Is It Time To Sell Your Business?

Mr. Kent Humphreys

It was a Saturday afternoon, and I was watching a ball game at home. My son called and said that he would be over in a few minutes. I was about to get the shock of my life. Shortly after he arrived, he shared his heart with me, "Dad, I believe that God has called me to be a pastor, and I would like to plan to leave for seminary in the fall." As a father, it provided a moment of pride; as a CEO, it was the worst day of my life. My son had completed six years of a ten-year plan to take over my job. He was a better leader in his 20's than I was in my 50's. He was not spoiled and was respected by all the employees. Now I was left without a plan. However, the day before, we had received a letter offering to buy our distribution firm. I had laughed about it and had thrown it into the trash. My son stated that he had retrieved the letter. Was it now time to sell the thirty-eight year old family business?

Every one of us as business owners has considered selling our business at one time or another. When we lost key customers or when I was working too hard, I'd give it a brief thought. When each of my brothers sold their interest, I wondered if I was a fool to stay. But my desire was to continue to enjoy the challenges, make some money, minister to my employees, and someday turn it over to the third generation. We had purchased over twenty businesses over the years, was it now time to sell? I had to answer some serious questions and discuss the events with my wife before I was ready to respond to that letter of inquiry.

There are several reasons that owners of privately held businesses decide to sell:

1. The business is losing money, or not making a reasonable return on its market value.

2. The owner wants to retire and does not have an employee, partner, or an outsider who can come in and run the business.

3. A primary shareholder cannot get along with his partners.

4. The business owner is "tired" and wants to do something else and has another way to make a living. He may want to live off the proceeds and try another business or contribute his time to his community or to a charitable cause.

5. Another firm is offering much more than the business is worth financially, and the only reason to stay would be because of the employees or that you simply love what you are doing.

Selling a business is far more complicated than buying one, and the decision is usually made fairly quickly and cannot be reversed. The financial factor is not the most important consideration. Of far more importance is what the owner wishes to do with his or her time, health concerns, the future for the employees, the effect on key managers or partners involved, as well as key vendors, and customers, the consideration of creative alternatives, and changing market conditions.

Let's take a look at the financial conditions of Carl's company:

ASSETS	INCOME STATEMENT	CAPITAL & LIABILITY
Cash: $.1m	Sales: $10m	Accounts Payable: $.7m
Receivables: $1.1m	Cost of Sales: $7m	Bank Loan: $1.2m
Inventory: $1.4m	Gross Margin: $3m	Equity: $1.5m
Total: $3.4m	Expenses: $2.4m	Total: $3.4m
	Interest Exp: $.1m
	Depreciation: $.2m
	Net Taxable Profit: $.3m
	Income Taxes: $.1m
	Net Income After Taxes: $.2m

 

Here are a few other items to consider:

Book Value = $1.5m	Market Value = $3m
Earnings on Book Value = $20%	Earnings on Market Value = 10%
Net Income 3% of sales	EBITDA = $.6m (Earnings before interest taxes, depreciation & amortization.)
Carl's 401K = $500k	Carl's Salary: $100,000

 

Carl is 58 years of age and gets a firm offer of $2.5 million for his company. What questions should Carl ask? Would you sell the company if you were Carl?

Last week we reviewed Carl's company, his financial statements, and an offer of $2.5 million for his firm. What questions should Carl be asking? Let us go back over the reasons to sell and look again at Carl's situation.

Questions for consideration:

• Carl's business is not losing money. However, it is only making an 8%-10% pretax return on its market value. Is that enough for the added risk? What if Carl must invest another $600,000 in new equipment to stay competitive? What if his firm's major customer (23% of sales) is in financial difficulty? What if a major customer (18% of sales) is expanding rapidly and expects to double in size the next 24 months?

• Carl wants to retire but does not have someone to take over. Would it make a difference if a key VP could run the firm? Carl is considering having Joe take over the operation and will not give ownership for five years, but will give Joe 25% of the net income as a bonus. Then in year six to ten, Joe can purchase 50% of Carl's interest over those five years. Insiders can never pay as much as outsiders, but you maintain some ownership for a longer time and the employees and company's culture have some stability.

• What if Carl has a partner with 30% interest and they do not get along? What if it used to be fun to go into work, but the last five years, since Carl sold some interest to a key employee, it has not been fun?

• Carl has invested some of his earnings over the years in selected real estate. He now thinks that it may be time to do some traveling and spend more time overseeing his investments. Carl also is considering teaching or mentoring at a local college. Finally, he has been asked to do some consulting that could keep him busy one or two days a week.

