How do you imagine life after selling your business?

Are you travelling? Europe maybe? Patagonia, or somewhere nice and warm?

If you’re like most of the business owners I know, you imagine selling your business, having a going-away party, and riding off into the sunset.

Increasingly, it’s not working out that way.

In a shaky economy, with banks shy to lend, the proportion of cash that business owners get when they sell is sinking with the proportion of the sale price put “at risk” in some sort of “earn-out” or “vendor take back” loan is going up.

Recently, I hosted a workshop in Toronto and invited an M&A professional who spoke about the typical deals she is doing these days. She shared the story of one buyer who is acquiring marketing services businesses for as much as ten times earnings before tax. The fine print? They only pay three times earnings upfront and leave the possibility of the other seven in a five-year earn-out.

The seller sees the finish line; the buyer fires the starting gun

Buyers and sellers come at the M&A process from totally different points of view.

The seller is usually just willing their tired old body to the finish line. On the other, you have a buyer just about to fire the starting gun. But the buyer isn’t planning on doing any running; they expect you to hear the gun and run faster than you ever imagined possible.

Is it just me, or is there something wrong with this picture?

Note to buyers: we’re tired, not stupid

I think buyers need to stop being greedy. I saw a deal recently where a rental business had grown to twelve million dollars in sales and more than two million in EBITDA. They were being offered six million dollars upfront and another six million dollars available through a complicated, five year earn-out formula.

Are you kidding?

Do you know what it takes to build a business from scratch to a point where it is generating two million dollars of profit? Have you any idea how burned out and tired the business owner must feel? This owner has built the business to the equivalent of a Picasso and you want to steal it for three times earnings?

For a gem like this, you need to pay a decent multiple upfront and put a reasonable set of goals together for a one or two-year earn-out. I don’t care what your spreadsheet says; a victory lap is okay but indentured servitude is not.

Note to sellers: move up your “sell by” date

Sellers – I like you. A lot. I consider myself on your side, but you have to understand that the days of driving off into the sunset on closing day (unless maybe you own a technology business that runs itself) are over. As a seller, I would tell you to plan to sell WAY earlier than you think you want to, so that you still have the energy, ideas and passion for the business to get you through the earn-out.

Yes, if you do everything right (recurring revenue, management team, unique niche, double digit EBITDA growth etc.), you can increase the cash proportion of your take from a sale from maybe 40% cash upfront to something closer to 65 or 70%; but you’re still going to be leaving at least a third – if not much more – of your money on the table if you plan to take your foot off the gas after closing day.

If you think you want out in five years, my advice is to plan to sell in two, so you have some juice left to get you over the finish line, which is moving ever further away.

(photo courtesy of Flickr/Nordea Riga Marathon)

About a year before I sold my last business, I started working with a friend — let’s call him Rick — to help me prepare my company for sale. Rick had sold his own business and had gone on to lead M&A for a public company.  He had seen the guts of a lot of deals.

Our first few conversations were frustrating because I wanted to focus on how to maximize the multiple someone would pay for my business and Rick always responded in the same way:

“Multiple of what?”

“Multiple of earnings of course” would be my response, annoyed because I knew he was acting dumb.

Over time, I came to appreciate what Rick was talking about. It took me about a year — call me a slow learner — but I finally got it. So in this post, I’ll try to pass on Rick’s wisdom to you.

A multiple of course is M&A parlance for the multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) that you’ll fetch for your business when you go to sell it. Smaller businesses use something called Sellers Discretionary Income (SDI). Like fishing stories, cashed-out entrepreneurs often brag about the multiple they got for their business leading owners to a distorted view of what their business is worth.

Like a golf handicap or a marathon time, it’s tempting to fixate on getting a certain multiple for your business. It’s natural to want an objective measure for the value of your business and your multiple looks clean and simple to calculate.

But just like any other number on a spreadsheet, multiples can be manipulated.

