In selling a business, there should always be goals and objectives in place as well as an understanding of the possible consequences of any decisions made. In this episode, Tad Render discusses the “commandments” that need to be followed when deciding and preparing to sell. Tad is a partner with Miller, Cooper & Co., Ltd. where he leads the Transaction Advisory Services Group. His decades of experience working with buyers and sellers in varying industries taught him what he knows and shares with others. His experience includes dealing with financials on the buy and the sell side, due diligence, and consultations on mergers and acquisitions.
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Tad Render: The 10 Commandments Of Selling Your Business
We have a repeat guest joining us. Tad Render is the Head of the Transaction Services Group at Miller Cooper & Co., Ltd. Miller Cooper is a mid-market accounting firm here in Chicago. It’s the eleventh largest and a tremendous firm. We’ve had the opportunity to do a number of transactions with Tad and his group. They are an excellent organization. If you haven’t checked Tad’s previous episode, it’s full of great information for both buyers and sellers, people who are considering selling their business and how to prepare it. In this episode, I sit down with Tad and we’re going to talk about the ten commandments of selling your business and what you need to know about as an owner of a business if you’re looking to prepare it.
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Tad appended an article with a small assist from me labeled The 10 Commandments of Selling Your Business. It is an excellent overview of the things that owners of businesses should be thinking about. I contend from the day you buy or start a business, but certainly a couple of years before you’re getting ready to exit the business. Tad was a previous guest in one of our early episodes. It’s an episode that has gotten a ton of downloads. The message around accounting and quality of earnings has resonated with the community. I’m excited to have Tad back. Tad, welcome.
Thank you for having me back, Domenic. I appreciate it.
You’re the head of the transaction services group. Maybe you could talk a little bit about Miller Cooper and your group and what you guys do.
The Miller Cooper is a Chicago based accounting and tax firm. We have about 350 professions located in the Chicago land area. Our transaction advisory services group that specializes in buy-side, sell-side, financial and tax diligence and related quality of earnings work for lower middle-market enterprises.
You guys do incredible work. We know a ton of mutual clients that respect the work that you guys do. I’m happy to refer anybody at any time. Why don’t we dive into this article, The 10 Commandments of Selling Your Business? This is not to offend anybody. This is not in any way a religious slant on anything. It’s a cheeky title for what is a pact article of great information. Let’s dive into point number one which is understanding your goals and objectives as an owner. Talk a little bit about that and we’re going to try and give an example of what each of these points as well from owners that executed well or ones that didn’t. Tad, why don’t you take it from there?When the typical homeowner decides to sell their house, one of the first people they call is the realtor. Click To Tweet
Understand Your Goals And Objectives
There could have been ten more but I kept the article at ten. First, when understanding goals and objectives, we find that a lot of times that business owner’s main objective in wanting to sell their businesses to take some chips off the table. If this is the case, there are a lot of different options available to that seller that will allow them to diversify assets without going through a traditional sale process. For example, they can leverage the business and this can include leveraging real estate that’s related to the business. They can bring in a minority partner and can even consider potentially converting to an ESOP. A lot of times, sellers think they need to outright sell the business when there are a couple of other options available to them. Furthermore, a seller always needs to think about what their involvement wants to be with the business post-sale. Some people want to buy a sailboat and enjoy their retirement while other sellers want to stay involved with the business but not in a full-time capacity. It’s all important things to decide before going through the process.
On my mergers and acquisitions business, one thing that we offer is something called a presale assessment. It walks owners through a short 7 to 10-minute survey about what would they do after the sale and what are the things leading up to the sale that is most important to them. It’s a litmus test around are they ready to move away from the business? Should they consider some of these other options that you’re discussing like ESOP, recap or any number of other things that they can do that doesn’t mean they’re walking away from the business? With that said, let’s move on to number two. Number two is planning ahead. This has come up in so many of my interviews around preparation being such an important piece of thinking through an M&A transaction or at least a march towards an M&A transaction.
