SCORE Business TV – Exit Strategies – The 10-Step Selling Process (Steps 1 to 5)
Dennis Zink: Welcome to SCORE Business TV. In this series, experts share their opinion with business owners on a variety of topics. Today, we’re presenting part three of a series of episodes addressing exit strategies. Today’s topic is the 10-step business sale process. In part one, we explore the important considerations sales must understand before exiting their business. In part two, our experts presented ways in which businesses are valued. Today, we’re going to outline the steps in the selling process leading to a successful exit. We will have a freeflowing dialogue on each of these steps. But before we begin, I’m happy to introduce two experts in the field. First, we have Peter Gruits. Peter has had a long and distinguished career as a banker, realtor and business owner, and he leads our Exit Strategy Program for SCORE. He’s a SCORE mentor, and SCORE by the way is a 55-year old nationwide nonprofit organization providing free mentoring services to business owners. We’re a resource partner of the Small Business Administration. And we’re also happy to welcome Matthew LaPointe, principal at Blalock Walters P.A, a Sarasota and Bradenton, Florida law firm. Matthew is a principal in the firm’s business, corporate and healthcare law practices. Matthew represents companies in all business sectors. Welcome gentlemen. Today, we’re going to examine the 10-step exiting process. Step one is arrange for professional or business intermediary to represent your company. Why would a seller of a business want to do that? Matthew, let’s start with you.
Matt LaPointe: Well, you know, I think it’s important to understand that just because you’ve a built and know how to run a business, that doesn’t mean you know how to sell that business. And there are experts in all kinds of fields and there are experts in selling businesses. You should look for an investment banker or a business broker who has experience in your particular type of business. They can really add value, they understand your business, they understand the industry, who the potential buyers are. I just think it’d be foolish not to use an expert in a case like that.
Dennis Zink: Peter, does SCORE function as a business intermediary for clients?
Peter Gruits: That’s a good way to put it. I think one of the biggest challenges any small business represents or has is really how to use professional services. I mean, professional services are expensive. Professional services have a very unique niche that they have to get involved with. So, what we do at SCORE is we have a team of exit strategists who in effect provide this confidential, free and experienced consulting, not consulting, mentoring. That in effect helps a client understand what the process is all about and how to prepare themselves for, as Matt says, the professional services. You have to know that if you sit down with an attorney, that clock’s ticking. You have to know if you’re sitting down with a CPA, that clock’s ticking. And if you go to them as a blank tablet and you say, okay, help me out, that clock’s ticking. So what we try to do at SCORE is not take away from the fees of the professionals, but in effect say to the client, you have an opportunity to prepare to use a professional efficiently, and to use a professional efficiently means you need to know where you got to go. Where am I going, why am I doing this, how am I going to do this, and what are some of the things that I don’t know that in effect SCORE can help me with. So that’s why we set up the Exit Strategy Convention. I mean, Dennis, in your foresight on doing this, we really wanted to help existing businesses as much as we wanted to help brand new businesses. And so, that’s why we went in this direction.
Dennis Zink: Step two is conduct an in-depth review of the business, including financials, leases, contracts, assets and liabilities. Can you elaborate on what a seller should do in that regard?
Matt LaPointe: Absolutely. You know, Peter and I were just discussing before the show how important it is to plan your exit strategy. I’ve found that if a client comes to me and says, I want to sell my business in the next six months or a year, I say you’re too late. You should have been here five years ago. I mean, you really do need to plan your strategy. And so I would say, really, five years ahead of time is the time to start planning. So, when you talk about doing the in-depth review of your company, what we’re looking at are of course from the legal side, we’re mostly looking at contracts. We’re making sure you have your management team under contract with appropriate non-competition clauses, with appropriate assignment of intellectual property clauses depending upon the type of the business of course. But, you know, the right kinds of documents in place there. If it’s a business that’s owned by more than one person, we have to make sure you have a good buy-sell agreement, a good agreement that discusses what happens when it’s sold, how the two partners are going to handle that. You also want to look at intellectual property, do you have the appropriate copyrights or patents or trademarks. You want to look at the vendor contracts or contracts with your customers. This is what buyers want. Buyers want to buy a business that has all these things in place. A buyer is not going to want to buy a business where the three key employees have no contract and could leave the day after the buyer buys the business. So, this is the kind of in-depth review you need to do before you even think about marketing the business and talking about, talking with an investment banker or what have you. So those are the things that I would look for. On the financial side, mostly this would be the CPA but I would get involved in this a little bit too. You want to see what do the tax returns look like. Has this company been doing a great deal of creative accounting? If they have, now’s the time to clean that up before we go to sell.