Let’s say you’re having lunch with a potential acquirer and you ask her how much she thinks your business is worth. To answer your question accurately, she would likely do a discounted cash flow analysis.  Instead of making your eyes roll with complex financial equations, she responds by saying  “four times”. That sounds like a straightforward offer but, as the example below illustrates, there is a lot of room for interpretation:

Time

Let’s say you expect your business is going to generate $500,000 of EBITDA for the year ending December 31, 2011. Therefore, you might assume her offer of “four times” would equate to $2,000,000.

However, most buyers would argue that they’re going to peg their offer on your most recent completed financials.  If you only did $300,000 in EBITDA last year, then her “four times” offer now amounts to $1,200,000 – almost half of what you thought.

What’s more, some buyers will take a blended approach and average the last three year’s EBITDA. Assuming you just broke even in 2009, and you can get them to include your current year forecast, your average would be $266,000 and their “four times” offer is half of what you were expecting.

“Normalized expenses” – the market rate effect

Not only can an offer of four times vary on when you calculate EBITDA,  the price you get for your business will also go up or down depending on how you keep your books.  A buyer will want to “normalize” your earnings which means they will want to figure out how your business would perform if you stopped using it as a tax shelter.

For example, you might pay yourself a below market salary to minimize your personal tax bill. An acquirer will argue that, if they buy your business, they will have to install a manager with a market rate salary and will therefore recast your Profit and Loss statement with a fatter salary for the manager and corresponding lower EBITDA.  Therefore, if you’re paying yourself $100,000 a year but it would cost $200,000 a year to replace you, then your “normalized” EBITDA is going to be $400,000, not the $500,000 you told the buyer. Their “four times” offers will go down from $2,000,000 to $1,600,000 (4 x $400,000).

“Normalized expenses” – the piggybank effect

Normalization can work the other way too. Let’s say you’ve been running your business like a personal piggy bank (don’t worry, I won’t tell). Your spouse is on the payroll and the kitchen renovation you did at the house last year found its way on to your list of business expenses as an “office renovation”. You can argue to an acquirer that these costs should be deducted from your expenses when calculating EBITDA. So maybe, once you eliminate the piggy bank effect, you actually make more like $600,000 of EBITDA which means an offer of “four times” should garner more like $2,400,000.

Hard assets

When you’re talking about multiples you also have to take into consideration any hard assets. If your motel is generating $500,000 a year and you get offered “four times”, $2,000,000 may sound like a fair price until you take into consideration the land your motel is sitting on (that you own) is worth $1,000,000.

Working capital

Sometimes buyers will offer you an abnormally large multiple only to take it all away with an overly stingy working capital calculation. Working capital is the money you need to leave in your business at closing. If you’re able to pull out $200,000 in excess cash based on the working capital calculation a buyer proposes in their offer, you’re putting an extra $200,000 in your jeans even though the multiple the buyer is offering has not changed.

Fully loaded

Some buyers casually refer to a multiple they would pay including an earn out. For example, let’s say for a business generating $500,000 in EBITDA an acquirer offers $2,000,000 at closing with another $1,000,000 in consideration available if certain performance targets are met in the future. Most would agree that the acquirer is offering “four times” based on the cash changing hands at closing. But a sly buyer, looking to optically inflate their generosity, may choose to characterize their offer as “six times” basing the multiple on the full price paid if the earn out is achieved. That’s a big if.

Savvy buyers know that we entrepreneurs get fixated on getting a certain multiple for our business and the smart buyers use our obsession to their advantage.

Before you agree to discuss a potential acquisition based on a certain “multiple”,  peel back the layers of the offer to understand the details.

Just curious, how else have you seen multiples manipulated?

I started Warrillow & Co. in 1997 to help big companies understand the small-business market. The company was acquired in 2008. Over those 11 years, I built some relationships with people who work in the world of entrepreneurship—people like Bob Lapointe, the president of Inc. (Inc. magazine, Inc. 500, etc.), Curtis Kroeker, the boss at BizBuySell.com and Wendy Vinson, the president of The E-Myth, the coaching company behind the book of the same name.

