Mastering the Art of Business Sales, Expert Insights and Strategies | 114

In this episode, Andy delves into the critical process of selling your business, offering valuable insights for business owners looking to transition. The podcast emphasizes the importance of critical decisions, assembling a team of experts, understanding the buyer's mindset, and thoroughly preparing for due diligence. With real-life examples and practical advice, Andy Contiguglia guides you through the complexities of selling a business and highlights the significance of professional support. Don't miss this episode to ensure a smooth and lucrative sale for your business.

Are you looking to sell your business successfully? Join Andy Contiguglia as he shares his expertise in this comprehensive podcast episode, covering pivotal decisions, assembling expert teams, understanding the buyer's perspective, and much more. Selling your business is a labor-intensive endeavor compressed into a relatively short timeframe, and Andy's guidance offers essential tips for a smooth and profitable sale. Don't skip the legal steps – subscribe to "Don't Skip the Legal" and share this valuable episode with your network to maximize your business selling potential.

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Please note that the legal information shared in this podcast is for general informational and entertainment purposes only. It is not a substitute for consulting with a licensed attorney for specific legal matters. Past performance does not indicate future results; every legal case is unique. Consult your own attorney for personalized legal advice.

Transcript

Andrew Contiguglia:  

Hello and welcome to another episode of Don't Skip the Legal. I am Andy Contiguglia, your corporate casual business attorney bringing you the Don't Skip the legal podcast. In this episode I want to discuss a topic that is really close to my heart, and also one that I think is really close to many business owners hearts, and that is selling your business in a world right now where there's a lot of information out there about buying businesses and growing and scaling your businesses through acquisition.  

One topic that I think has been neglected is what happens if you're on the other side of that? What if you are not the individual who is going out and acquiring other businesses, but instead you're the one who wants to sell your business? It's important that you, as the seller of your business, really set up your business for success, and that starts off way before you ever want to start the selling process.  

So as you grow and develop your business, you decide, Hey, this legacy business or this? What the hell is the other word? This lifestyle brand that you have built is really now time for you to sort of ride off into the sunset. I mean, just a couple of weeks ago, I was thinking about buying another law firm here in Colorado to acquire things. But this person really did not set up their business for success when looking to sell it. And if you're looking to get out of your business, you need to really take advantage of opportunities that you have in order to put your business in the right stage.  

So in this in this episode, we're going to discuss the different ideas, what you can do to make your business sell at the best possible option.  

SEGMENT 1: The Decision to Sell 

All right. Let's talk about the decision to sell. Right.  

This really is the pivotal decision to sell your business. For many business owners, this moment can be an exciting and also very anxiety inducing endeavor. It represents a crossroads where you must weigh the potential financial gains against the emotional attachment you may have to your company. Something that I always look into when looking, when buying businesses, when helping other companies by other businesses is the business that we're buying. Can it operate independently from its owners? If it can, it's a great business for you to look into and purchase.  

If it can't, then really what you're doing is buying a you're buying an employee who is just going to be sort of glorified throughout the rest of this process. And many people in selling their business really create this emotional attachment to their company, and they need to really divide themselves and separate themselves from the idea that this is not an emotional transaction, this is a business transaction. So separating yourself from the emotional attachment to your business, I think is really, really imperative. So this decision really shouldn't be taken lightly as it will significantly impact your future. So as you're looking and evaluating it, whether you want to sell your business, seek advice from those who have been through the process. S 

o as the old adage says. As the old adage says, you don't know what you don't know. So this is where experienced business owners who have successfully navigated mergers and acquisitions, they can offer invaluable insights. They can help you gain realistic understandings of your company's potential value in the eyes of buyers or other investors, and also provide guidance on positioning your business for a favorable outcome. There is truth in knowledge. There is value in other people's trials and tribulations as they've gone through in selling their businesses. Reach out to these individuals. Talk to them about what they experienced in going through the sale of their business.  

SEGMENT 2: Rely on Experts With Transactional Experience 

And this really relies this really sort of Segways into the next segment here, which is rely on experts who have transactional experience. So once you've made the decision to sell. The next step is assembling the right team of experts. So imagine you're climbing Mount Everest without an experienced guide. This is just going to be a recipe for disaster.  

