Selling a business is never as easy as you’d like it to be, as David Lester learnt from personal experience.
People say buying a house is the most significant financial decision the average person takes. For entrepreneurs, selling your business tops that.
Hence this issue’s focus on selling your business. Most of you won’t be ready to sell your business yet – though you might consider selling off a part of it.
Crimson, publisher of this magazine, has in fact done just that. We’ve sold What Laptop magazine in order to spend more time on other areas, which we believe we can grow more. What Laptop was nicely profitable, and we have got a price at the lower end of expectations – but the deal still makes sense for us because we expect to be making larger profits from the business we’re left with than we would have done still owning What Laptop. Just like pruning some of the branches on a tree in order to make the tree stronger.
And as so many advisers say, the best way to sell is to groom your business to be ready for it, which can take years. You might also want to wait until the right time to sell comes along. In most transactions, one party will be more keen to do the deal, which can lead to a higher or lower than normal price.
The trick when selling is to find a buyer who wants your business so badly that they will pay more for it than its ‘normal’ worth. That’s far from easy, and may not be possible if you want to sell in a given timeframe.
The biggest lesson I learned is to try to understand that balance of power. When selling my first company, I did not know at the time that the public company I sold to needed our profits to achieve the profit target it had given the stock market. I was focused on signing soon since I needed to give notice to a key supplier, so I felt that the pressure was all on me – when in fact the acquiring company had even greater pressure on them. I am now sure I could have obtained a higher valuation than I did.
The second lesson is to pay out the bulk of any cash in your company before you sell it – the price you get will almost certainly be based on future profit potential, regardless of the cash, so why leave it for the new owners? I didn’t do this the first time I sold a company, but a friend who sold his company to the same acquirer did just that a few months later. That mistake cost me more than £1m.
The third lesson is not to underestimate the time it will take doing the deal, Growing 22 Business December/January 2005 especially once you have got to the point of an offer. My wife is a lawyer who has acted on many deals, and has literally never seen one without a major hitch in the last few days before signing.
That matches my own experience – so expect something to come out of the blue. On my first deal, it was my earnings. Like many entrepreneurs, I had never paid myself a market salary when I ran my own company – I paid myself more than enough to live comfortably, but not the market rate.
I had simply assumed this would be corrected on the sale, though, and this became an issue. In the end we compromised, but it always rankled a little with me. So remember – put your post-deal compensation firmly on the agenda early on.
My final tips? Allow yourself more time and expect a bigger legal bill than you would otherwise have anticipated. Make sure someone else is driving your business while you’re going through the process. And don’t start to spend any money until the deal is signed and you have the money in your account!
David Lester, founder of Crimson Publishing, has established or run half-a-dozen businesses, as well as advising others.