Dennis Zink: I knew you were going to say that. Peter, how does the SCORE exit strategy team get involved with that step, conducting in-depth reviews? Does the team get with the client and explain what they need to do or?
Peter Gruits: What we do is as a mentor, is we have like three different levels that we participate in. The first level is for you to tell your story, tell your story to us as experienced and non-fee charging experts and let us see if your story makes any sense. And as you tell your story, it’s kind of like when you tell a joke, sometimes you remember all the components and sometimes you don’t. Well, we want you to tell a complete joke, not that your business is a joke, but we need you to tell your whole story. Once you’ve told us your story, then we have to go back as your mentor and say, okay, let’s validate that. Let’s validate that your story really matches where you want to go. Why are you doing this? One of the big things that is missing in most small businesses that try to sell their business is the absence of a marketing plan. Well, I’m not going to own it anymore so what do I have to worry about as far as a marketing plan? If you don’t have a marketing plan and you’re trying to sell the business to somebody else and they’re looking to invest their money in it, they’re going to say, well, I didn’t want to buy a dead cat. I was looking to buy an ongoing business. So, we at SCORE are more involved in trying to get your story together. Now, once you’ve got your story together, you would have to reduce that to writing. A lot of people can tell a great story, but when you reduce it to writing, they fall apart. So, the SCORE Exit Strategy Mentor is there to help you reduce that to writing in such a way that you can communicate without having to tell a two-hour story every time you sit down with somebody. So if you’re going to use an attorney, you’re going to use a CPA, you have to have an idea of where you’re trying to go.
Dennis Zink: The third step is obtain a business valuation. Why is a business valuation necessary?
Matt LaPointe: Well, it’s very important for the business owner to have reasonable expectations. In talking to business brokers and investment bankers who do this for a living, they tell me that that is often their biggest problem, that the business owner thinks the business is worth a lot more than the market. So it’s important to have a business valuation done by an appropriately credentialed expert to come up with what is a fairly solid, reasonable expectation of what the company will sell for. It makes it a lot easier when the business owner has in mind that reasonable number rather than a pie in the sky number that really
Dennis Zink: Peter, can you weigh in on that?
Peter Gruits: I think a business owner needs to understand that there are ways to increase the value of the business, and that when you get an appraisal or you get a number in your head and then you look through all the financials, you look through the last three years, you do pro-formas, you look at your tax returns. And as you go through that process with a SCORE mentor, in effect, you’re going to begin to realize the reality of your situation. If it is that you want three times the earnings or the EBIDTA or whatever’s available, maybe your EBIDTA is not high enough. So you need to in effect engineer your business so that you can increase that value so you can get the number you’re looking for. That isn’t offending somebody if you say, well, my business is worth a million bucks. Well, maybe it isn’t at this point in time but maybe you could make it worth that as you go along.
Dennis Zink: And for our audience, EBIDTA is earnings before interest, taxes, depreciation and amortization.
Peter Gruits: Yeah, and that would apply to larger businesses. Smaller businesses would be in effect, we’d be looking at it after the tax return.
Dennis Zink: They go by what’s called SDE, seller’s discretionary earnings, which includes their own salary, correct?
Peter Gruits: Yup.
Dennis Zink: Step four is prepare a business prospectus. Matt, why don’t you start with that one. What should a seller include in their business prospectus?
Matt LaPointe: Sure. So again, a business prospectus, I would call it a selling document or a sales document. It’s a document where the business broker or the investment banker would help you to draft what is essentially a marketing piece. And it
describes your business, describes in general who your customers are. It describes in general what your sales are. It describes your industry, your location geographically. It’s a marketing piece. It’s to send out to potential buyers to get them interested in your business. The best thing would be if that sales document started some kind of a bidding war and you had multiple suitors trying to buy your business, that would be terrific. But putting that together is frankly not something that I get involved with as the attorney. It’s generally the business owner in cooperation with the broker.
Dennis Zink: And that typically is done, is sent out as a blind memo. In other words, you don’t mention the company’s name, you may have a number there and then they respond to that for more information.
Matt LaPointe: That’s right Dennis because, in this stage of your business sale, you really don’t want it out there in public that such and such a business is for sale. You don’t
want your key employees to get nervous. Gee, what’s my future at this company? You don’t want any of that. So, you do need to keep it confidential. And so, these marketing brochures are generally, they do not identify the name of the company, but they identify enough of the company and enough of the information to generate interest on the part of buyers.
Dennis Zink: Just as a point of interest, one of my companies had one who was a one pager and it got eight responses and eight offers on the company. So it created a bidding war, and of course that drives the price up. So Peter, let’s look at the
SCORE, the exit strategy program, and how you get involved with a seller as it relates to the business prospectus or business selling memo.
