Key Idea: 5. Sell to the Highest Bidder
Bob Orenstein sold his business for double-digit millions.
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Key Question:
A: Peter took the anonymous road and Lorraine took the friendship path. Peter wrote an ad (just like an advertising man, right?) and ran it in the Wall Street Journal. He described the type of person he was looking for which was the way he found a person like himself.
Lorraine told her banker friend that she wanted to sell and it turned out that she had more than one offer. The person who "won the right" to buy the business told Lorraine that he loves plants and that was the opening of the buy-sell negotiations. Because she was able to sell to a plant lover, Lorraine felt good about the sale. She felt that the employees and customers would be happy because the new boss is in simpatico with the founder.
The big bonus for Peter and Lorraine is they didn't just get money for their businesses; they transferred the business to a person that they felt would keep the business much like they found it.
Key Question:
A: Bob and Tracy sold their companies to publicly-traded compaines and they both got big piles of money.
The sales started off differently but ended up being handled in a similar fashion. Bob started chasing a buyer and Tracy was chased. While you might think that Tracy could negotiate from a strong position since her buyer sought her out, Bob was able to get the interest of several buyers which made his position even stronger.
What they both did was seek out experts to help them. We learned from them that when you are ready to sell, you'll need a business broker, an attorney for the legal documents, a CPA, and potentially, a banker.
All of these experts are important, but probably business brokers (up to $50M sale), the Mergers & Acquistions people ($10M to $300M sale), and investment bankers ($50M to over a billion) -- all "matchmakers" -- are the most critical. Tracy and Bob used different criteria in making their decisions and each made the right choice for her and his company. Tracy was approached by a buyer directly and contracted with a broker with industry expertise. Bob had made the decision to sell and sought the "right" broker based on skill set, enthusiasm, and dedication; he was less concerned with industry expertise. You meet his mergers and acquisition person, Larry Starks, in this episode.
The first job of a business broker is to place a value on the business. However, it doesn't hurt to educate yourself. We all need to be aware of a program by the American Institute of Certified Public Accountants (AICPA); they offer an accreditation program to CPAs in business valuation. Once completed, the CPA is designated as an ABV, Accredited Business Valuation professional. If your CPA is not accredited in this area, you should have a candid discussion with him or her about the need to seek additional assistance. The CPA, as a valuation expert, is particularly critical in circumstances where the broker is compensated with a percentage of the purchase price.
When the buyer or his/her representatives comes in to evaluate your company, that process is called "due diligence". You want to pass due diligence with flying colors. The single most important thing you can do to ensure this is to keep great books. What do we mean by great books? We mean annual financial statements and the underlying records that support those financial statements. It is only with the bottom line results of your company that the buyer can calculate EBITDA -- earnings before interest, taxes, depreciation and amortization, and his or her return on the purchase price. Nothing makes your numbers more credible than if they are certified and attested to by your CPA. And most buyers want a five year track record of audited financial statements.
Key Question:
A: One way is to sell it to people you know. Jim Schell sold to trusted employees and Russ Seeley sold to one of his sons.
Q: Why did both of these sales turn out to be so positive for everyone?
A: In Jim Schell's case, he had gone off and started another business, so the one that he sold had already successfully been running without his day-to-day involvement. This turned out to be a practice run for the two employees who bought him out. They had proven to themselves and to Jim that they had what it takes to make the company even more successful.
Jim priced the company fairly and set it up for them to pay him out over ten years which made the payments low for the new owners. They were so motivated to get rid of debt and they were so good at running the business, they were able to pay him off in three years! Today the company is three times larger than it was when Jim sold.
Russ Seeley was smart not to give his business to Matt because even though Matt was working at Quality Bending, there were two other children to consider. By selling the business to Matt, the other children could not complain that Matt received inheritance that should have partially come to them.
You heard Russ say that Matt was ready to take over. He had learned the ropes as Russ gradually ceded responsibilities at a pace that gave Matt plenty of time to master the necessary leadership skills. In addition to training Matt, Russ also was brilliant to advise Matt to hire his own representation so that both the buyer and the seller had professionals crafting the document that outlined the agreement.
