joseph Sabatino, a third-generation cabinetmaker, knew a full year before the sale that he wanted to get out. Starting a year ago spring, he developed a strategy that maximized the return.
“I’m 62 and I have other things I want to do with my life,” said Sabatino. “But it takes that long by the time you find right broker, position your company and put together a good presentation. It’s not something you do overnight.”
The first thing Sabatino did was to reduce spending. The sale price is almost always a multiple of the business’s profit.
“When you’re planning to sell you want to maximize profit, so you control spending and long-term capital investments, things like that,” he said. “Then you want to boost sales.”
Sabatino eventually sold the business to two people: a businessman from Boston and one of his top managers, with a sale price way over a million dollars. Every employee of the business was kept on by the new owners – including Sabatino, who agreed to become a paid consultant for an unspecified period.
“I’m going to stay on and help them for a while, as long as it doesn’t interfere with my traveling,” said Sabatino. “Technically, I guess I’m retired.”