• The book value of Carl's firm is $1.5 million, but he thinks that he can sell it for $3 million or more (he has an offer for 2.5 million), and Carl believes that the prospective owners want him to stay on as COO of the combined firms for another 3 to 5 years. That gradual leaving the firm has some appeal to Carl. Carl really does still enjoy what he is doing, but would like to take some risk off of the table.

Only in rare cases can you make more off the proceeds of a business than you can in continuing to own and run it. However, creative alternatives can allow you to sometime "have your cake and eat it, too". Develop excellent employees and managers so you do not have to be there all the time. Take adequate vacations and time off. Create a culture of values and minister to your employees.

After answering these questions and many more, Carl discovered that it was not an easy process to decide to sell a business. Finances and security were not the only factors to consider. Carl is only in his 50's and may live into his 80's or 90's. Will he have enough income? What will he do to keep busy? Can he be fulfilled not working long hours every week? Are there other things that he could be passionate about? How much is enough and are there other things to do with your life in the next stage? These are questions that Carl is trying to answer. The key question remains- "Is it time to sell?" Only Carl can answer that question. Advisors can help with options, but only Carl can make this crucial decision.

We've analyzed Carl's alternatives to selling his business. Let's assume that you think that you want to sell your business within three to five years. What things should you be doing right now if this is a possibility in your future?

First, you need to be in a group of your peers. Christ@Work and a number of other ministries and businesses in the United States have weekly and monthly groups for business owners. While there are some excellent secular options, I recommend that you join a group of Christian peers who operate their businesses based on Biblical principles. Most small business owners do not have a legitimate board of directors or advisors, so finding such a group is a must. The time and money that you spend will be rewarded many times over. Most CEO's consider getting involved in such a group to be one of the best decisions of their business career.

Next, you need to have an excellent accountant and banking relationship. It may pay you to start having audited statements each year. This is not a bad investment, even if your banker does not require it. It always helps to have outsiders come in and review your process. While you're at it, it is time to clean up your expense account and get all the personal expenses off of your company income statement. First of all, this shows integrity to the IRS and others, and secondly, it will reveal your firms true profitability. Make sure that you have a current "Buy/Sell Agreement" with any partners, term life insurance for the unforeseen, and a current will and living trust to assure proper transfer of your ownership. Also, make a list of the legitimate advantages that you get in owning a business including retirement contributions, healthcare and insurance, travel and automotive benefits, and authorized entertainment or other perks of ownership. Every executive has internet, cell phone, and other office benefits that could be lost in the sale unless you negotiate for them.

Then, you'll want to look at your balance sheet. Why not be honest with yourself and charge off that receivable that you cannot collect? In fact, do you have some customers that have always been slow paying? Are they worth the hassle? Look at your inventory. If it is over one year old, you are kidding yourself about its value. Anything over a year old is a museum piece, not inventory. Charge it off now, get the tax benefit, and dispose of it or give it to a charity. Closely check your equipment list for assets that are still on the books, but you stopped using years ago. Technology usually becomes useless before you can depreciate it. So, clean up your assets, and make a list of good assets (like desks, and equipment) that are not on the books, but one still functioning and bring value to a sale.

Do you have an allowance for doubtful accounts? Have you got all of your accrued expenses on the year-end accounting? Have you listed your prepaid items, like insurance? If you work over your balance sheet now, then you will properly reflect your earning the next few years.

Next, look at your key people. Are they being well paid, with adequate bonuses, and retirement benefits? Do they have a chance to move up with more responsibility? Is there someone who could take your job? Have you started to groom that person for more responsibility? Are your key sales people rewarded with incentives? Do all of them have a non-compete contract? Is it enforceable? Who has the key relationships with your major customer? Do you reward your stable long-term employees? If you knew that you were selling the business or part of your ownership within five years, what ministry or culture do you want to create while there is still time? What can you do for the spiritual lives of your employees, vendors, and customers? How can you impact their families? What about a company vision, mission, and values statement? What about having a Chaplain service? Do your co-workers know your values, your beliefs, and your concern for them?

Is this firm more than a job or just a financial investment to you? Is it an investment of your life and a ministry? Can you groom a successor and keep part or all of the ownership of the business? Can you take off more time and grow your management team? Do you have other business interests, investments, and ministries? What is your passion? If you knew you had only one year to live, what would you do? Why aren't you doing it now?

If you get all of the above done, then you may decide that the business is too valuable of a personal investment to just sell for money. You may want to keep it. But, if not, then all this work will greatly enhance the financial value of your business and the process will be invaluable in determining the next stage of your life calling. Preparing to sell your business is an exercise that every business owner should go through, whether you intend on keeping it or not. The passion, the people, the purpose of your life greatly overrides the financial balance sheet issues. Every business is a gift and responsibility from God for only a season or for a lifetime. This exercise helps answer that question.

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For more information about Christ@Work visit their website or call 1-405-917-1681.

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