A few weeks ago, I went groveling to people like Bob, Curtis and Wendy so I could pull together a package of goodies for you in return for ordering my new book this week. You know the drill: in a world of distracted readers and fragmented media, the week of a book launch—like that of a new movie—can make it or break it. So I leaned hard on my friends, pulled in all my markers and put together what I hope you’ll agree is a nice package of bribes for ordering Built to Sell: Creating a Business That Can Thrive Without You this week.

If you order one copy of Built to Sell between today and this Saturday, you’ll get five gifts worth a total of about $65 (offer #1):

1. A one-year, complimentary subscription to Inc. magazine

Every time Inc. arrives at my house, I steal away to a quiet corner and crack the spine. I start with Jane Berentson’s letter and then skip right to Norm Brodsky’s column, “Street Smarts.” Norm’s advice is so good that I consider him a mentor even though we’ve never met in person. Then I read Jason Fried’s latest rant. I study the “American Dream” article about the latest business for sale. Then I dig into the cover package.  After an hour with Inc., I invariably feel better about my decision to shun corporate life for the wild ride of business building. It’s one part therapy, one part inspiration and one part how-to manual. If you order my book this week, I’ve arranged to get you a complimentary, 12-month subscription to Inc. magazine.

And…

2. A two-hour conference call with me

At Warrillow & Co. we held an annual summit each year, and I used to hate listening to paid speakers stand up on stage and give their rehearsed spiel in exactly 45 minutes. I would sit restlessly waiting for the Q&A period. I got to moderate the discussion and always tried to get the speaker to go “off message.” I loved it when someone asked a question so good that the speaker needed to think. It was the gaffes, candid admissions and spontaneity that I craved—which is why I think you’ll like this call. I’m going to answer your questions about building a sellable business. I’ll be direct with you—I’m sure I’ll say things I’ll later regret—and the only thing you won’t get is a rehearsed speech.

And…

3. An e-book from The E-Myth on building a sellable company

When I started my first company, I read The E-Myth, and to this day, it is the book that most profoundly shaped my thinking on what it means to be a successful business owner. The E-Myth is so good that it has become the entrepreneur equivalent of What to Expect When You’re Expecting—practically required reading for business owners. So I asked the coaching company behind the book to develop a special package of content for you that applies the idea of “working on your business, not in it” to building a sellable company. This e-book is not available publicly—it’s just for the people who order my book this week.

Plus…

4. A free BizBuySell.com valuation report

I used to ask myself two recurring questions when growing my last business: “What is it worth today?” and “If I do x, y and z in the coming years, how much more would it be worth?” If you’ve ever wondered what your company is worth—or what it could be worth down the road—a BizBuySell.com valuation report is your answer. The report takes your key financial data and compares them against recently completed transactions in your industry to develop a benchmark for the multiple being paid for a business like yours. As the Internets largest marketplace of businesses for sale, BizBuySell.com has a deep data set of past deals to draw benchmarks from. If you order a copy of my book this week, you will receive a code to develop a customized BizBuySell.com valuation report for your business. Just plug in your basic financial stats and see what your business might be worth. (The report alone retails between $19.95 and $59.95, depending on the number of comps included).

And…

5. A $25 Kiva.org loan in your honor

I stumbled onto Kiva.org when we, at Warrillow & Co., were looking for a charity to support. I instantly loved its business model.  Through a website, it allows people to lend money to aspiring entrepreneurs in the developing world and follow their progress. If I’m ever feeling a little low or something is not going quite right, I make a loan and get an instant pick-me-up—a feeling that I’m helping someone in need and a reminder of how lucky I am to be able to lend.  If you order my book this week, I’ll make a $25 loan to a Kiva entrepreneur in your name. You can then follow the entrepreneur’s progress for yourself and see how you’ve helped someone pick him- or herself up by the bootstraps.

