I was giving a speech yesterday in Mississauga and a business owner asked me when he should tell his employees that he is considering selling his business. His question triggered memories I would rather have forgotten.

My advisors told me I would need to notify my managers early so that I could present a management team to prospective buyers. In my case, I told two key managers and they agreed to help me sell the business. The conversations were tricky. On one hand, my managers were relatively young and ambitious and looked forward to the  chance to work for a more professional company  On the other hand, they were smart enough to know the integration of one company into the next would get messy.

I waited until the deal closed before telling everyone else on my team.

Telling your employees that you intend to sell your business one day is an intensely personal decision. Some argue you should share equity with all of your employees from the start and make it clear you intend to build, flip and share the spoils widely. Others argue you should hold your cards close and not tell anyone you’re planning to sell until the last possible moment. This ensures customers and employees don’t get spooked, but requires a degree of duplicity many are uncomfortable with.

I opted for a Machiavellian hybrid: telling my managers and hiding it from everyone else.

When I finally revealed to my employees that the company had been sold, I felt like a fraud.  For years I had been minimizing salary increases, scrutinizing expense claims and preaching thrift to my employees insisting they put the company’s needs ahead of their own and I was doing the exact opposite.

In the end, my hybrid model worked. I was able to merchandise a management team to potential acquirers without the distraction of having an entire company worried about their jobs. It would have been more honest to be truthful with everyone but perhaps less successful.

I hate it when effectiveness is the enemy of honesty.

Have you shared your long-term exit plans with your employees? Do they know you’re considering your options? If so, how have you kept them engaged and loyal in the face of upcoming upheaval? If not, when and how will you tell them? Please share you comments below.

If you want to tell your management team and need a carrot to energize them about helping you sell your business, you can use a Long Term Incentive Plan.

Here are four new articles about creating a business you could sell. I hope there is a nugget or two in there you will find helpful.

Did last year drag your company’s value down?

~ published April 6, 2010 The Globe and Mail

I had coffee with a business owner who wanted to know what kind of multiple he could get for his business.

He owns an ad agency and he had heard that marketing services businesses are going for between “four and five times,” by which he meant four to five times earnings before interest, taxes, depreciation and amortization (EBITDA).

The key question is, four or fives times what? Most business owners focus on the multiplier and spend less time on what they are multiplying. Some buyers will calculate their valuation by taking your last complete year and applying their multiple to your reported pre-tax earnings. Others will take a blend of your earnings from the past three years.  » more

Supercuts versus Tony the superstylist

~ published April 7, 2010 The Globe and Mail

I discovered Tony when I stumbled into his hair salon in downtown Toronto one day, running late for a meeting, and asked for a quick trim. Tony obliged and he had me out the door 15 minutes later, cleaned up and $28 poorer.

I thought $28 for a haircut was a lot, but I liked Tony, and I assumed he had some considerable expenses given his location in downtown Toronto. His salon was right across the street from my office, so I went back to see Tony a month later.

Every time I returned, Tony welcomed me by name and ushered me to his chair with an easy smile. I became loyal to Tony and went back every five weeks or so for 10 years. Sometimes I would call for an appointment on Tony’s day off and be offered another hairstylist, but I usually waited, preferring Tony’s easy banter about life back in Italy and his low-key demeanour. » more

Appraise a company long before sale

~ published April 8, 2010 The Globe and Mail

Do you know what your business is worth?

I used to collect hockey cards: Guy Lafleur, Darryl Sittler, Tony Esposito, Wayne Gretzky in his rookie year — I had all of the biggies for a kid growing up in the late 1970s.

As time went on, I kept them in perfect condition nestled under the clothes in my dresser drawer. Since then, I’ve lived in eight different places, travelled, married and had kids, and those hockey cards are still with me. I’ve always wondered what they might be worth, yet I have never had them appraised. » more

I just heard about a dentist who is offering Botox therapy to his patients to supplement his income; which is down as a result of the recession. These days, I’m hearing more about business owners grasping for revenue with new product lines just to keep the lights on.

In fact, I’m starting to get nervous about my book tour this spring. A big part of my talk that supports Built To Sell is the importance of focusing on a single product/service that scales if you want to build a company you could sell.

I learned about the importance of absolute commitment to a single, scalable offer the hard way. When I first tried to turn my research business into something sellable, I developed a subscription-based offering but continued to accept custom projects. Clients and employees could sense I wasn’t truly committed to the subscription business and pushed back. Ultimately, I had to shut down the subscription offer, put my tail between my legs, and go back to selling time.

After a few years, I made a fresh attempt at the subscription business but the second time, I turned off the consulting business and told customers and employees all we were offering was the subscription. It worked because I stopped offering customers a choice and gave our sales people a chance to sell a consistent, packaged offer.  Customers who wanted our expertise, had to buy it as a subscription.  We stopped responding to Requests For Proposals (RFPs) which gave our sales people more time to sell. Ironically, eliminating choice and packaging what we had to sell better, helped us sell more.

I feel like the message is even more important in today’s economic context but I have to find a way to deliver it without sounding tone deaf. Enter Trevor Currie of Podium Consulting. Podium trains people to be better public speakers and Trevor is helping me find a way to make an audacious point seem reasonable. So far Trevor has come up with the idea of showing the audience a famous quote as the lead in:

“Until one is committed, there is hesitancy, the chance to draw back, always ineffective, concerning all acts of initiative (and creation).  There is one elementary truth, the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then providence moves too.”
-Johann Wolfgang Von Goethe

I’ll let you know how I make out; the first speech is Tuesday in Mississauga.

