How to Help Business Owner Clients Sell Their Firm

Our firm is often called upon to do what we refer to as a “salability review” for our clients. When we do that, we study the financial histories, inquire about operating issues, review real estate relationships and study M&A markets and recent transactions to get a strong feel for pricing and trends. The net product of such review is two-fold. We provide an estimate of likely salable value today, along with our best approximation of percentage likelihoods at various pricing thresholds. We further present an analysis of selling strengths and weaknesses to give owners a sense of what business attributes need to be nourished, or corrected, in advance of a sale in order to maximize potential outcomes. We charge $10,000 for this analysis, and we typically spend between $20,000 and $25,000 worth of time to put it together. It’s worth the write-off to us, though, because it lets us get to know the prospective client, so we really know if it’s a job we can do well; and if we do later get to sell the company, hopefully it will be a company worth more.

Encourage your business owner clients to think about real salable value, and to keep tabs on it as it changes, to identify the right possible timing for their move.

A friend of mine, who is an investment advisor, seems to do a magnificent job in coaching his mid-sized company owner clients. (He also seems to consistently win their eternal loyalty.) He emphasizes business value by taking every owner’s business value into his asset analysis each year, with a simple conservative value based consistently on four times the pre-tax income. That’s usually very safe – manufacturers might sell for between five and seven times pre-tax earnings, whereas an “average” mid-sized service company might go for more like three to six times pre-tax earnings. His objective is to put in a safe number that should be readily realizable someday. As owners watch how that value changes over time, and as they see how significant it may be to their overall net worth, they begin to take a heightened interest in its evolution.

If a little bit of discussion with your client tells you that they may consider sale, encourage them to get professional help. Private investment bankers who focus on the sale of companies can often get two or three times more in cash at close than the do-it-yourselfer. Why?

• They have experience. The owner operator does not.
• A careful and competitive sale takes an enormous amount of time. (We average more than 2,000 hours per transaction.) It’s impossible for a seller to spend the needed time all alone.
• Your client needs an advisor with an incentive to get the deal done. (Not his CPA, who will lose a client at close; not his attorney who has a myriad of scheduled appointments every day.)
• A third party can describe your client’s company much more effectively than he could ever do himself and still remain credible. (It’s like if a friend wants to get you a date and says, “He’s a good-looking, witty, great guy”–it plays much differently than if you say it yourself.)
• An outside agent creates the feeling of competition. If the owner has hired this firm specifically to sell his company, buyers know that there will be competition, and they respond accordingly. (Al Capone said you can get a lot more with a kind word and a gun, than with a kind word alone. The seller’s agent for competition is his gun.)