So that’s the deal. If you take two minutes now and order the book from Amazon (or Borders, Barnes & Noble, Chapters/Indigo, 800-CEO READ, etc.) for around $16 and forward your order confirmation to rachel@BuiltToSell.com, we’ll get you your package of five complimentary gifts today (please note, the Inc subscription is only available to U.S. residents. If you live outside the U.S., you’ll still get the other four gifts).

Get my advice on your business (offer #2)

Occasionally business owners ask me to consult for them about how to create a sellable business. It probably doesn’t come as a huge surprise to you that I hate the consulting business model. I just think it is flawed on so many levels, which is why I don’t consult.

But for this book launch, I’m bending my rule a bit.

If you have a specific question and want my advice—maybe it’s about valuation or creating a recurring revenue stream—I’ll spend an hour with you on the phone one-on-one to answer your question, provided you order 10 books this week. If you send me some details about your business before the call, I’ll also spend some time prepping for our discussion. Given my allergy to consulting, I’m limiting this offer to the first 10 takers.

Ten books is about nine more than anyone would ever need, so my suggestion is to give the ones you don’t need to friends who own a business. Or if you’re in an Entrepreneurs Organization (EO) chapter or Vistage forum, hand them out to your chapter or forum mates. If you can’t think of anyone to give them to, let me know, and I’ll donate them to an enterprise center where new entrepreneurs go to get business advice.

Just email your proof of a 10 copy purchase (e.g. Amazon order confirmation) to Rachel@BuiltToSell.com before this Saturday April 30, 2011 and we’ll be in touch to book your phone meeting.

Spend two intense days with me to make your business more sellable (offer #3)

I’m going to host a small, intimate session at the Four Seasons Hotel in Chicago on Sept. 28 and 29, 2011, for a group of 16 business owners interested in making their businesses more sellable.  The Sellability Workshop will be an intensive, two-day session designed for business owners running companies with between $500,000 and $5 million in annual revenue. I will lead a spirited discussion and Q&A around the following themes:

• Recurring/subscription revenue models
• Pricing psychology
• Branding and packaging
• People and leadership
• Positioning yourself for a strategic acquisition

The limit of 16 people is a luxury. We’ll have lots of time to get to know each others businesses and provide our lessons learned and war stories. I’ll lead the conversation, but it will be a workshop format with lots of discussion, Q&A and time to reflect.

The Sellability Workshop is $2,495, but if you buy 50 copies (at a cost of around $800) of Built to Sell between now and Saturday, you can come as my guest. Again, just forward your order confirmation to rachel@BuiltToSell.com. Please give the other 49 copies of my book to friends or forum mates who run companies, or we can donate them on your behalf to an enterprise center library, where they will be well loved. This offer is obviously limited to the first 16 people who send in their confirmation of a 50-book order between now and Saturday. (Hint: often times 1-800 CEO READ or B&N are better at handling large bulk orders).

Have me as a guest speaker (offer #4)

From time to time, I get asked to speak to Vistage chapters or EO forums.  Usually it is not a fit because I charge to speak, and most groups are looking for me to speak in exchange for exposure to their audience. That model doesn’t work for me because I don’t have a follow-on product to sell: I’m not a consultant or an M&A professional who speaks to gather leads. The upside is, if you have me speak, your members get 100 percent content with no hidden agenda. The downside is, I don’t do freebies. To that end, I’d be happy to speak to your group, provided you order 400 books by this Saturday (this offer is limited to the first two takers).

Just email your proof of a 400 copy purchase to Rachel@BuiltToSell.com before this Saturday April 30, 2011 and we’ll be in touch to book your speaking engagement. (Hint: often times 1-800 CEO READ or B&N are better at handling large bulk orders).

Q&A

Q. What’s the difference between the first edition of Built to Sell and the second edition being launched this week?

A. In the second edition of Built to Sell, the story of Alex Stapleton remains intact and is accompanied by an all-new 10,000-word Implementation Guide, which outlines my experience, war stories and lessons learned from starting and exiting four businesses. The Implementation Guide is a practical, nuts-and-bolts manual for turning a business into one that can thrive without you.