Similarly, attempting to navigate the complex terrain of mergers and acquisitions without an expert also is going to be a risky proposition. Surround yourself with the right people, with business brokers to help you get your company listed, helping you find buyers with a lawyer who's skilled in mergers and acquisitions and others who have sold their businesses in the past. Surround yourself with a team of people who can really help you navigate this difficult the difficult endeavor of selling your business. So your team should include people such as an accountant, a lawyer, transactional advisors, people who specialize in mergers and acquisitions.  

These individuals possess the knowledge and experience necessary to prepare you for the sale process. Managing negotiations with with potential buyers and ensuring that all legal and financial aspects are handled correctly. And depending on the size of your deal, you may work with investment bankers for larger transactions or M&A brokers or advisors when it comes to smaller ones. While some business owners may believe that they can handle the process on their own and saving themselves money in the long run, this approach, unfortunately, has, as I have seen, often leads to undesirable outcomes.  

Many times I've represented individuals who are selling their businesses after the decision to sell the business has been made after a letter of intent has sort of started to be circulating around. And I'm looking at these deals and I'm like, What are you doing? And they are completely out of their league. They are good at what they do, which is building their business and engaging in the business that they do. Hire somebody who's good at what they do. Like me in mergers and acquisitions. 

In order to help you get to the right place and the right quality outcome, a good expert is going to understand the intricacies of M&A and can also help create a competitive atmosphere that attracts multiple buyers, resulting in better offers and also a smoother transaction in the end.  

SEGMENT 3: Understand the Buyer's Mindset 

Understanding the buyers mindset is also critical in this process. So as we look and evaluate this element of a successful sale, we have to look at what the buyers are trying to create, what their end game is going to be. Typically, buyers are looking for opportunities that align with their strategic goals and financial expectations.  

As a seller, it's essential to convey that your business fits those criteria. So as you maintain momentum and competition throughout the sales process, you need to make sure that you keep the heightened sense of your business really sort of urgent, that you are out there looking for people whose values in buying your business align with your barre values in running the business and selling the business. If a potential buyer senses that your deal is going to lose steam or that the interest is waning, well, they may become skeptical and hesitant to move forward.  

So if you find somebody who's interested in your business, you don't want to be overly anxious to try and get the deal done. But you do want to stay engaged and you do want to, you know, go through the process in order to maintain the desire of of somebody buying your business. It's kind of like a date as you go on. If you don't expressed an interest with the other with your partner on the date, they are going to lose interest in you.  

So this is where somebody who's experienced in mergers and acquisitions, again, somebody like a banker or a broker or a lawyer, these people can be invaluable as they can create a structured, competitive process with specific deadlines, ensuring that the deal progresses smoothly as you build this out in your LOI, your letter of intent, these types of deadlines and how you're going to move this event forward are really going to be critical. So making sure you have a good LOI in place is important.  

So these experts will be able to protect you as a seller by keeping buyers honest and making sure that they are doing their jobs, understanding that there are many tactics that buyers employ, such as trying to quickly secure a letter of intent for, one, to eliminate competition and then renegotiate terms before closing. We've had this happen a couple of times where one of my clients engaged in a letter of intent before I was ever involved, and then once the LOI was signed, the buyer was looking to then change the terms of the deal. And no, you can't do that.  

If you want to if you think the deal is going to get better with you as the seller and you want to make changes, great. If both parties to the agreement want to make the change, that's awesome. But typically you're going to bind people to these lies. Even though it isn't going to bind the purchase, it will certainly bind the terms if a purchase is going to happen. So an experienced advisor, it can really help you as the seller to navigate these challenges, ensuring that you have a fair and favorable outcome when you do in fact sell your business.  

SEGMENT 4: Choose Your Team of Experts Wisely 

All right. Let's also look at choosing your team of expert wisely, experts wisely. In the beginning of my book, Don't Skip the Legal, The Legal and Practical Guide to Building and Starting Your Business. I make the argument that you must have a lawyer as an integral component to your business no differently than you would an accountant or a CFO, somebody to manage the finances. A bookkeeper. A marketing manager. You need a lawyer and. When you are selling your business, this is something else you want to take into consideration.  

