Goldilocks & The 3 Buyers: Interview with Dan Scherotter - Wendy Dickinson, Catalytic Conversation$
12.4 Goldilocks & The 3 Buyers: Interview with Dan Scherotter
Show Notes written by Wendy Dickinson, Catalytic Conversation$.
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Today we are taking a last look at the process of selling your business. If you remember from our last time together, selling a business is called the deal or the transaction.
Picture this - you’ve worked for years to build your business. You hope to retire in the next five or six years. You will use the money from that sale to buy the family a relaxing cruise, invest some for retirement and finally, do what you want to do with your time.
Sounds lovely, doesn’t it? Unfortunately, for many who hold that dream dear, it doesn’t work out that way. It happens for a lot of reasons. Sometimes, the market conditions aren’t right. At other times, owners get in their own way.
Today you have the chance to get the insider view of the transaction at the point of choosing the best fit buyer. Dan Scherotter, a broker and strategy consultant with Filament Business Advisors, has a background in the restaurant industry.
Dan is a former chef and restaurant owner. Dan has a finger on the pulse of the restaurant industry. As a consultant and broker for Filament, Dan is going to discuss with me the unique aspects of selling a restaurant, asymmetrical buyers and how the past year has “laid the industry bare” structurally.
Let’s make the most of it and get a sense of how a buyer is chosen.
SHOW OBJECTIVES: THE WHY
KEY ISSUES: Problems You May Encounter:
In my experience, these are the obstacles that owners don’t prepare for, lead through, or navigate successfully, during the transaction.
1. Owners don’t really know what their priorities are before they begin the transaction process. Before you begin the sale - “the deal” think about what is most important.
2. Owners don’t think about who their ideal buyer is or what their attributes should be. If you don’t want the buyer to snap up the product line or customer list and then close out your company, you need to be clear on that.
3. Owners don’t really know how much their business is worth. Owners make up numbers that they think they need - they don’t realize that they could become a minority owner if the buyer is a financial buyer, or maintain ownership of the real estate.
4. Owners have built the entire business around the owner. No prospective buyer can see themselves as able to replace the original owner.
5. Owners have failed to build value within their business - value to a prospective buyer, that is. This can happen as a result of concentration of customers, only 1 supplier, or success depends on one sales person.
6. Owners fail to run the business successfully once the transaction begins. This is another example of woner sabotage. The owner gets so focused on the list of prospective buyers, supplying the data for due diligence, and then the negotiations, that the owner takes their eyes off of the business and that, my friends, is like issuing an invitation to the buyer to renegotiate the purchase price. Never a good sign!
7. Owners don’t get the timing right. Owners say that they don’t want to sell when they are making so much money, or when the market is so hot - actually that is the time to sell.
8. Owners don’t have the right advisors. Many try to sell the business as a DIY project - without knowing the fair market price, how to protect their proprietary knowledge, and how to weed out the tire kickers. This is also owner sabotage.
9. Owners don’t have a communication plan for their team and word leaks.
10. Owners try to lead the negotiation process without the input of their advisors.
What You Need To Know - THE WHAT:
First, you need to sit down and define your priorities. What do I mean?
Many owners don’t know what they actually need to realize from the sale of their business. Sounds crazy, doesn’t it? But, it’s true. I recently heard of an owner who thought (no data, just thought it) that he/she needed to walk away with $3M to be comfortable in retirement. As it turns out, $2M was the magic number and that business sold and the owner was able to take an earn out for a larger purchase price based on forecasted earnings.
Think about your other priorities:
These requests are reasonable if they are presented in a professional manner and the owner has created a strong position as a valuable company. The likelihood of those priorities being accepted depend on the value of the company, and the timing of the ask. This is another incident where the right advisor is critical.
What You Need To Do - THE HOW
Here are my rec’s:
Know what your priorities for the transaction are: employee wellbeing, location of company, name of company, etc.
Know your terms for exiting the business. Decide if you will exit immediately after the close of the transaction or at some mutually agreed upon time, two years after the sale for example.
Decide what role you will play during that time.
Decide, and then prepare, the perso who will be the ultimate decision maker if you are no longer in the owner’s seat.
Get a valuation by an independent source. A certified valuation can run as high as $15K. A broker’s opinion of value can be as little as $1500.
Consult your financial planner to determine the amount you need to live comfortably in retirement. Ask if you could manage an earn out, or reinvest as minority owner. If so, for how much?
What would it mean for your bottom line to take part of the proceeds and divide it among your most loyal employees – or those who were particularly helpful during the transaction? This kind of gesture can go a long way to encouraging the key performers to stay in place through the transition.
Develop relationships with a broker, attorney and accountant who have expertise with buying and selling businesses. Don’t share an attorney with the buyer. Please.
Conduct an inventory, a cash flow analysis, account receivables over 90 days are considered a lost cause. Collect on those ahead of time. Sell any outdated equipment and inventory before beginning the transaction. I’ve seen people walk away from a deal because they paid $20K for something ten years ago and the new buyer doesn’t want it. Seriously.
Consider the “curb appeal” of your property. If you plan to keep the real estate, you do not get a pass on clean up. Make sure the property looks as professional as possible to engage the most prospective buyers for the highest possible price. It makes no sense to save a few hundred bucks and cost yourself a sale. Clean and spruce up ahead of time.
Prepare your team, and your customers, for transition. It will cost you if your key performers/customers up and leave once the deal is closed.
Many business owners describe due diligence- the period of time between the letter of intent and the close as the equivalent of a business colonoscopy. What do I mean by that?
1. Your prospective buyer will go through your books with a fine tooth comb. So, clean up your books and accounting ahead of time. Cash is king. If you cannot demonstrate a robust cash flow management system, you reduce the opportunities you will have to sell your business.
2. Your prospective buyer will assess your inventory and other assets according to current market value – not what you paid for it, or how much YOU think those items are worth. Think of it like a house with a pool - valuable to you, not to every buyer.
3. Your systems and processes will be examined, questioned and then evaluated, as will your customer concentration. Look at these things prior to going on the market. Your books should be clean, stand up to scrutiny and the new buyer set up for financial success.
4. Real estate assets are also subject to comps and the market.
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