Selling a small business
Real life success stories

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Case #1: This seller came out in good shape, even from a “forced sale”
Midwest Building Supply Company

Frank Hill had owned Midwest Building Supply Company through times both thick and thin. The company, based in a Midwest city of about 75,000 people, had prospered during building booms and suffered during down times. To minimize the peaks and valleys, Frank had diversified into distribution of some construction tool lines, but even with diversification, the latest down period had been particularly difficult. The company was $400,000 in debt and, even worse, Frank had reliable information that a national building supply chain was seriously considering opening a store in his city.

three biz peepsFrank resisted the idea of selling – he was 55 years old and had three kids in college. He couldn’t afford to retire and his employment options weren’t very attractive. On the other hand, given the company’s near-desperate financial position and the impending new competition, he took the first step toward selling.

Hill got the name of the regional sales manager for the national chain from a sales rep and made a phone call. He was low-key, saying that he had heard about the chain’s interest in his market, and added, “My business is not on the open market – I’m not trying to sell – but if I were offered the right price, I would be open to discuss a sale.” The regional manager scheduled a visit, adding he’d need to clear it with the company president before they met. That told Frank that the company president was the real decision maker and he should not lay all his cards on the table at that first meeting.

The first meeting was casual. Frank chatted about the industry and encouraged the company to check his background, but didn’t hand over specific financial information, especially about his store’s debt. The meeting ended well and Frank waited…and waited…and waited. Six weeks later, he heard from a sales rep that the chain thought he had lost interest in selling. Frank immediately called the company and re-opened discussions. The chain’s president scheduled a visit and said he was bringing his VP of Finance for serious negotiations.

With the help of his attorney and accountant, Frank assembled his financial information and planned a strategy. When the president arrived, the parties met at Frank’s attorney’s office. The president outlined the needs of the chain – they were only interested in assets and would not pay for goodwill or intangibles. Frank agreed to these general terms, then outlined his general needs, stating he would like to retain his tool line distributorship assets – this would be his new employment and also allow him to retain two salesmen who had been with him for years. Since the chain had little interest in the distributorship, there were no problems with this arrangement.

The big stumbling block was the valuation of the assets. Frank had to bite his tongue when the chain offered less than 50% of the purchase price on almost-new forklifts, racks and other equipment. “I had bought top-of-the-line on everything and maintained the equipment extremely well. It was like new,” he said later, “I really had to struggle to keep from taking their low offer personally.”

Frank did not accept the first offer – in spite of his advisors stern warnings that he might be blowing the deal. The chain offered $450,000 for the building and inventory, which Frank accepted. But he said the $90,000 offer for the equipment was too low, calmly pointing out that the quality and condition were excellent. After several tense minutes, the chain raised the equipment offer to $150,000, lower than the $220,000 that Frank wanted, but still acceptable.

Since it was an asset sale, Frank was also able to negotiate keeping some office furniture and equipment that the chain wasn’t willing to pay fair value for, as well as some land that Frank’s company had owned. The parties shook hands, the lawyers hammered out the details over the next three weeks, and the deal closed. Frank paid off his $400,000 debt and walked away with $200,000 in cash, land worth $70,000 and a job in the distributorship he still owned. He had done his best with a desperate situation.

Case #2: Dress up your company for a successful sale
Eastcraft, Inc.

Michael East was the second-generation owner of Eastcraft, a maker of small gift items sold in luggage stores and department stores. Michael’s mother, Theresa, started Eastcraft, and the company provided a comfortable (but not luxurious) living for the family as Michael grew up and attended college.

Michael joined the company after earning a business degree, and his joining the firm allowed Theresa to spend more time selling. Sales increased over the next 10 years from $1.5 million to about $5 million. Then the unthinkable happened – Theresa was diagnosed with a terminal illness and passed away a few months later. Michael had little direct sales experience but knew enough to run the company, and fortunately the customer base was strong. sign the darn paper!

Although the five years following his mother’s death were extremely busy as Michael worked hard to keep the business on a successful track, he often pondered life as a small business owner. Theresa had worked 60+ hours a week for the 35 years she owned Eastcraft, and passed away before she could sit back and enjoy the fruits of her labors. He feared the same thing would happen to him. At the age of 42, Michael vowed that he would sell the company and retire within three years – and concluded that he would need to sell the business for at least $6 million for accomplish his goal.

After doing some initial research into valuations in his industry, Michael estimated that the company was currently worth about $4 million. That meant he would have to increase the value by 50% to reach his goal. He set up a plan to boost Eastcraft’s value:

Step 1: Increase sales to $6 million from the current $5 million annually.

Step 2: The company balance sheet had practically no retained earnings – Michael and his mother before him had typically paid out the profits in salary and expenses to minimize taxes. He needed to build some retained earnings in the balance sheet to make the business more attractive to financial buyers.

Step 3: Michael had no children to bring into the business and had managed the entire operation pretty much on his own. There was no potential successor if Michael left. Realizing this would be a potential drag on the selling price, Michael hired a competent person to be his second-in-command.

Step 4: New products were not Michael’s strong suit – Theresa had the sense for what consumers would buy. But he realized that buyers often see risk in an older product line without new product ideas in the pipeline. So he made a point to spend time with store buyers to learn about trends and came up with a list of ten new product ideas that Eastcraft began to develop.

Michael worked very hard to increase sales and he reached his goal of $6 million in sales within two years. The sales increase helped profits, but he also cut non-essential expenses – not critical ones, because he knew a savvy buyer would spot any critical cuts and adjust them back into the expenses.

