Finding a way to dismount: Part 4
Editor’s Note: This is the final installment in a series of four articles about exit strategies for small business owners.
In the first article of our series “Finding a Way to Dismount,” we discussed how the old Chinese proverb, “He who rides tiger must find way to dismount,” relates to small business and how owners can prepare to dismount or exit the tiger of a business they founded and have ridden successfully for many years. In the second article we explored selling to “a member of the pride.” The third article dealt with selling to “someone outside the pride.” This article will explore the possibilities of selling to another pride; possibility a competitor.
Selling to another company in your industry or competitor may be the last thing in the world most of us would want to consider since the potential purchasers were most likely our competitors for many years. Our ego may get in the way and we may ignore this option since we may feel as if “they’ve won” and “we’ve lost.” But in any serious business consideration it would be to our advantage to put the ego and emotions aside and not let them affect a sound business decision.
Perhaps the greatest disadvantage of selling to another owner is that many times he or she will want to buy only the accounts/book of business and nothing else. They may not need the equipment, location, or even the employees if they intend to “tuck in” your accounts with their current operation.
You would then be faced with selling the other assets yourself and your employees would be faced with finding another employer. Additionally, the business you have worked so hard to build would essentially cease to exist.
Another disadvantage is that typically another owner will want to pay the major portion, if not all of the sale price, as a percentage (typically 10-15 percent) of “business realized” over time, which is typically one to three years. Whereas, you would prefer to get all cash for the business, or at least a major portion in cash instead. As a result, you would share the risk of keeping and/or growing the accounts over the payment time period, but essentially have no control over how well it is executed.
If a deal is properly structured when combining two companies, it can be very beneficial to the financial well-being of the business. Regardless of whether the two businesses are consolidated into one location or kept separate, many duplicated costs can be eliminated, resulting in a more profitable operation. This puts the combined business on sound footing and the risk associated with the payback is reduced if the seller carries back a portion of the financing.
Contrary to the behavior displayed by most owners on the hunt to purchase a competitor, they can often afford to pay more than a buyer from outside the industry. This is especially true if the two businesses can be consolidated into one location. If you presume that 50 percent of the sales dollars are cost of goods and labor, this leaves another 50 percent to cover any debt service and incremental contribution to profit. For example, let’s presume a $1 million company buys a $500,000 firm and pays $250,000 for it in cash. Further, assume that the buyer can produce the work with the existing facility and equipment. If only 50 percent of the business is maintained, that still leaves $250,000 of incremental profit over two years and the acquisition has paid for itself. From that point on, it’s all gravy. You can apply whatever percentages are correct for your business or industry to do this analysis.
I know this is oversimplified math, but don’t miss the main point — an owner buying another similar business can usually afford to pay more than an outside buyer because of the ability to consolidate redundant expenses. The result created is higher profits than the two businesses enjoyed when standing alone. But rarely will another owner offer to purchase another firm for more than an outside buyer is willing to pay…at least in my experience.
Too often, when a sale is made to another firm it is because the seller’s business is “sick and wounded” and the only alternative is for the business to be consolidated with a healthier operation. In many cases, this occurs at the eleventh hour when the financial pressures force the weaker operation to consider selling.
Although the preceding may sound too negative, I must say that there are many examples of companies acquiring or merging with other firms resulting in very successful outcomes for both. The buyer makes a leap forward in growth and profitability and the seller effectively retires.
In some cases, these result in great partnerships between the seller and the buyer, including instances in which the seller is hired by the buyer and no longer has to deal with responsibility of financial and/or other ownership matters. This solution is one way to deal with some of the hard realities that are being faced in many mature and consolidating industries.
I have had the opportunity to personally experience almost all of the “dismounting” options I have discussed in these articles. During the time I owned my company, we acquired two complete companies with all-cash deals, acquired three others that were headed for bankruptcy for almost nothing and, finally, acquired two others by paying a percentage of business realized over two years. During my time in a management role at Alliance Franchise Brands I witnessed more than 200 transactions that included a mixture of all the dismounting methods. In these articles I have tried to share some key thoughts that may be beneficial to both buyers and sellers.
As I conclude this series of articles, I would like to leave you with the following:
To effectively dismount this tiger you created, you must prepare properly. You should choose your own time frame and make certain you have taken the necessary steps to ensure your safety before you even think of trying to dismount.
Again, at the risk of being repetitive, if you read the first article of this series you may remember the points we made about how to properly position the business for sale. Basically, you need to “run it like you never intend to sell it.”
The number of prospects to sell your business will increase dramatically if: You are growing; Are profitable. You have a staff of strong, capable employees. You have kept up with technology. You have curb appeal. You want a fair deal, not lopsided for either buyer or seller
If you have these attributes, you are well-positioned to dismount by selling your business by any of the methods we have discussed in these articles:
Sell to a member of the pride (family member or employee)
Sell to someone outside the pride (buyer from outside the industry)
Sell to another pride (another company in your industry; probably a competitor) Which is right for you? The answer always is “it depends.” Do some honest soul searching and be willing to get some advice from an objective outside source.
In conclusion, here is my final piece of advice: Determine first if you really want to retire or dismount. Some of us, myself included, tried once, failed miserably, went back to work, and lived happily ever after…..until the time was right to retire and become a volunteer. Its fun, the pay is just not so good.
Whatever your choice and whatever your timing, I wish you well and would welcome comments and questions.
Carl Gerhardt is retired chairman of Alliance Franchise Brands, with 600 franchised print and sign locations worldwide. He currently volunteers as a SCORE mentor/consultant to small business in Reno. He can be reached at firstname.lastname@example.org.
“Reach for this book with an open mind and there’s much to learn, whether you’re the owner, supervisor, or an in-the-trenches worker.”