Nothing lasts forever. At some point, every owner will have to or want to sell their business. Are you ready? Do you have the right team in place to maximize your return? Upsize and Club E brought together a half-dozen experts to share their advice.
Edited by Andrew Tellijohn
Rick Brimacomb, moderator, Club E and Brimacomb + Associates: What are your global thoughts on our topic?
Joe Caruso, partner, Franklin Partners: One of my pet themes is if you are a business owner and a potential M&A client, it is great to assemble a group of subject matter experts. You need them. But if they are not functioning as a team you are not getting full value.
The analogy to March Madness is if you can put five All-Americans on the court and not win the tournament. If the players are focused on hogging the ball and scoring points and not playing defense and not rebounding and not communicating, not doing the things you should be doing if it’s a good team, you’re not well served.
Jeff Johnson, partner, L. Harris Partners: I’ve done 200 to 300 deals on the buy side. It always amazed me how a seller would not be prepared with the appropriate information or emotionally for the process they are going through. My favorite assignments were those who really couldn’t tell me what their growth strategy was, what their financial controls are, how their management team would operate the business after they were purchased.
It also amazed me how many sellers thought they could control what the buyer was going to do after the fact. So, my job in that process was to lower the price and extend the terms. In those situations where they weren’t prepared it was a very easy process. Even though they ‘had a contract,’ if I didn’t get a 20 percent price reduction, I failed.
Mark Johnson, M&A corporate attorney and shareholder, Winthrop & Weinstine: You need a properly coordinated team of experts to get through this process well. The upfront planning people need to do is critical, both for your company and your personal goals and aspirations. A big part of our goal is to make sure that the entrepreneur gets through the process with minimal risk.
Business transactions involve big thick documents. Every word means something. You’ve got to read those words, you’ve got to pay attention to them, you’ve got to understand them, you’ve got to talk to your client about them and manage that risk.
Melissa Johnston, vice president of business banking, Highland Bank: From a banker’s side, don’t skimp on the due diligence. And shop around for financing. There are lots of options out there and unless you are either extremely cash rich or have a certain amount of liquidity, now is a really good time to get financing.
Work with those financing partners, whether it’s a community bank or other financing partners to make sure the package is right for you. As a buyer, you want those deals structured with limited prepayment penalties, so over the next three or four years you can repay any debt you took out while the rates are low.
Tom Rushfeldt, local entrepreneur who has sold several businesses: Inter-Tax was a startup. We operated for 12 years prior to the sale. It was a software service business where we downloaded GPS fuel purchase dispatch data from trucking companies around the country and we used that information to provide compliance services for the trucking companies and summary analytics information to help them improve operations.
We grew quickly. Sales weren’t an issue. Our ability to deliver the product constrained our growth. We had more than 300 clients. We were the largest provider of this type of service in the nation, competing against a lot of larger corporations. We had an obvious pool of buyers. We started the business with the intent of selling at some point to one of them.
When we got to the sale process we interviewed three different investment bankers. We selected Franklin because it felt they related to the size of business we were trying to sell. After they analyzed our business, they said we weren’t ready to sell. They asked us to develop some financial goals that, when we reached them, we’d be closer. It took us about 18 months.
Franklin prepared a confidential offering document. They also identified a large pool beyond what we originally identified. They submitted the document to about 50 potential buyers. We shared detailed information with four to six and visited three or four potential buyers.
Between the first offers we received and the final sale, the price more than tripled.
We ended up with a final sale price that was 2.1 times sales — it was a cash offer — with another earnout of 1.3 times sales, for a total of about 3.5 times sales.
One thing we did well was, my partner and co-founder ran the day-to-day operations while I managed the sale. That was why we didn’t drop the ball on the operations of the business.
Brad Theisen, partner-in-charge, Eide Bailly: I look through the tax lens. One of the most important pieces of selling a business is getting it ready for sale.
We look at it as if you are selling your house. Realtors talk about staging your house, fixing things up and decluttering. We look at it the same way with your financial statements. Bankers like to see an audit versus a compilation or some tax returns, so those are things you can do ahead of time to prepare yourself for the sale.
Rick Brimacomb: How does a deal structure impact taxation?
Brad Theisen: Usually the seller wants to sell stock, because then you get capital gains treatment on that sale. The buyer wants to buy assets so they can get a step up in basis and depreciate those assets, get a quicker write-off. There is a big difference in the taxation. The difference between the highest federal tax rate and the capital gains rate is 20 points. So, the way it’s structured is important.
Then after the sale, typically you’ve got a seller who has had business income and wages along the way. Their whole tax return shifts sometimes to a lot of investment income and things like that. And usually if you sell, we’re looking at some estate planning, because you’ve got some liquidity and more net worth.
Rick Brimacomb: You talked about working with a buyer two to five years in advance. Why does that process take that long?
Jeff Johnson: It’s not quick to do the legal work or the accounting work related to changing ownership structures.
The advisers really do know what they are talking about. Most business owners go through this once, maybe twice. They really don’t understand the processes that occur or what a buyer is going to do to them. I used those words intentionally. I was paid a lot of money to get people upset so they didn’t really get involved in actually managing the process.
The value creation, the dollar amount, what they need to get out, is the management team in place that can manage the place after they leave — they must be prepared. It’s not a six-month process, it’s not a one-month process, it is two to three years plus to get your house in order.
Rick Brimacomb: What other challenges do business owners need to be prepared for?
Mark Johnson: The first one is disclosure and communication. When do I let them know, when do I get them involved. You can’t go at this by yourself. You need to have people on your management team helping you through the process. At the same time, you don’t want to let all your employees know. You want it as confidential as possible.
And buyers are going to want to contact customers. When is the right time? Normally later in the process when everything is locked down.