We perform diligence on many companies that we refer to as lifestyle businesses. This is where the owner is happy making a decent living from the business but they’re not looking to maximize enterprise value. That owner can make some tough decisions, whether it’s a personnel decision or a customer decision that can reap rewards by maximizing the value. A specific example is we’re looking at a business where the owner employed many of his friends as independent sales reps with way above market commission rates. We’re helping the buyer because the buyer stuck with these high commission rates and it’s hurt the value of the business. This is an example where the seller could’ve made some tough decisions prior to taking the business to market that could increase enterprise value.
Hire An Intermediary
It’s unintended consequences. We’ve seen some things on our side as well. We’ve even seen owners knowing that they’re going to sell the business within the next 1 or 2 years go out and make massive capital investments on things that they’re never going to reap the returns from. It didn’t move the needle on the value in and it didn’t keep the company relevant from adding preparation from a technology perspective. It was a depreciation attempt to lower their taxable income and depreciate it. It didn’t make any sense. Thinking through what makes sense as you’re marching towards a potential transaction that gets us to the next part, which is number three is hire an intermediary. Maybe you can talk a little bit about that.
We’re always proponents in a seller hiring a side advisor. In the article, when the typical homeowner decides to sell their business, one of the first people they call is a realtor. A lot of times small business owners are looking to sell their business without the assistance of a professional. It’s a mistake from day one. There’s a lot of value adds that a sell-side intermediary can bring. They keep things on schedule. It can help us through the diligence process. It can help evaluate offers and help negotiate those offers. They’re always good at playing the bad cop in negotiations with the buyer. The point is that sell-side advisors have done this many times. You’ve done it hundreds of times. They understand the nuances of a deal. This may be the only company a business owner ever sells in their lifetime. Applying the professionals to help you through the process will reap rewards.
It seems self-serving for me to be to opining on this particular point but it’s not hard too. I’d like to point an example in our firm. We represented a client that was a C corporation, and we knew immediately that there were going to be tax issues around that. When you have a C corp, you’re subject to double taxation at the corporate level and the individual shareholder level. We knew it from day one when we met the owner and we started having conversations with him about that. Interestingly enough, he went to his local tax guy and they did the tax work up and they came back with, “You’re going to have to pay double taxation.”
We knew better because we had done, thankfully many previous transactions where there are options around selling the stock or assets out of a C corp. We were able to help that owner think through that and implement that. At the end of the day, cut their tax bill by over 50% and saved hundreds of thousands of dollars. It’s one of many examples. I’m sure there are tons of intermediaries out there that have their own stories around that. The point is well taken. Why not leverage the experience of people who have done these hundreds of times? Chances are they’ve seen about everything and if they’re on the ball, we’re going to help you through your issue.
That’s another example of when talking about the C corp structure. That’s another example of planning ahead even before you have any inkling idea that you’re going to sell the business. That’s something that in the corporate structure that you can possibly change well in advance of the sale to avoid double tax. The same goes for if you have a goal to pass wealth to the next generation. There are some estate planning techniques that can be put in place prior to selling the business to greatly reduce current and future taxes.
Number four, prepare for a long process. I can’t believe how many times we meet with folks and they’re surprised when we tell them how long it’s going to take. I want you to give us your perspective on that.
Prepare For A Long Process
Everything takes time. I wish that transactions didn’t take so long to close, but it’s the nature of the beast. We helped a medical device company through a sale process and they went to market. They received fifteen plus offers. It took about two months to receive and evaluate all the offers and eventually stuck with a buyer. That buyer went through with three months of diligence. At the end of three months of diligence, they ended up having to back out of the deal. It’s was nothing related to the company that was selling. The buyer had some internal issues of their own. We were already in it for five months and another buyer was selected, which took time to negotiate. After three more months of diligence, the transaction finally closed. All in, it was a nine-month process. The intermediary did a good job of keeping the seller patient and keeping the process moving as this was a nine-month process. A lot of it was out of the seller’s hands.
Nine months is not an outrageous amount of time. We track our numbers and close percentages closely. At least our close percentage is when we get into diligence how long it takes. Now, the average is about ten months. It takes time.
If the seller understands going into it, it makes the process go that much smoother.