We know of at least one other situation where the second generation simply accepted a deal offered by their father and that deal turned out not to be in the best interests of the sons. Too bad. It's hard to imagine a father not wanting the best for his children but then again, that's the lesson taught in the book of Daniel. All men (and women) have clay feet.
Think about it
Can you provide a three to five year track record of financials?
Clip from: From Equity to Exit Strategies - 8 Possible PathsThe world: Most of us small business owners do OK competing with the big businesses in our industries or we don't survive. But when it comes to our exit strategy and succession planning, most of us fall on our face.
This episode is to explore business valuation and exit strategies.
An exit strategy is just like doing a will, but here you try to maximize the dollars you get out of your life's work. Nobody wants to see you liquidate. That's getting pennies on your dollars. Tangible assets get sold (fire sales) and the intangibles are lost forever. Liquidation is the worst kind of liquidity.
Most of us will sell our business through merger or acquisition. But, if we get much over two-to-three times sales or six times earnings, we all think we've done very well. Yet, when big business sells, they usually begin at six times earnings. Then we see 40 times and even 300 times earnings on the open markets. Why should we be satisfied with so little?
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Every small business owner, everywhere in the world, will exit their business someday.
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5. Sell to the Highest Bidder
BOB ORENSTEIN (Founder, International Wine Accessories): It was like being a rat on a treadmill. I was running and running and running, and it was time to figure out, `How do I get off this treadmill?' And there were different ways.
HATTIE: (Voiceover)Bob Orenstein and Tracy Myers both used a broker and both sold to publicaly traded companies. Tracy showed us where in 1981 she opened her business, the Advertising Arts college. It offered curriculum designed to prepare students for a career in advertising. The school grew and in 2000 she sold to The Art Institute, a growing enterprise traded on the Nasdaq.
TRACY: I think I was in shock at first. I kind of thought someday it would be nice to be able to sell the school, and everybody thinks about an exit strategy. Do I have one? Do I need one? Is there someone to pass this to?
BOB: First thing I'd like you to do is I'd like you to just pick up this glass, roll it a little bit, and try to smell the aroma.
HATTIE: (Voiceover) In 1983, Bob Orenstein started International Wine Accessories in the spare bedroom of his condominium.
BOB: But remember, this is functional also.
HATTIE: (Voiceover) Bob grew the business to over $20 million in sales, and in 2000, he sold to the $5 billion conglomerate the Foster's Group. After the sale, he promised to stay on as president for three years.
HATTIE: How did you, A, come up with the valuation, and then, B, come up with the prospect list that you would pitch? BOB: The valuation is based upon — that you do all the financials going back five years, you project five years forward. And then it was Larry Starks from The Geneva Companies it was their responsibility to go in and make an evaluation.
HATTIE: (Voiceover) Larry Starks met us at IWA.
LARRY STARKS (Waterview Advisors): And very simply, it's contingent on a company's cash flow. And this is very much a financial model, the one I'm talking about now. But I look at discounted cash flow, I look at what I call market multiples. Those are, from a simple perspective, someone may know of a price/earnings ratio, and it's a similar kind of approach, but applied to private company valuation. (Voiceover) And then the last thing you would look at is the value of the assets of the business, not their book value, but their fair market value. And in Bob's case, the unique asset he had is an intangible asset that really had strong value, and that's his customer list.
BOB: (as voiceover, backgrounder) What else is coming down?
LARRY: (Voiceover) Now, should someone rent Bob's mailing list. It only has this much value, but the ownership of the mailing list in combination with the people he has in the International Wine Accessories brand, now that is a brand! It's something people come to trust over many, many years of looking at their catalog, understanding the products they carry, understanding it's a reliable source for high-quality top-line products. That's really what adds value. It's the combination of those intangibles. But the person making the buying decision, deciding what to pay for a company, is the CFO, and he's looking at the bottom line more often than not. Not always, but more often than not.
HATTIE: How do we build something that somebody else wants to buy?
BOB: The first thing you have to do is you have to have solid financial numbers, numbers that somebody can check and rely upon. A lot of small businesses put all their effort into growing the sales, growing the organization, investing in the future, but they don't invest in the accounting. We had everything on a trajectory that looked like you could project right into the future.
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