Think of who you want on your team. Who do you want your team of experts to be? And utilizing these individuals, I can't overstate this enough. So it's a critical decision that really can significantly impact the success of your business sale. Many business owners assume that their current network of lawyers, accountants, advisors is really going to be sufficient for this M&A transaction. However, this may not necessarily be the case.  

Your dad's, you know, accountant who set up his estate plan or his estate planning attorney may not be the right person to navigate you through the M&A transactions. You really want to look for professionals who have specific experience in mergers and acquisitions. As I mentioned, your family lawyer or some solo practitioner account may not really possess the expertise required for such a complex process.  

Making the wrong choice can lead to a prolonged delay, misunderstandings and unfavorable outcomes. And most importantly, helping you understand what this M&A deal means, making sure that you understand the intricacies of certain clauses, and making sure that there are ways out of this deal, or making sure that once the deal is done, people aren't stepping on your toes and violating the agreement.  

Violating the agreement. So think of assembling your expert team as a hiring decision that you really can't afford to get wrong. Proceed with caution and rigor seeking individuals who have successfully guided businesses through similar transactions. By doing so, you will enhance your chances of a smooth and lucrative sale.  

SEGMENT 5: Understand the Market for Your Industry, Size, and Business Model 

So once you've gone through all these, it's really important that you understand the market for your industry, including the size and the business model of what it is you are trying to sell. You can't sell to everyone. You have to sell to individuals.  

And you are looking to develop your market and expose yourself to or expose your business to people who want to get involved in your in your company. So understanding the market dynamics specifically to your industry, the size and your business model really is paramount in setting realistic expectations when selling your business. It wouldn't be uncommon for a business owner to overvalue their company, believing that they are more differentiated than they actually are. And to attract buyers, you must have a clear understanding of what constitutes value in your industry. Just because you did a great job. But that doesn't mean that the new owner is going to do a great job. And it doesn't mean that just because you find a significant amount of value in your company that somebody else is going to find significant value in your company.  

All right. Potential buyers are typically going to be larger companies, more established companies within your vertical or private equity firms that are well-versed in your industry's M&A market. They're looking to acquire companies, grow in scale or break them apart and sell them for parts. They are going to evaluate. They are going to evaluate your business based on industry benchmarks and their standards. They're going to look at this strictly from a numbers game. They're going to say, What can we do? What did you do in, you know, your last year of business? And what does this look like for us moving forward as a seller? You need to know how your company is size and pricing model compares to others in the market. What is going to make your business more attractive than another business in the market? If these companies coming in looking to buy and acquire other businesses, why they would want to choose you over somebody else. So always make sure that you have a significant number of processes and procedures in place. There's a great book out there to your assets that I'm actually reading for the third time, I think. And it really goes through that when you are looking to build your business and differentiate yourself, your company needs to have these 24 assets. If you are the only asset of your company and you are gone, your company isn't worth anything because you are the asset. And when you get rid of the asset. The company has no value. So developing these other assets within your company will help differentiate you from other businesses similarly situated. So making sure that your influence includes. All right. So when these businesses come in, they are going to evaluate your business and they're going to base their buying strategy on. When these businesses come in, they're going to evaluate your business. They're going to evaluate your business based on industry benchmarks and other standards that they have set. And as a seller, you need to know how your company's size and pricing model really compares to others in the market. One key factor that influences a business is value often includes the industry you operate in. Some are going to get higher multiples of value than others, and this will also take into consideration your level of profitability, your growth rate and the business model you have in place. And also those assets that I mentioned earlier. Professional services businesses, for example, often are based on profitability, typically as a multiple of EBIDTA, your earnings before interest taxes, depreciation and amortization from the past 12 months. But remember, in a service based industry, if you don't have products and you are in fact the product when you're gone, what does the value of what is the value of the company if you are the asset? You need to think about other avenues that your company has. What about customer lists? What about products that you are selling? All right. So when you when you're evaluating, when you're comparing your business to other businesses, you need to be cautious because not all businesses are directly comparable based on these various financial factors. It's really essential to objectively identify the closest industry comparisons and anchor your expectations around actual closed deals that align with your company's profile.  