Q. What if I order after Saturday, April 30?

A. Sorry, April 30, 2011, is a firm date. Send Rachel your order confirmation before 6 p.m. Eastern Time on April 30 to take advantage of any of the offers above.

Q. What if I live outside of the United States?

A. All offers are valid except for the complimentary subscription to Inc., which is just for U.S. residents. If you live outside the United States and you send Rachel your order confirmation by April 30, 2011, you’ll still get the other four gifts.

Q. What if I have already ordered the new book?

A. First of all, thank you. Provided it is the second edition (Built to Sell: Creating a Business That Can Thrive Without You), dig up your order confirmation and send it to rachel@BuiltToSell.com, and we’ll send you your five-pack of gifts.

Q. What if I ordered the first edition, Built to Sell: Turning a Business into One You Can Sell?

A. Thank you. Unfortunately, these offers are just for people who order the second edition, called Built to Sell: Creating a Business That Can Thrive Without You.

Q. Are these offers good for e-book purchases (e.g., for Kindle, Nook, iPad)?

A. No. Unfortunately, these offers are good only for hardcover book purchases.

Q. What if I don’t need that many books?

A. Let us know, and we’ll arrange for the books you don’t need to be donated to a small-business development center (SBDC) or enterprise center library.

Q. What are the logistics on the Sellability Workshop on Sept. 28 and 29, 2011?

A. We start at 9:00 a.m. on Sept. 28 and finish by 4:00ish each day.  We’ll grab dinner together somewhere nice the evening of Sept. 28. You’re responsible for your own travel and hotel costs (there are lots of choices in Chicago, from super-swank to very modest). There is no long-distance or webinar access to the session. This is an intimate and small-scale group. Plus, Chicago is a great city in the fall—it’s worth the trip, promise.

Mont Sainte Victoire, Aix-en-Provence.

Yesterday I had a call with a woman from The Strategic Coach. We were discussing the possibility of a partnership but she didn’t like the name of my book, “Built to Sell”.

“We encourage our members to keep their business forever” she said, “and I don’t think we want to be associated with a book that recommends entrepreneurs sell their company”

Hmmm, how strategic of them…

Distancing one’s self from a book called “Built to Sell” is actually pretty common. Often reviews of the book start with the following disclaimer, “Now I’m not thinking of selling my business, but if I were, this would be worth reading because blah blah.”

Somehow, the idea of selling a business has become something only money-grubbing, heartless mercenaries would contemplate.   >> More

DONE DEAL

By Nick Whitmore

Colin (not his real name) sold his central Virginia business-referrals firm after 11 years of running the franchise he’d created.

Prior to closing, Colin’s business generated revenue of $420,000. He decided to sell to focus fully on a new business-advisory enterprise he’d set up.

The business had two divisions: one in Shenandoah Valley and one in central Virginia.

“My mentor told me, ‘You have two businesses within that business, so you could split it up into two and sell them separately,’” said Colin.

Colin didn’t place a single ad to sell his business. He gave his assistant, who was running the central Virginia arm of the business, the option to buy it. However, the assistant wasn’t able to purchase it because of finance issues. In the end, Colin received four offers on his business before finally closing a deal.

The buyer of the central Virginia division was a good friend of Colin’s. “He said, ‘Are you selling it?’ I said, ‘Well, we weren’t, but we’re always open to selling it.’ We really liked the guy, so we said we’d sell it.”

Colin’s former bookkeeper purchased the Shenandoah Valley arm.

In total, Colin’s business was generating $206,000 of earnings before interest, taxes, depreciation and amortization (EBITDA). The business was sold in two parts for a combined total of $550,000, representing an EBITDA multiple of 2.67. The business was sold “as is.” There was no earn-out or seller finance involved.

Deal Snapshot

Business type: Business-referrals
Revenue: $420,000
EBITDA: $206,000
Selling price: $550,000
Multiple paid: 2.67

(photo courtesy of sxc.hu/blary54)