It’s also very important to not get distracted from your core business. Maybe it sells, maybe it doesn’t. There’s always a chance you are going to continue operating. If it does sell you want to deliver the maximum value and make sure that everything is going great throughout the sales process.
Finally, prioritization. You’ll have 30 issues. You’ve got to figure out which ones are most important to you and prioritize them.
On the buy side, the big challenge is finding and evaluating good targets. That’s much easier said than done. You can get distracted from your core business by chasing things that aren’t going to add a lot of value. And then when you find the ones that will add value, how to execute them. That’s a good time to reach out to your advisers.
Rick Brimacomb: How important is it to have the team of advisers understand the seller’s goals and have that team working together?
Joe Caruso: You need the quarterback of the deal. That’s our job. But the team aspect of this is you can’t make priorities as a business owner without advice from subject matter experts. If they aren’t communicating with one another respectfully and listening to each other respectfully, you’re not being well served.
You really need as a team to collaborate on the must-have list and the nice-to-have list, knowing full well that you aren’t going to get both. You start out the negotiation with a fixed amount of negotiating capital. You better be acting as a single mind as to how you are going to play those cards.
Rick Brimacomb: What options are out there for financing?
Melissa Johnston: There are a lot of options out there depending on the deal size. We have folks who do deal sizes $15 million-plus. As a community bank, I’m doing deals from about $500,000 to $15 million. There are other partners out there, alternative financing sources, there are factoring companies, there are some government programs, Metropolitan Economic Development Association and the Metropolitan Consortium of Community Developers can be fantastic sources. Private equity firms are buyers, they’re all over the Twin Cities and outside.
When we’re putting deals together, we’re looking for 25 percent down. That can come from a combination of cash and seller financing. It’s very rare for me to get on board with a deal that doesn’t have solid financing. I’ve obviously done it, but I’m highly motivated with my buyer to get some aspect of seller financing. That can look different depending on the deal.
Rick Brimacomb: You’ve been through the process a few times now. Are there any common threads?
Tom Rushfeldt: Yes, the first couple times were either negotiated sales or we went through a broker. If your business is above a few million in sales I don’t think that’s a good plan. I would recommend as a business owner that you get involved early and often with an adviser, an investment banker, it just makes a world of difference. You might be good at running the business but you don’t sell them enough to know what you’re doing.
From the audience: What documentation should you have in place for the sellers?
Mark Johnson: We have prepared a buy side due diligence checklist. This is the type of information the buyer is going to be asking. That’s one way of giving an idea of what you could be thinking about.
Melissa Johnston: Make sure the financial statements are in order. Buyers are going to be asking a lot of questions about the margins and the add backs. And just make sure you’re legit and genuine in your comments because buyers will really be relying on your trust.
Rick Brimacomb: What advice do you have for someone thinking about selling but not quite ready?
Brad Theisen: Get an audit ahead of time. A buyer places a lot of reliance on that in addition to their due diligence. A lot of deals are based on EBITDA, so you want to clean up your financial statement, get rid of questionable items that might be in there.
From the audience: How do you get multiple interested parties around the table?
Jeff Johnson: We always involve the investment banker. They do that day in and day out. They’re in the business. They know how to do the research. They get the universe of companies that are available, contact them and weed through the muck.
Joe Caruso: This is going to sound trite, but the world is very flat. A five-person M&A boutique firm in Minneapolis can reach the same prospective buyers as a firm in New York. It’s all research driven. It’s all transparent. You have to subscribe to the data services. You have to do the work. But the tools are there.
Rick Brimacomb: What’s a typical mistake you see throughout this process?
Jeff Johnson: The seller is not prepared and not getting advisers involved at the right time.
Melissa Johnston: For a buyer, be mindful employees are fearing the new owner and what’s coming down the pike, so communicate the benefits, talk through the process and make sure the communication is open with employees.
Brad Theisen: Get your team together. When we’ve seen things go bad it’s when they didn’t contact us in time and they’d gone down a path that they couldn’t reverse.
Joe Caruso: A common challenge is deal fatigue. This is a very emotionally intense, time consuming process. You’re trying to run your business and stay in the cockpit on the deal. It’s tough.
Rick Brimacomb: Any final pieces of advice?
Brad Theisen: You have to plan ahead of time and be ready for it. It doesn’t happen overnight. It’s a process. It’s a marathon not a sprint. Be ready.
Tom Rushfeldt: As a seller, be prepared to be emotionally wracked.
Melissa Johnston: “Good to Great” and “Tipping Point,” if you haven’t read them, they are both good reads.
Mark Johnson: Plan ahead. It can’t be overemphasized.
Joe Caruso: Keep your sense of humor
Mark Johnson: Try to enjoy it. It’s the most important thing you are going to do in your business career, so make sure you keep your perspective.
CONTACT THE EXPERTS
Rick Brimacomb is managing partner at Brimacomb +
Associates and Club E: 612.803.3169;
rick@brimacomb.com; www.brimacomb.com
Joe Caruso is a partner with Franklin Partners: 612.436.0892; jcaruso@franklinpartnersinc.com;
www.franklinpartnersinc.com
Jeff Johnson is a partner with L. Harris Partners: 952.944.3303; jeff.johnson@lharrispartners.com;
www.lharrispartners.com
Mark Johnson is M&A corporate attorney and shareholder for Winthrop & Weinstine: 612.604.6607; mjohnson@winthrop.com; www.winthrop.com
Melissa Johnston is a vice president at Highland Bank: 952.858.4798; melissajohnston@highlandbanks.com;
www.highlandbanks.com
Tom Rushfeldt is a local entrepreneur:
trushfeldt@yahoo.com.
Brad Theisen is partner-in-charge at Eide Bailly: 612.253.6539; btheisen@eidebailly.com;
www.eidebailly.com
