Rich Owner - Poor Seller (eBook)

Chapter 1

Don’t be a Poor Lemming!

Become a Rich Shark!

In this chapter, we’ll look at those small business owners that followed the masses, like lemmings marching into the sea. They chose to sell their business. The selling process created frustration and failure. Most never sold. They became disappointed in the pricing, the costs, the lengthy process, and the poor results. Most remained Poor Owners. None became Rich Sellers.

By definition, small businesses are too small and worth too little to generate a sales price that makes an owner wealthy. So avoid becoming a poor lemming! Don’t sell too early. Consider other choices. In the end, if you must sell, know the basics about the process. Once you do, I believe you’ll rethink your options and take a more rewarding path.

Eventually, all small business owners will exit their business one way or another. So focus on running your business now for as much financial gain as possible. Then, smartly prepare for an exit. Only a small percentage of small business owners do any exit planning. And of those that do, few fully consider all the exit options of selling, such as liquidating, closing it down, partnering, finding an investor, or managing it absentee. There is likely a more financially suitable exit plan for you than selling. But you must be open to considering all the options.

I’m not going to get into complicated ESOP exit plans, little-understood insurance schemes, risky shell company strategies, or public penny stock offerings. I’ll leave that to the “how to become a millionaire” marketing charlatans. I believe that the simple basics can teach you a lot. They point you in the right direction from the start! Remember my 20-80 Rule mentioned in the Prologue: 20% of the basics would reward you with 80% of the upside!

In this chapter, I detail my observations during the past 20 years. During that time, I worked as a licensed business broker, investment banker, M&A advisor, financial advisor, real estate broker, and media broker.

I observed much about small businesses, their finances, their structure, their processes, and their operations. I also learned a lot about the broker selling process, the broker marketplace, the small business marketplace, and the abundant research available.

My observations are not necessarily those of the professional community. I didn’t become a broker or investment banker with any particular bias in mind. Broker services just seemed like a valuable service. I’d be helping owners sell their business, cash out, move on, and begin the next chapter in their life, or enter retirement. I loved finance, accounting, brokering, marketing, and selling. I also enjoyed dealing with business owners and decision-makers.

My observations, however, consistently led me down similar paths with similar conclusions. I felt that owners of small businesses needed to understand much more about their options. Should they continue running their business? Should they hire a manager? Find a partner or investor? Should they try to sell it? Liquidate it? Or close it down?

Do small business owners understand the actual process of selling a small business? Do they know the complexity of it all? The costs? Success rates? Failure rates? Typical results? Have they considered how selling will impact their long-term financial well-being?

Over time, I learned and saw a lot about the process and metrics of selling a small business. Having that understanding will help owners make much more informed decisions. Help them select choices and paths that are truly best for them. Sell? Run? Manage? Liquidate? Close? Which one is the right one for them? It depends.

I saw that most small business owners were very uninformed about three areas. First, they could know a lot more about the best practices involving building wealth through their small business. Second, they understood little about the process of selling a small business. And third, they hadn’t explored the other exit options thoroughly.

Unfortunately, most of the marketing noise and advice comes directly from one source: the selling broker or selling advisor. That would be comparable to visiting a car dealership and asking the car salesman if you should buy a car from him. Duh!

If the advice to sell your business comes from your CPA or attorney, and they say they can help you, I have a problem with that too. I’ll share more about that later. But remember, they are accountants and lawyers, not brokers! Lawyers do lawyering, accountants do financials, and brokers market and sell.

Keep in mind that about 90% to 100% of a business broker’s remuneration comes from the success fees or success commission. In other words, they make money when you sell your business. If it doesn’t sell, they make nothing! NOTHING! NADA! ZILCH! That’s a compelling reason to push, push, push, and convince you to list and sell your business.

There you have it. Are you thinking of selling? Consider the points below.

• For starters, selling a small business is a 12monthto18month process on average.
• It usually entails a detailed, lengthy restructuring of your financials.
• It can be expensive. You will usually need to engage your attorney, CPA, and tax professionals. You pay for these expenses.
• It may put at risk your key employees when they find out.
• It may open you up to additional tax liabilities. You pay.
• You will face higher tax liabilities at close. You pay.
• Don’t expect to be successful in selling. Only one out of five small businesses represented by a broker will sell. The other four don’t sell. That’s an 80% failure rate!
• Less than 1% of all small businesses sell. That includes those represented by a broker and those that are not. Ouch!
• Half of those that do sell get less than 2.6 times cash flow before paying taxes. That means you keep just about two years of income.
• On the flip side, only 10% get more than two years’ income at the close of the sale.
• Broker commissions are high. (Typically, they are 10% to 12%)
• Taxes can take another 20% to 40%.
• The selling process creates a ton of work for the owner.
• It could take one to two years to sell.
• Isn’t this enlightening about selling a small business?
• It’s not easy! Not inexpensive! Not quick! Not cheap! And not very successful!
• And it’s not very rewarding financially!

These are the facts. They are readily available from services such as BusinessBroker.net, IBBA.org, D&B, Reference USA, and Business Reference Guide.

Now you are becoming a more knowledgeable owner, a more knowledgeable potential seller, and probably a more cautious seller. You’ll likely not join all those uninformed poor lemmings marching into the sea. And, after reviewing these selling facts, you’ll probably be asking yourself how you should proceed. What other options are there? Is there a better way? Yes. I believe there may be. Read on.

So that’s enough about lemmings. If you must be labeled something, become a Shark. It will serve you much better. Let me explain.

The definition of a Shark, according to the Webster dictionary, is a carnivorous fish in the class Chondrichthyes. It is also slang for a person who is an expert in a specific activity. A Shark might be a tough lawyer who is expert in his practice of lawyering and thus always wins his cases. It could also be a successful venture capitalist or equity fund manager who is skillful and expert in recognizing a business’s both current value and future potential value. They buy it on the cheap, way below market value, only to manage and build it into a profitable business worth many times more.

So become that business Shark yourself. Learn to recognize business opportunities and value. Learn how to build it. Learn how to make it worth many times more for yourself. As you learn more, you will not act so quickly to sell your business to a Shark. You will become the Shark yourself. You will become skilled at recognizing business values and business potential, and ultimately know how to grow your small business yourself. The more you know, the better off you’ll be. Practice and execute through your own business. Capitalize on all of this. In time, you may decide to go out into the market and hunt like a Shark for new opportunities for yourself.

I saw hordes of Sharks out there. The equity fund and venture fund Sharks are always trolling for good valuable businesses to acquire cheaply. The broker game is all about finding good sellers motivated to sell. Yes, the lemmings. It’s a tough job. Good profitable businesses to sell are hard to find. Buyers are a dime a dozen. Good companies to sell are rare. If you represent one, buyers will come.

But I’m not writing this book for the benefit of the Sharks, the Vultures, the Venture Funds, or the Equity Fund buyers. I’m writing it for the small business owners. Yes, for some of the lemmings and the potential lemmings.

During my experiences as a broker, I saw, essentially, three exit strategy options for small business owners: (a) selling your business, (b) liquidating it, or (c) putting a manager in to run it for you. Let’s look at each briefly.

I saw that selling is challenging and complicated. The process has low success rates. Nonetheless, selling a small business...