SEGMENT 6: Clean Up Your Books 

Now there is a process in the M&A space called due diligence. Due diligence is this process of learning about the various legal conditions, financial conditions of the company, the liabilities that the company has. So cleaning up your books becomes essential. All right. This is a fundamental step, and it can significantly impact the success of your business sale. Many business owners, especially those who have co-mingled their personal and professional finances, fail to realize how potential buyers will interpret their financial picture. You need to make sure you don't exaggerate it. You need to make sure that when you present your financial position to a buyer that it is truthful, that it is reliable, and that it is based on actual numbers and not just some pie in the sky. Hope that you have. So buyers, when they look at this and they go through their due diligence, they want to see financials that adhere to generally accepted accounting principles or gap. All right. And adjusted EBIT, your earnings before interest and taxes, which provides really a more accurate financial snapshot. This adjustment process can reveal both add backs and subtractions. So remember back at the beginning of this episode, I was talking about the various individuals and the professionals you need. This is where a where an accountant is really going to come in helpful to you to help you get these numbers adjusted properly. All right. Things like add backs are expenses that are no longer relevant after the sale, such as vacations, non-working family members on payroll, other costs. An accountant will help you make sure that those are in line and that you're not overexaggerating these things. Because when a buyer comes in and looks at these and sees that there are a number of different add backs, like, Hey, I don't need to give my cousin George this extra pay because I'm going to fire everybody. So I'm going to add back in all of these extra expenses or salaries, right? That is going to increase profit from a buyer's perspective and really is going to potentially raise your business's value because you're not spending that money. So now you have a higher profit value. On the other side of that, you have subtractions which are unaccounted for expenses that will reduce future profits, such as things like below market salaries for key employees. Like if you're going to keep a key employee and they're only getting paid $65,000 when the buyer comes in and sees that they need to keep this individual on in order for the business to be successful. But that person's not going to stay around unless they raise their salary to $120,000, doubling that expense. Well, that is going to be a subtraction that they're going to have to take into it, because that may lower the value of your company. All right. So these are going to be factored into the valuation. Ensuring a more accurate representation of your business is worth. So preparing your financials in this matter is really not a quick task, and you should begin well in advance of entering the market. It's crucial to make sure that you have a strong financial impression to potential buyers, and this process can help you achieve that. So get an accountant on board early and often.  

SEGMENT 7: Do Your Own Due Diligence 

Now, I mentioned earlier due diligence from the buyer's perspective, but you too want to do your own due diligence. So before entering into a sale, conduct your due diligence on potential buyers. Who are these people who are looking to come into your home and take over everything that you have worked so hard for? This isn't always about the money. You have to consider whether the buyer is the right fit for your business. So research their history of closing deals. Who are these individuals? Do they have a history of going through and buying up businesses and then breaking it apart and selling it for parts? Like you would a car.  

There is an episode in season four of suits if you're into that show where there's this acquisition of a company and Mike Ross is trying to make sure that anybody buying the company isn't going to lay off all of these employees. But yet Harvey Specter on the other side of the deal is looking to come in for his client, who is then going to take over the entire company and sell it for parts. And so you have these opposing forces in place about what the goals and objectives of the sellers are, which is, listen, I don't mind selling my business to you. It's going to happen. But I don't want you to get rid of all my employees, because if you do, all these people who have relied on me for the past 25 years, they're going to be out of a job. All right.  

So look at what these buyers are looking to do. Are they going to be the right fit for your business research, their history of closing deals, their past acquisitions, whether they are genuinely interested in doing business with you or merely casting a wide net, are they looking to get into other ventures? Are they looking to tuck this in and use it in someplace else? Are they looking to come in, build it, and then sell it again at a higher profit value? There are a lot of people who do it, a lot of different business models when it comes to acquiring businesses. So if you anticipate staying with the company or having a future earnings tied to its performance, you look into their leadership team, look into the buyer's leadership and their corporate culture.  

