Fictional Wealthpreneur Patton Thorne is sitting across the table from his daughter, Nicole Thorne. The Thornes are meeting with their Certified Exit Planning Advisor (CEPA) to discuss the future of Precision Manufacturing LLC, an operating subsidiary of their diversified family holding company. Precision is a specialty manufacturer of original equipment parts used by several large North American car manufacturers.
Reap the harvest
Patton and Nicole know the current industry and overall economic environment could impact the potential sale of Precision. But as their CEPA has explained, the timing of the sale is a secondary consideration. As Level 3 Wealthpreneurs, the Thornes know the amount of value they realize from the sale is a result of the ownership exit strategy they choose.
Wealthpreneur Lesson
The Exit Planning Mindset
“Expect the best. Prepare for the worst. Capitalize on what comes.”
– Zig Ziglar
Know Before You Go
- Plan to sell your business when the company is on a winning streak and your financial data creates “deal momentum”.
- Before you start the sale process, conduct pre-diligence by compiling a package of information on the essential elements of the business for sale.
- To prevent an interruption in the deal’s cadence, make sure you have gathered all the information a potential acquirer needs to complete due diligence.
- Minimize the potential for “deal fatigue” by preparing answers to questions that potential buyers might ask about your business before you go to market.
The big bad proprietary deal wolves
Nicole tells a story about her recent experience at an industry conference. “I ran into two interesting people there. One was a partner in a private equity group, and the other was the Executive Vice President of Business Development for an original equipment manufacturer of automotive parts. Both of them asked whether we might be interested in selling Precision. And get this: they both hinted at the possibility of a proprietary deal!”
Patton chuckles as if this was a joke. He replies, “I was born at night, but not last night!”
Many crafty potential acquirers try to convince business owners to enter sale negotiations without creating a marketplace for the sale. Fortunately, the Thornes didn’t fall for that devious buyer approach!
Don’t Be Little Red Riding Hood
- Since there are no other bidders, buyers in proprietary deals tend to make lower priced offers with more punitive terms.
- Proprietary buyers often drag out the process of evaluating your company. Once you’re exhausted by the process, they reduce their initial purchase price offer because they know you have no other buyers.
Is your business art?
A few months ago, Patton was interested in selling one of the museum-quality artworks in his collection. But before he took any action, he hired an intermediary with mastery of the auction sales process for fine art and other collectibles. With the help of the intermediary, Patton successfully sold the painting well above his targeted price.
Selling a business and selling a piece of fine art have several similarities. In the business sale market, intermediaries can be called business brokers, mergers and acquisition specialists, or investment bankers. Like fine art auctioneers, these professionals can help you get top dollar for your business.
Your Friend the Business Intermediary
- Business intermediaries often prepare a “teaser” document that reveals just enough about your business to tempt a group of potential buyers to sign a non-disclosure agreement (NDA).
- Once the NDA is signed, potential buyers receive a detailed information package about the business for sale called a confidential information memorandum (CIM).
- After reviewing the CIM, potential acquirers who fulfill the business intermediary’s conditions may be invited to preliminary discussions with the seller and management team members.
Slow and steady wins the deal
Patton and Nicole know they will need to share key information with potential Precision acquirers. But how much should they reveal, and when should they reveal it? Their CEPA advises them to slowly trickle information to prospective buyers. This protects the Thornes and creates interest among potential bidders. The buyers may even begin fighting over the company at the same time! Providing vital information too early in the process harms you and gives would-be acquirers an unfair advantage.
Stay in the Driver’s Seat
- Take the lead in the dance of selling your business.
- Strategically decide when to reveal new information about your business.
- Never relinquish control of the selling process to potential buyers.
Leverage your negotiating power
Patton and Nicole leave the meeting with their CEPA feeling confident about selling their business. But what about you? What is the value of the business you are considering selling? How does its financial performance compare to similar companies in the industry? If you are interested in tax-smart exit planning, this article shows you how Patton Thorne sold a highly appreciated asset in a tax efficient manner.
The insights above were inspired by the teachings of John Warrillow. For those interested in additional information, I recommend his book, The Art of Selling Your Business.
