Protecting your interests after selling your business (Voices)
Special to the NNBW
RENO, Nev. — Besides asking, “How much is my business worth?” the second question all owners want answered when selling their business is, “How can I protect myself so I don’t get the business back later?”
In many ways, the latter question is a more sensitive issue than the first.
An improperly structured transaction can create problems for the seller years after they have sold the business.
For example, let’s look at the case of one Reno owner – who had been in the home improvement business for 25 years – who decided to sell. He found a willing buyer whose enthusiasm to have his own business unfortunately exceed his ability to run it.
After 18 months, the new owner decided that the rewards of owning the business weren’t worth the time or the effort and decided to walk away from his responsibilities, both of running a successful business and paying the previous owner.
What sellers need to realize is that, just like there are risks with owning their own business, there are risks with selling it.
Although there are no guarantees, a combination of the following recommendations will significantly reduce the likelihood that the seller will be stepping back into the business after stepping out.
Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc., are obvious. However, many are not.
One of the most common mistakes sellers make is not getting enough of a down payment. One of the best ways to ensure the successful transition of their business is to have the buyer invest a significant amount of their own capital in the transaction.
Few incentives inspire the new owner to achieve success greater than the risk of the loss of a significant amount of their own money. In simple terms, it is a lot harder to walk away from a $150,000 down payment than a $15,000 one.
Another way to minimize a seller’s risk is to know their buyer. This goes beyond having some of the same interests, common friends and an affinity for the same brand of Cabernet.
It means a thorough review of the buyer’s credit, analysis of their personal finances and a complete resume illustrating not only their accomplishments, but also their life experiences.
For example, if the buyer has a poor history of paying of their credit card, they likely might have problems making their monthly principal and interest payments to the seller on a timely basis. If the buyer doesn’t have a strong financial statement, they may not be able to weather any unexpected slow periods.
As far as life experiences go, the passion and skill sets that are required to run a daycare center will be significantly different than what would be needed to operate a light manufacturing business.
This is what happened with that Reno home improvement business owner. Although they shared many interests, the buyer didn’t share the seller’s passion for customer relations, which is so important to the success of the company.
Anther common error sellers make is having a due on sale clause in the promissory note. In some cases, buyers find that being a business owner just isn’t what they thought it was going to be or that they can’t successfully operate the business and they just don’t want it anymore.
A smart seller will give them the opportunity to resell it to someone else who will operate it effectively. As long as the original seller reviews and authorizes the second buyer, he can ensure that his payments will continue to be made. Additionally, instead of having one buyer listed on the promissory, the seller now has two!
Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine. A qualified facilitator will structure the transaction to ensure that potential potholes are covered.
Our experience has been that in all of the transactions that we’ve been involved in, fewer than 3 percent have had these types of problems. In the small percentage where they did exist, we were able to resolve many of them by finding a new buyer.
By incorporating these obvious and not-so-obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.
Buzz Harris, a Licensed Business Broker with The Liberty Group of Nevada, writes a recurring Voices column for the Northern Nevada Business Weekly. Contact him at 775-825-3948 or BHarris@TheLibertyGroupofNevada.com.
Heather Ashbridge, who started with Nevada State Development Corporation in 2008, previously served in several roles with the organization, including assistant vice president and loan officer. She is based in NSDC’s Reno office.