Way out
by Beth Ewen When owners come to Tom Lyons, sick of their business and ready to sell, he often tells them to hold on. Lyons is president of Faelon, a business brokerage firm in St. Louis Park. How much will their business sell for today? Is that enough to see the owner through retirement? If not, what is enough and how can the owner build the business to that goal? Answering those questions can help them maximize the value of their biggest asset.
Upsize: How important is an exit strategy?
Tom Lyons: What we like to talk about is long-term planning. As the years pass, I ask, “What are you going to do next year?” They say, “More of the same.” I say, “How much is your business worth today? Is that enough? Where are you going with this and how long do you take to get there?”
Some people have no idea what they’re going to do when they’re done with the business. We challenge business owners to think about: What would be challenging for you? We shouldn’t try to fit that business owner into one method. What does retirement look like for you? It’s all part of financial planning.
Upsize: Have most owners you work with done this?
Lyons: A lot of business owners don’t have a good idea of what they’ll have left after they sell, and pay the taxes and fees. That planning piece helps us to figure out where they want to be. They can then figure their goal: If I can double the size of the business I can accomplish it. We have something firm to work toward.
And then the estate planning piece is huge. We hear a lot of talk about the federal estate tax being reduced and it has been. The maximum rate was 55 percent, now it’s 48 percent. At the same time, the state of Minnesota’s rate increased to 60.5 percent, on the largest estates. You can take a portion of your personal exemption now and transfer it to a trust, for example. You’ve removed a million and a half of the value of your business. It’s all about controlling the timing of the sale of the business.
Upsize: What’s the state of mind of your typical client?
Lyons: A lot of people come in and say, “I’ve had it. I just lost a customer. I can’t take it any more. I want to sell.” We say, “Time out. Why don’t we fix that symptom?” Then they can go back to cleaning it up, shining it up, get it so the financials are in order. Half of the people who come in and say they want to sell, I talk them out of it.
Upsize: Like who?
Lyons: A guy came to me seven years ago. He was in his mid-30s, and wanted to sell. I said, “Why?” He said, “I want to spend more time with my boys.” He started the business when he was 18. I said, “What will you do then?” He didn’t care. We got a price for $1.2 million. He decided to keep it, and he moved it downtown, tripled the size of his business. Now we’re satisfied. We’re going to sell now, after seven years, and I’m sure we’ll get more like $5 million today.
Upsize: What can owners do to increase the value of their businesses?
Lyons: I have a workbook from the seminar I do, I’ll walk you through the steps. There’s the value of planning, the advisers you’ll need, retirement planning, investment advice, estate planning. Then we get to preparing your business for eventual sale.
It can be as simple as getting rid of outdated equipment, cleaning up your facility. And then, making sure your financial statements are in terrific shape.
Upsize: What does “terrific shape” mean?
Lyons: You’ve got to have perfect financial records for at least three, maybe five years. When a buyer does due diligence, whatever that is, they’re going to want to know everything, when it comes to every single item. If it plants a doubt in a buyer’s mind, you won’t get as good of a price.
Upsize: What else needs to be in good condition?
Lyons: Get organized. HR plans, safety plans, job descriptions. The more confident the buyer is, if you can remove as much doubt as possible, that will get the highest price.
Upsize: What things cause doubt in the minds of buyers?
Lyons: Remove doubt. Remove obstacles. So if you were selling your magazine, the buyer would want to know how many ads are there. To what extent are you discounting the price? Who are your employees? What qualifications do they have? It’s just like interviewing for a job.
Upsize: What about the owners’ relationships with customers? So many times the owner is the one making all the sales.
Lyons: That’s a risk factor to a buyer. There are a couple of problems that can come up. We had one client, a manufacturing firm, the only person with sales relationships was the owner and he wanted to sell. We advised him to stay, build a sales force and prove that those people could sell. He sold anyway, and the buyer locked him up for three years as an employee.
Another dangerous situation: If you have one or two customers that make up a majority of your sales, that’s a big risk to the buyer.
Upsize: What size companies do you sell?
Lyons: Middle-market companies, with $1 million to $53 million in valuation. Above $53 million there are special securities regulations. They’re closely held concerns.
The structure of the deal makes a big difference. The sooner we can adjust those things, the more impact we can have. There’s a chart in my book on the difference in taxes between a stock sale and an asset sale, more than $1 million difference. A CPA experienced in M&A will help on that.
Upsize: Venture capitalists always talk about exit strategies. But this is not only for those companies getting venture capital funds?
Lyons: It applies to all businesses. We keep track of individual local buyers, and then there are strategic buyers, corporations in the same space. They’re the best buyer because they have the money. Then there’s the private equity firms that have a platform company. That’s a good buyer too, because they have the money.
Upsize: You like those buyers with money.
Lyons: It’s about qualifying the buyer. When the buyers call, I ask, do you have the money? What’s the name of your banker? Otherwise it’s a waste of everyone’s time.
Upsize: Can any company be sold?
Lyons: If a business has assets and profits, it can be sold. If it’s lacking assets, like a service business, it’s harder. If it’s not profitable, it’s hard too.
Upsize: How can service businesses be sold?
Lyons: You can sell to a larger, similar firm, or you can bring in younger associates, groom them, and make it easy for them to buy some day. That's what I'll do with Faelon.
Upsize: Are there typical mistakes that sellers make?
Lyons: I like to talk about traps. There’s an insurance trap. If you were to sell your business and the last day you cancel your insurance, you probably think you’re covered. But not necessarily. If you have an M&A-experienced attorney they will tell you that.
Same thing on the CPA side. If you have a Subchapter S corporation, if you’ve been that for at least 10 years or since you started the business, you’re fine. But let’s say you were a C corp for five years then switched to S. Part of this is going to be subject to double taxation. That’s another instance where if you have an experienced CPA in M&A, you’ll avoid the trap.
Upsize: What’s the most important thing to show the buyer?
Lyons: In a perfect world you would show three to five years of No. 1, increasing gross revenue, increasing gross profitability and increasing net income; No. 2, a diversified client base; No. 3, get it as thoroughly organized as possible. The combination of these things will get you the best price.
[contact] Tom Lyons is president of Faelon, also known as Faegre & Lyons, a business brokerage firm in St. Louis Park. He’s the author of Exit Strategy: Maximizing the Value of Your Business: 952.591.1998, ext. 1; lyons@faelon.com; www.faelon.com