Peter Gruits: Well, we have spent time developing what we call an elevator pitch. In effect to say, here’s what my business is all about, here’s what I do, here’s how I do it and this is why it’s of value. So, really, this is kind of an executive summary of a larger deal that you’re looking at. And it allows the customer, the client to in effect tell their story in an effective and compelling way. They don’t do that the first time out. They’ve been working on their business for 20, 30 years and they’ve never really had to tell their story. In particular to tell their story based on what a buyer might be interested in, a SCORE mentor is going to listen and in effect say, well, you’re off base a little bit there. You’re going too far here. You need to bring it back, I need to have you anchor that particular idea.
Matt LaPointe: You help them refine the story and bring it down to the basic issues that buyers will want to know.
Peter Gruits: And a broker is really just going to try to pick up the stuff that you’ve talked about and be creative in what they’re going to write. So if you don’t give them good information, they’re going to write a lousy listing. So you really want to, in effect, spend time to develop that and SCORE is a great place to have that experience. We find when we do seminars and workshops that we have people do an elevator pitch. And the difference between their elevator pitch here and when they’ve worked with us down here is so significantly different, it’s like you don’t even see the same person. So it’s very important that you take, you have to exercise, you have to work to this. You can’t do it just by talking in the shower.
Dennis Zink: Step five, develop a marketing strategy. Now this applies more to Peter than you Matt but why don’t you weigh in first and then we’ll go to Peter.
Matt LaPointe: Sure. Well, no, you’re absolutely right. As the lawyer, I generally do not get involved in this sort of thing other than to advise the client to be truthful. We certainly don’t want to be, I mean, puffery is okay but we certainly don’t want to have untruths in our marketing. This actually relates back to the first question you asked, which was why hire an intermediary, why use a broker or an investment banker? And this is why. These guys know first to whom to market, right? You don’t take a scattershot approach when you’re selling a business. You market the business to the people who are most likely to buy it. And that could be quite a small segment. It’s not the universe. And so, I think part of the marketing strategy is determining who are the potential buyers and figuring out the best way to get before them. I’m sure SCORE probably helps the people do that. How do they do that?
Peter Gruits: The key to a marketing plan, of course, is to know who your target market is. Just as you’ve said, you’ve got to really understand who you’re trying to sell it to. And once you have that target market now, you’ve got to understand your competition, you have to understand the value proposition that you’re bringing to those customers. And in effect, how are you going to deliver that? How are you going to market towards them and what issues do you have to do? One of the things that I think is really compelling in a selling brochure is to say, I have a marketing plan but I don’t have enough money to execute the whole thing. And that’s one of the reasons why I’m looking to either raise money or sell my business is my business will do so much better if in effect I’m able to institute this marketing plan, I’m able to say, I can do this advertising, I have this target market in focus. I’m in effect being able to expand my services and for the 10,000 or $20,000 I have to invest in my marketing plan, I’m going to get back 100,000, $200,000 in sales. That is a compelling argument that most experienced business people forget. And we as SCORE mentors, we as SCORE as an organization really push on that and really look to in effect to develop a comprehensive good solid marketing
plan. Rick Ross, one of our co-chairmen with Dennis has, one of his favorites is having a marketing calendar. Layout the year. What are you going to do throughout the year to market your business to more of your existing clients and to new clients?
Matt LaPointe: Well, that same principle would apply in the sale of the business itself. That broker or investment banker would use those same principles in marketing the business as the product. I mean, you’re thinking, you’ve gone through all your life working on your business, marketing your products. Well now you’re marketing yourself, you’re marketing your business. And so it’s important to figure out how best to position your business for sale.
Dennis Zink: So, Peter, what about advice for removing relatives, having your children on the payroll, that kind of thing?
Peter Gruits: As they say, it’s family. Well, I think it’s very important to understand when we’ve talked before about the fact that we at SCORE are there to help you stop up the value leaks. And you’re leaking value if you don’t have the best possible people working for you. You’re leaking value if you’re not in effect reengineering your balance sheet and your income statement. One of the areas that people don’t understand, we see all kinds of financial statements, small businesses don’t focus on the cost of goods sold like they should because they don’t, they put everything in expenses. You should in effect be measuring what your gross margin is and in effect how it changes month to month.
And the same thing applies with your family. Are they working full? Are they goofing off? Are you holding them responsible? And it’s a difficult issue to do but if you’re trying to get the most money for your business that’s going to in effect help you pay for your retirement, you better get active on this. And SCORE helps you to determine that. Our SCORE mentors are trying to focus on what is going to make the most valued decisions for your business as you take it to market.