It was nearing time to put the company on the market. The last step was to fine-tune the cosmetic image of the company – like most owners of small companies, the beauty of Eastcraft’s offices, plant and warehouse were not a high priority of Michael’s. But he realized the importance of curb appeal so had the building re-painted inside and out, and re-organized the office to clear years of accumulated clutter. This was also a good way to find and organize the records that he knew buyers would want to examine.

Today, Michael is living his dream. He sold Eastcraft for slightly more than his goal, and has retired. In his case, preparation and planning paid off handsomely.

Case #3: Use advisors wisely
Butler & Jones, Inc.

Tom Butler and Julie Jones bought the patent rights to a small golf accessory in 1988, and by 1995, had grown their business into $1.2 million in annual sales and a product line with over 35 SKUs. But both were burned out – to jump the business to the “next level” required more energy and risk than they were willing to give. At the same time, they realized that standing still in their ultra-competitive market would spell disaster for the company within a few years. They knew that, if they stood by, the company would quickly decline as more aggressive competitors passed them by. They decided to sell the business.

no way is this Tom and Julie Butler!Their first step was to visit their accountant. During their 90-minute meeting, the accountant asked Tom and Julie what they thought the price of the business should be. Tom had read that 1 x annual sales was realistic and he said so. The accountant proclaimed that this was probably an acceptable asking price but that he needed to perform a more thorough analysis. The meeting also involved discussion of business brokers (the accountant suggested talking to the only one listed in the city’s phone book), and general discussion of a selling plan.

A week later the accountant called to say that his analysis confirmed $1 million to be a fair asking price. Another week after they received the accountant’s bill – $400 for the meeting and the accountant’s “analysis” of the valuation. The accountant also mentioned he had a couple of potential buyers and would like to call them to discuss the business (He would not divulge company name or financials, of course, until the prospective buyers signed a confidentiality agreement).

Tom and Julie were disappointed in the quality of the buyers their accountant referred to them. It was obvious from early discussions that none of the three buyers were qualified financially. Tom and Julie did not want to spend time with unqualified buyers and took a hard line in qualifying them, including asking for personal financial statements. The accountant sent a bill for $250 for his time in contacting the buyers and arranging the meetings.

With expenses at $650 with only a confirmation of the asking price (which they already knew) to show for it, Tom and Julie gave up on the accountant as a resource this early in the sale process. They determined the accountant shouldn't be involved in the process until they had lined up a reasonable number of qualified buyers. Then, he would play a key role in suggesting deal structure and terms to minimize taxation. The accountant would also prepare financial information and reports.

Although they had a competent attorney for their general business needs, Tom and Julie contacted a different lawyer, one who had strong business sale experience. The attorney helped them set up a strategy for selling their company. Again, business brokers were discussed, but the attorney warned that a $1 million company is pretty “small potatoes” for most brokers, and they would probably be looking at an up-front fee plus a 10 to 12% commission at close. Tom and Julie interviewed two brokers – one wanted $5,000 up front plus 10%. The other wanted a $3,000 per month retainer up to a maximum of $35,000, with a 12% commission. Realizing this would drain a huge dollar amount off their sale proceeds, Tom and Julie decided to market the business without a broker.

Because their industry (like many) was relatively small and close knit, keeping the company’s identity and location confidential in advertising would be necessary. Their attorney agreed to let them use the law firm’s mailing address (the law firm was located 75 miles from the city the company was located in) in their ads, and forwarded responses received from their classified ads. Tom and Julie obtained a toll-free fax number so they could give the number in ads without divulging their location. They relocated the fax machine to a room that could be locked when the office was closed, and was located away from their small office staff.

They realized the selling process would take several months, and perhaps a year to close the deal. They agreed to both work diligently in the business during the selling process. A mistake many sellers make is “easing up” on running the business and focusing only on the sale. It is important to run the company “business as usual” right up until the closing day.

Ads were placed in national business publications, and response was good. Tom and Julie did the initial qualification of prospective buyers using the procedures as detailed in the Business Sale Center manual. When they reached the point where they were required to discuss possible terms and deal structure with buyers, the owners worked closely with their accountant and attorney to make sure that that buyers were approaching the deal structure in the proper manner. Their attorney reviewed the top three Letters of Intent and gave advice as to which potential buyer was the best choice.

As closing approached, the accountant was called on to prepare up-to-the-minute financial statements that the buyer could rely on as an accurate picture of the company. Their attorney reviewed and modified the purchase agreement that was prepared by the buyer’s lawyer and nitpicked a lot of the fine points with the buyer’s attorney. Some hard negotiating was required at times, and their attorney played the "bad guy" role so that the relationship between seller and the buyer on friendly terms.

Tom and Julie’s attorney also carefully prepared and reviewed the representations and warranties portion of the purchase agreement and negotiated terms so that future payments would be well secured. Since the buyer and seller were across the country from one another, there were limited face-to-face meetings – the buyer spent four days with Tom and Julie in their offices on due diligence matters. During negotiations, three phone conferences of about an hour each were held, including the buyer, seller and both of their attorneys. The attorneys also had several discussions between themselves. The total selling price was finalized at about $1.3 million, approximately one-half down and the rest a structured as a combination of covenant not to compete, consulting agreement, earn out, interest and a small balloon loan payable after five years. Closing was held at the offices of the seller’s attorneys.

Not counting the first $650 of accounting fees, total professional fees (accounting and legal) for this sale were less than $19,000. Total marketing costs, including advertising and toll-free fax number, were less than $2,000. The total expenses of $21,000 were approximately 1.6% of the total selling price.

The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing)

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© 2009 First American Publishing
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