Point number five, Tad, this is up your alley. Make sure your books and records are in order.
Make Sure Your Books And Records Are In Order
The best case of having what I’ll call messy books and records is it will delay the process. In the worst case, it can hurt the valuation of the business. This correlates the planning ahead. You don’t want to start getting your books and records in order as the buyer sends their diligence team in. You’re going to want to do it well in advance of going to market. An example is we worked on a buy-side quality of earnings where the target had a bunch of unwritten leases. There are verbal rebate programs with some key vendors. There are unwritten bonus arrangements with some key employees. This delayed the process by at least a month while these agreements had to be negotiated and it ended up hurting the valuation of the business. Each one of these parties uses this as an opportunity to renegotiate their deals. This all related to having contracts in place that should have been there all along.
If you would’ve taken the time to clean that up, how much smoother that could’ve gone.
When you get involved in a sell-side engagement, one of your first questions is to start accumulating the contracts and making sure they have everything documented in place.A lot of small business owners sell their business without the assistance of a professional. It's a mistake from day one. Click To Tweet
There are many things when it comes to contracts. Are they assignable? Do you need approvals? If so, what do you have to go through to get the approvals? We went through this with a large media client that had clients that were in the Fortune 100 to 500 range. As you can imagine, there were lots of sticky issues with those contracts but the client had done their homework and had prepared in advance. By the time we were going to market, they had done a great job of getting their arms around what had to happen there. It made for a much better discussion with the buyer diligence and ultimately on closing the deal. Moving on to point number six, hiring experienced professionals.
Hire Experienced Professionals
When it comes to selling your business, you want to consider who your advisors are and to make sure that they have experience in the M&A space. You may have used a great corporate attorney for years but if that corporate attorney doesn’t have transaction experience, they may not be the person for the transaction. It’s the same thing that goes for your account. An experienced deal accountant is going to make sure your financials can stand up to the scrutiny of a buyer or buyer’s advisors. An experienced deal attorney can help you negotiate the purchase and sale agreement of the business. They can also protect you from reps and warranties that are going to be included in that purchase and sale agreement.
I have a great example of this. It’s not on the accounting side but it’s on the legal side. We had a client in the toy business that sold several years ago. Eighteen months after the sale, they ended up being a substantial product liability claim. Fortunately for the seller, they had an experienced deal attorney. That deal attorney included a provision in the purchase agreement that the buyer assumes all product liability claims past, present and future. This is something that could have easily been overlooked by a non-deal attorney. Long story short, the buyer of the business brought suit against the seller. The case was dismissed and the seller was all protected. It’s tiny nuances of having an experienced deal attorney.
That’s a great good news story. I wish I heard more of those. I’m always surprised when I have a lot of clients who come in the door and have had an attorney or accountant that they’ve used forever. I understand the allegiance to those people. They’ve gotten them to where they are now. In many cases, they’re good friends. If they’re not experienced at M&A, 1 of 2 things is going to happen. They’re going to go to school on your dime, which means the meter is going to run at an incredible clip.
Two, they’re going to make mistakes and miss things like what you mentioned. The statistics are somebody’s business is within their top three assets, if not their number one asset. Why would you leave one of your largest assets at risk by not going out and hiring somebody who specializes in M&A transactions? They’ve done a lot of them, seen everything and knows how to protect you down to past, present and future. You don’t want to miss those things that could come back to bite you.
Luckily for the seller, they used an experienced deal attorney.
Number seven, present your financial statements in the best light.
Present Your Financial Statements In The Best Light
This gets back to maximizing the value of your business and making sure you’re fairly compensated. A lot of times in the lower middle market, the valuation is based on a multiple of Earnings Before Interest, Taxes, and Depreciation. It’s referred to as EBITDA. It’s making sure that your EBITDA is maximized. What we do as deal accountants help sellers identify and quantify adjustments to EBITDA that increase the historically reported earnings, which has a direct result in valuation. For example, we’re helping a company quantify the P&L drag of an unprofitable business line. The company, if they had referred to this show previously, they would have planned ahead and abandoned this product line. They still have an unprofitable product line and we’re presenting pro forma income statements without the impact of this product line. In this situation, it’s going to create up to $100,000 increase in annual earnings so five multiples. We’re talking $500,000 additional enterprise value by being able to isolate this unprofitable product line that’s going to be dropped on a go-forward basis.