Dennis Zink: And where might be some places that you would list your company for sale?
Peter Gruits: Well, there’s probably a dozen different ones. BizBuySell(.com) is one that is
very, probably the largest one. And you may want to in effect list it, list some kind of little tombstone ad in an association (publication) that you might belong to. There’s a whole series, I mean, we go over that in reference to trying to market with that. And that’s something you should be aware of. There are a lot of businesses for sale and there are a lot of businesses that never gets sold. And you’re not going to get your business sold if you don’t step up your game.
Dennis Zink: I’ve heard that percentage of 10 to 20% of the businesses that are out there that are listed do not sell. Does that sound about right, Matt?
Matt LaPointe: I actually think it’s higher. I do. And I think the reason is a lot of the business owners don’t do what we’ve been talking about here. They don’t get good advice. They don’t get a good broker or intermediary. They don’t do some of the things we’ve been talking about. You know, you mentioned a place to list the business. In addition to the things Peter was talking about, I would say, don’t forget about your competitors. I’ve had many clients who’ve been acquired by competitors when they’re ready to go and the broker gets involved, that’s one of the people to whom they send that marketing pamphlet. And a lot of times, the competitors see that as a strategic acquisition to expand their footprint, expand their business. So that’s a good place to look.
Peter Gruits: Well, the next step to that of course is when someone has shown an interest in your executive summary, then in effect, that’s when it comes down to nondisclosure agreements, that’s when it comes down to a letter of intent. That’s when it really is a very full-blown thing. That’s really when an attorney is there to do the job necessary to protect you.
Matt LaPointe: Yeah, that is when we really ramp it up.
Dennis Zink: And of course, and near the end is the due diligence process which is always lots of fun. Can you just explain briefly what that is?
Matt LaPointe: Oh, sure. So, once you’ve got a purchase and sale agreement in place, whether it’s a stock purchase agreement or an asset purchase agreement, a very important part of that is the buyer has an opportunity to kick the tires, to do what’s called a due diligence investigation. To investigate all of those things that were in that marketing piece to make sure they’re really true. Check your contracts, check your financials, check your product, your intellectual property, your corporate documents that you have the proper bylaws and all that legal stuff. All of that stuff gets really run through the ringer, it can actually be quite an arduous process. And I often sit down with my clients before that process to prepare them for it because the business seller oftentimes, they’ll sometimes get their back up a bit. Well, why are they asking me that? Well, why do they need to know that? Well, I need to prepare that client for these kinds of questions and help them understand that it’s part of the situation. They’re spending good money to buy your business. They want to make sure that they know what they’re getting.
Dennis Zink: Matt, you hit the point that I wanted you to, which was relating it back to the marketing strategy, because it really does. If you make representations and warranties, the buyer is going to look under the sheets and see what’s really
Matt LaPointe: That’s right. You have to put your money where your mouth is.
Dennis Zink: This has been a very complex topic and we didn’t get but halfway through it. So, in our next episode, we’re going to continue with steps six through 10. Do you have any final thoughts, Matt, I’ll start with you on this topic?
Matt LaPointe: My final thought would just be plan. I think as you say, this is a complicated topic. We’ve gone through these first five steps and to me, what runs through all of them is planning. This is not something that you should expect to do immediately. You should think ahead about when you want to exit your business and plan for it.
Dennis Zink: Peter, how about you?
Peter Gruits: Don’t sign anything. That’s my first statement to you. Until you plan, until you know what you’re doing, the sharpies will pick your bones. Don’t sign anything. Get a SCORE mentor to help you out with this to get through this pothole road that you have to walk on. If I didn’t say it emphatically enough, I’ll say it again, don’t sign anything.
Dennis Zink: Matt, how can our viewers reach you?
Matt LaPointe: The best way to reach me would be email, [email protected], and
I’d be happy to talk to anybody about this stuff. I love it, it’s my passion.
Dennis Zink: Peter, how about you?
Peter Gruits: For a qualified SCORE mentor, you need to go to score.org and go through the process. We are the Manasota SCORE chapter in Sarasota and Bradenton. And just request a mentor and we’ll be more than happy to talk to you.
Dennis Zink: And the price is?
Peter Gruits: Zero. It’s a very effective pricing scheme that we have.
Dennis Zink: And Matt can’t say the same, but anyway. I would like to thank our guests for appearing on this episode of SCORE Business TV. I’d also like to thank our sponsor Wells Fargo. Please tune in for our next episode when we continue part two with the 10 steps in the selling process for your business. Until then, this is Dennis Zink saying, thank you and have a great day.