THE first time Chris Ludwig sold his refrigerant reprocessing company, he said he acted as if the deal was done long before it was. He beefed up inventory, added sales staff and generally increased his expenses.
But as the buyers delayed, “I got myself in a bad position,” he said, adding, “I said, ‘Let’s hurry up and close.’ I didn’t get near as good a deal as I should have.”
Matt Matich, who ran a trucking distribution company, said he realized during the sale of his business that he and his partner should have consulted a business adviser earlier because they could have expanded the company themselves and sold it for a lot more than they ultimately received.
“We thought of the business as having three legs: you sell, you recruit, you operate,” Mr. Matich said. “We hadn’t looked at the fourth leg, which was finance. Had we had the fourth leg, we would have gone a different route.”
The mistakes people make in selling their businesses stay with them long after the check has cleared and their new life has begun. They may have a considerable financial cushion, but because their wealth came from building something from nothing, they had a deep attachment to the company. It was their livelihood and their path to wealth, but it was also a part of who they were. Not managing the sale as best they could continues to gnaw at some of them.
For small-business owners seeking to sell in what remains a strong environment for mergers and acquisitions, the lessons learned by those who have gone before them can be instructive.
“Selling a business is not all about the financial side of it,” said Terry Mackin, managing director of mergers and acquisitions at Generational Equity, a business brokerage. “Most are focused on the dollars, initially. They want us to tell them how much their business is worth. But they find there’s an emotional part to this. Eighty percent of the deals I’ve done have not sold for the best dollar offer.”
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Jay Messing, senior director of planning for Wells Fargo Private Bank in the Northeast, said he often advised people looking to sell their businesses to become more formal with everything from books and records to how family members are treated in the business.
“People aren’t as introspective as they could be,” he said. “They’re not running the business as tightly as they could be because they’re running it for themselves.”
The first piece of advice is to start running the business as if a buyer will come along at any moment. “Whether it’s now, five years or 10 years down the road, if you’re not ready and that buyer comes, you may not get that price that you want,” said Karen Reynolds Sharkey, national business owner strategy executive at U.S. Trust.
Dave Turbenson said he kept his company lean. In the years around the recession, his business, a leader in selling supplies for making beer and wine at home, grew at 30 percent a year for four years straight and was doing $15 million in revenue. But he said he was under constant pressure to manage his 70 employees and keep pace with internet orders coming in.
In 2010, when Mr. Turbenson had his business valued, the business broker put its worth above what he had imagined. By the end of the year, he had sold the business and walked away three months after the deal closed.
“It was striking while the iron was hot,” he said. “As it turns out, the whole industry had about 24 months left of sheer natural growth.”
Another piece of advice is not to run the business as if the deal is done before it is. Mr. Ludwig learned his lesson. He and his partner bought back the company in the late 1990s and ran it until four years ago when they sold it a second time.
When an offer came from a division of Sumitomo Corporation, a Japanese conglomerate, Mr. Ludwig said the due diligence process was incredibly slow, but he kept running the business as if there were no buyer. When a tsunami hit Japan in 2011, Sumitomo withdrew its letter of intent.
But eight months later, the deal was back on and the value of the company had increased.
“Mentally, an owner has to understand that getting to that letter of intent and signing an agreement is Phase 1,” Ms. Sharkey of U.S. Trust said. “The big part is going through the due diligence. It could take another six to 12 months after signing the letter of intent.”
Part of running a business to be sold is regularly reviewing how it is doing relative to its competitors. Mr. Matich said he built his trucking company, MSS Distribution, with clients in the automotive, window and door and retail sectors, over 15 years but sold it when he felt the business was stuck.
“I remember having this meeting with my customer and saying, ‘We can’t solve their problem; we don’t have the size,’” he said. “We needed to make a change to help service our customers, as they had greater needs.”
He and his partner began looking for buyers in 2014 and sold the company to a private equity firm last year. During that process, though, Mr. Matich said he belatedly realized that he and his partner might have been able to expand the company on their own or at the least build a firm that would have been worth more.
“You’re worried about sharing your info, but when you’re sharing your info you’re also gaining insights on others,” he said. “We were systems and process guys but we needed a finance guy.”
As to the financial offer itself, the amount is going to vary depending on the buyer and also what the buyer wants from the business owner. “They hope for the best offer and throw them the keys and go their merry way,” Mr. Mackin said. “One of the things we tell them is that’s not always the case.”
Mr. Ludwig said he wanted an all-cash deal so he could retire. He got that, but had to agree to consult for two years. “They honored those consulting contracts and paid us but they never used us,” he said.
But, he added, good advice from their lawyer kept them from being dependent on any additional payments. “Our attorney said what you walk away with is 80 percent of what you can count on,” he said. “That was some good advice.”
Although the money may be good, the buyer may not be right for the company. Rick Spilde said he and his partner sold their green energy company, Essential Energy Services, in 2009 to an investment firm in Texas, where the company was based. “Our company was at a plateau,” he said. “We needed more management or more sales staff. We were maxing out our capacity.”
He consulted for the investment group for two years and then moved to Florida to retire. But then the company began to fail.
“The people who ended up buying us were probably not the best fit,” he said. “They basically bought the company to own it, not to run it.”
A few years ago, Mr. Spilde and his partner bought back their company, paying far less than they sold it for, and put a professional management team in place.
“The first time around, we were trying to build the company,” he said. “The second time around, we’re as busy or busier than before but we’re letting our employees run the company. This time, if we go to sell it, we have some really key people in place who aren’t owners and that means the company will survive.”
And that is a feeling about as sweet as the money itself.
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