That’s tremendous. That’s earning your fee.
Domenic, you run into this a lot in trying to help sellers present the financial statements accurately but in the best light possible.
Sometimes, here’s the frustration that I see. It happens so much that people will come in and they’re close to deciding they want to sell. They come in and we do the workup for them, we present the findings and give them our opinion on the range of value and they’re disappointed. The reality is with some advance work they could have done some of the things that you described. Now, they have to go back to the drawing board and they’re going to have to spend 1 year, 18 months or 2 years undoing some of the things that they did in the past so that they can maximize their financials and show the highest amount of EBITDA. They’ve come to us at a point in their lives where they’re burnt out or they’re ready to do the next thing. They’re done and they may or may not have the energy to go back and run the business for another year or two.
That assumes that the economy is going to cooperate and things are going to continue to go well. You’re not going to suffer a downturn unrelated to anything else. It goes back to the point where you talk about all the time, don’t wait until the day you decide you want to sell. Do this work on a regular basis. It’s much easier to call you and your firm 5 or 10 years ahead to time and start that dialogue. They’ll know how to run the business, it’s not a surprise or comes to us or any numbers of professionals that can help them think through how to get their financials in order. Number eight, this is a good one. Disclose everything.
Keep in mind, we’re referring to significant valuation movers are deal killers only. We don’t need to be 100% open book. If we have a significant issue, there is no good that can come out of sweeping the issue under the rug. Here’s a perfect example. We had a client in the marketing business that did not disclose the potential loss of a significant customer. In this case, the buyer did successfully sue for a breach of reps and warranties and receiving a fairly large judgment. They received $1 million that was in the indemnity escrow and another $500,000 in damages above and beyond, legal fees and everything else that went along with that. The seller, in this case, was not proactive and disclosing this potential loss of a customer, which they knew about but decided to sweep under the rug while the buyer was performing their diligence.
It’s so important. It’s a great example. We’ve got a live one. There was a deal that’s marching towards the closing table and we learned that a key employee was leaving. We counseled with the seller and we’re like, “You’ve got to get ahead of this. It’s going to be a hole. You’re going to have to deal with it. You don’t want to deal with it after the fact because it will bring up all these indemnification clauses. Let’s get ahead of it.” Interestingly enough, the owner, the buyer, and my team met and they went through the issue and jointly came up with a plan on how to mitigate the loss of this key employee. The buyer was so appreciative and the trust level between all the parties went way up and everybody can sleep. Everything’s out there and they came up with a joint solution. It was fabulous. It may not always end that way but in this case, it worked out. You don’t have a choice. You still have to disclose those items to people.
That’s a great example of it not being negative to the transaction. It said in the article that everyone should look at this as another negotiation lover. Undoubtedly there are other positives that we’re happy to disclose as we go through the diligence process that can help mitigate some of the negatives. The point being, we don’t need to disclose every little thing but if there’s a material valuation mover or legal issue, no good can come of it.
Number nine, evaluate all buyers and offers.When it comes to selling your business, consider who your advisors are and make sure that they have experience in the M & A space. Click To Tweet
Evaluate All Buyers And Offers
This is in your wheelhouse. The highest offer may not always be the best. It depends on what the goals and objectives are of the seller. If an earn-out can get to a higher valuation and it’s probable that it’s going to be met, that may be the better answer. You also need to consider the tax implications of the offer. For example, is it an asset versus stock offer? It’s the big tax ramifications that are drastically different on how the offer is structured. Having your accountant understand that, explain that to you and run after-tax cashflow projections is important. Is there anything else you want to add, Domenic?