If they've acquired other businesses, speak to the leaders of those companies and gauge their experiences with the buyer. Money alone does not guarantee a successful deal. The buyer's character in their intentions are equally important. So remember, when you are selling your business, you're really entering into a partnership of sorts and understand that the buyer's track record and the buyer's culture can prevent unpleasant surprises down the road. So make sure you're getting into a deal with the right partner who aligns with your vision and your values.  

SEGMENT 8: Be Prepared For the Grind 

Now. Nothing about the business selling process is easy, so be prepared for the grind. So be prepared for the grueling nature of the sales process. Running your business while simultaneously managing the managing the sale can be mentally and physically exhausting. There is a lot going on. Going through and getting tax returns together. Making sure your profit loss statements are done, your balance sheets are done, making sure that the legal due diligence is done, and you're providing information to the other side so they too can make an educated decision about buying your business. So once you've found a suitable buyer, you've agreed on a price. You've signed a letter of intent. You now have to roll up your sleeves and really dig in. The due diligence process, as I started to say, requires countless calls and meetings explaining and validating every aspect of your business. Remember the buyers coming in and you need to justify the sales price that you are asking for. All right.  

This process can spend months. It involves bankers. It involves other buyers, accountants, lawyers. Right. You need to compile data and documentation for every contract deal or employee in your company's history. A deal that I was looking at a while back with one of my clients we were looking to buy. So we were representing the buyer's side of this and we were looking to buy a company with a number of different contracts. So we were buying a group that was basically had another, a bunch of other independent contractors under contracts. We're buying the business and then buying those contracts to take over those contracts.  

As we started doing our due diligence from the buyer's perspective, I had to go through and evaluate every one of those contracts. Well, let me tell you this. There was nothing, nothing at all that was consistent from one contract to the next. Nothing. Some of them had form selection clause that the contract had to be enforced in the Virgin Islands or in the Bahamas or in Delaware or in Los Angeles or in the Philippines. They were all over the place, and every one of these contractors was being paid a different margin, being paid a different amount. And so my client, as he's coming into looking at all these going through all these contracts, I'm like, you don't want this company. This is ridiculous. And some of these contracts have expired and they are just sort of on this month to month to month kind of thing. All right.  

This seller did not set the business up for sale. We were in a position where we went through and we looked at everything and we saw all the potholes that were coming down the line. We knew that once we bought in, many of these many of these contractors were going to jump ship. There was no obligation to keep them, much like the law firm that I was looking to buy. Many of the clients, I'm sure would say, Listen, Andy, I'm sure you're a great lawyer, but I want to go elsewhere. I enjoyed working with this other firm. I'm not interested in working with you. And they jumped ship and now I've got to deal with that. All right.  

So this due diligence process really is an opportunity for you to compile the data and the documentation that you have for every deal, for every contract you have all of your employees in your company's history and making sure that the company is not exposed to liability later on down the line. All right. It is an incredibly demanding process and it takes a huge toll on you and your leadership team. So while you're overwhelmed with this process, you also have to ensure that your business continues to operate at its best because of you can if you drive your company to the ground while you're going into this due diligence process, the slip in sales or the profits may cause any potential buyer to reconsider the deal. Because you ran it into the ground.  

It's now not worth what it was four months ago. All right. So in conclusion here. Selling your business is a very labor intensive and Denver endeavor. In conclusion, selling your business is a labor intensive endeavor compressed into a relatively short time frame, depending on what you put in your life. That time frame could be anywhere from a week, as I've seen in very some very small deals to six months on more complex deals.  

So as you navigate this journey, make sure that you have the right team in place, that you possess the right mindset and realistic expectations about what selling your company looks like. And while it may be tempting to handle the sale yourself, the benefits of expert guidance and support really can't be overstated. Surround yourself with experienced professionals like me to increase your chances of a smooth and lucrative sale.  

Now on my website, I have a number of different articles and I also have available to you some white papers and PDFs about due diligence in the sales process of mergers and acquisitions. I'm happy to share with you. Feel free to reach out. And also, if this podcast has been valuable to you, I ask you, please like subscribe to it, post it on all your social media platforms and bring it to other people's attention.  

All right. This is Andy Contiguglia reminding you to don't skip the legal. Good luck.