Below are three articles I wrote last week on creating a company you can sell:

One of the occupational hazards of writing about building a sellable company is that I’m constantly evaluating businesses for their ability to be sold — even when I should be focused on other things.

My wife arranged a sitter last weekend so we could go on a date. Unencumbered by kids for five glorious hours, we spent the day wandering around downtown Toronto. The only real fixed appointment we had was for my wife to get her hair cut by her favorite hairdresser who had just changed salons. As I waited for her to emerge, the only thing I could think about was the low multiple that a mom & pop hair salon would fetch. The business of cutting hair has some brutal attributes:

• Customers are loyal to their stylist (not the salon)
• No standard systems — each stylist seems to have their own approach to cutting
• Pricing seems to be subjective based on a mixture of how long the customer is in the chair and how well they know their stylist

We leave the salon and a few blocks later stumble upon this poster hanging in the window of a law office:

Here is a law firm – arguably one of the least scalable businesses around — trying to add some standardization to their business by pricing a set of standard services, packaging them like Procter & Gamble and merchandising them in the window like Macy’s.

I have a friend who is a lawyer and judging from his schedule and stress levels, I think law firms typically suffer from some of the same ailments as hair salons:

• Highly dependent on their employees
• Customized service for every customer
• Pricing that seems arbitrary to the uninitiated

To her credit, it was my wife who pointed out the comparison of the hair salon and the law firm because she knew I’d want to write a story about it. Now maybe I can start being a better date.

Last week I wrote 3 articles for The Globe & Mail that I thought you might find of interest:

Business in a small town can be a tough sell

– published March 23, 2010

Imagine owning a business in the year-round outdoor sports playground of Fernie, B.C. — powder skiing and single track in your backyard. Or being the CEO of your own firm nestled in the heart of Prince Edward County’s wine region in Ontario.

Does it sound like an idyllic life? It could be … until you try to sell the company. A smaller town can pose unique challenges given the more limited pool of immediate potential buyers and the speed at which news spreads.  » more

Is $13.25 reasonable for a cup of coffee?

– published March 24, 2010

This morning started as most mornings do around our house: Blurry-eyed, I went to Starbucks for a grande Americano. It cost me $2.65.

I could have ordered a regular drip coffee or even brewed one at home, but I’m lazy and I’ve become addicted to the powerful jolt of three shots of espresso in the morning.

Now $2.65 for a coffee may not sound like a big deal, but if you’re preparing to sell your company, that coffee may be costing you four or five times that. »more

Don’t make a business of your hobby

– published March 25, 2010

They say all you need is passion to start a business. I don’t buy it.

People who are too passionate about their company create a job, not a business.

Take, for example, a young person finishing school who is encouraged to start a business around “something they are passionate about.” Having enjoyed photography as a hobby, they might open a photo studio and offer to shoot everything from weddings to food ads to T-ball teams. They are good at what they do because they are passionate. Customers like them because they are passionate. Subjects give them their best smile because they are passionate. »more

I think I managed to singlehandedly offend the entire Mergers & Acquisitions (M&A) community this week.

It all started after I wrote a series of articles about the similarities between selling a home and a business (thanks again for your comments on my post earlier this week which helped me sharpen my thesis). My argument was all of the staging, marketing and negotiating steps in selling a home are a lot like selling a business. My intent was to demystify the process of selling a business for someone who had never gone through it.

In the process, I inadvertently offended some of the people in the M&A industry. Here’s a quote posted on The Globe & Mail’s website from one of the offended brokers which is representative of the earful I got from his peers:

“I take issue with the statement that selling a home is similar to selling a business. The implication that I got from the article was that it is just as easy too. I am a business brokerage professional and can tell you that the two are very, very different. It is much more difficult and different a process to sell a business.

Here are some reasons why it is different: valuing a business (there is no ‘market comparable’ data like in real estate) and every business has different revenues, costs, etc. Confidentiality, most businesses need to be sold in secrecy so staff and customers don’t find out. Financing – it is very difficult to obtain acquisition financing, inventory financing, credit, etc. And more… employee issues, tax issues, asset sale vs. share sale, non-compete agreements, and so on. To suggest that the two are similar does a disservice to the readers, with all due respect. Most homes listed for sale do eventually sell. The reality is that the majority of businesses do not because people don’t understand these important differences. I hope this comment remains on the board and is not filtered out.” — Steve Skrlac, MBA, CFA

If I made it sound easy to sell a business, I regret that. Nothing could be further from my experience. It took four years to reshape my last business into something sellable and another eight months of active negotiations with potential buyers to get a deal done. It was a slog.

Yesterday, we marked the end of the six part series comparing selling a home to selling a business with an online debate hosted by The Globe & Mail between Ron Dersch, an M&A professional and myself. Ron is a good guy and knows his stuff. Thank you for joining the discussion (The Globe & Mail has posted our debate if you missed it).

Do you plan to use an M&A professional or business broker when it comes time to sell your business? If so, what questions do you have about using a broker? If not, why not?