I take this one in two ways. One, as cautionary to owners, it’s nice to have multiple offers. I talked to a fair number of owners who have these hundred buyers or go down the path had one buyer and in some cases that makes perfect sense but in most cases, I would think you’d want to understand confidentially what the market is willing to bear for your business. Having multiple bidders reveals what the market is willing to do. I usually find that if they have multiple offers, 1 or 2 buyers are more motivated than the others and they’re willing to push the limits on not only price but on terms.
The example that I have in this category is we had a large fabrication company a number of years ago and probably had a total of nine offers on this business. One group, in particular, was listening to the owners. There were two partners. One was ready to retire long since done. The other one wasn’t certain he was ready to retire. There were higher offers that came in but this one group came in and made a tremendous offer where one of the partners would stick around, in a significant management capacity with equity and with some real upside. While the offer wasn’t as high as the others, it hit the mark for that particular partner and they won the deal. That’s because they were paying attention. They were listening to the owner. They took the time and the owners appreciated it and they evaluated all the offers but for them, that one worked, even though it wasn’t the highest price.
It stresses the importance of situations where it’s not an outright sale and the seller or one of the sellers are going to stay in the business, it’s critical that you get along with your new partner. Use the diligence and the offer phase as a way to date your departure.
Number ten, I have a great story on this one, but I want to hear yours first.
Continue To Focus On The Business
This somewhat relates to one of the earlier topics of a transaction taking the time and being prepared for a long process. Back to that medical device company. I use the example of nearly six months passing before the first deal ended up following through and luckily the ownership continued to focus on the business. In the interim, they were able to land a new customer in that time that ended up creating a higher valuation in the end when the second buyer came in six months later. That’s a great example of a seller continuing to focus on the business. We have a lot of scenarios where it’s the opposite and the seller decides one day to sell their business and stops focusing on the business. You never know what’s going to happen. Oftentimes, I’m sure you’ve seen this, Domenic, where the business starts to turn the other way and the enterprise value is injured.
In fact, that’s an example of the story I want to share. We had a client a few years ago and it hits on a couple of the points. It hits on this is going to be a long process, which we tell everybody repeatedly from day one. This owner luckily had made all the money they needed to make. He was ready to retire and wanted to sell the business. He engaged us to sell the business. We were about five months into the process and we had a couple of offers. We asked for updated financials. We got them and the business was off by about 40%. We were shocked because everything had been tracking and all of a sudden, we’ve got this updated report. These are true words, the owner said to us, “The day I signed the engagement agreement, I took a couple of vacations. I took a couple of more and totally stopped focusing on the business,” which is point number ten, focus on the business.
Luckily the business got sold but nowhere near what he had originally hoped for, at least the terms weren’t anywhere near what he had hoped for because the business was essentially a free fall. He took his eye off the ball. That’s a pretty extreme example. There are lots of other ways that people take their eye off the ball and it has an impact on the value or on the terms that you’re going to get. You need to understand that the day that you decide you’re going to sell is the day you should probably work harder than ever because he wanted to go smoothly. Also, have the business rocking while you’re in the process. Tad, this was a great article that you penned here. I appreciate the small contribution that I was able to have in this. Would you like to wrap a bow on this for us? Give us your high level.
We’ve talked about a lot of topics. If a seller can focus on even a couple of these items that we discussed, it’s going to help expedite the process and hopefully maximize the value of their business.
It’s such a pleasure to have you back. If folks wanted to reach you, how would they get ahold of you?
Thank you so much. If you would like to learn more about the process of acquiring or selling a business, please visit our website at SunAcquisitions.com or feel free to reach out to me at [email protected]. I look forward to seeing you again at the next show. Until then, please remember that scaling, acquiring, or selling a business takes time, preparation and proper knowledge.
- Miller Cooper &Co., Ltd
- Episode – previous episode with Tad Render
- [email protected]
- iTunes – M&A Unplugged Podcast
- The 10 Commandments of Selling Your Business – article written by Tad Render
- [email protected]
- LinkedIn – Tad Render
About Tad Render
Tad Render is a partner with Miller, Cooper & Co., Ltd. and leads the Firm’s M&A Advisory Services Group.
He has over 18 years of experience working with business buyers and sellers.
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