CHAPTER 1
The Art and Science of Selling a Company

Jonathan (not his real name) came to me wanting to sell the business he founded in the early 1970s. I could tell he was nervous by the way he clenched his jaw. He had several people approach him over the years, but he wasn't ready to sell until his wife pointed out they were well past retirement age. Now that he had made the decision, he realized he didn't have any idea how to proceed. He told me he didn't even know how to accurately price his business, much less how to handle all the paperwork that would go along with the sale. "It's basically like selling a house, right?" he asked. I had to tell him that selling a business and selling a home were two very different things. But I assured him that I could help him with every step along the way.

CONGRATULATIONS

Before we get into the nitty-gritty of selling your business, let me first offer you congratulations: You've built a company that's worth selling. As an entrepreneur, you understand how rare a feat that is. Many ventures fail or fizzle out, the victims of intense competition, economic forces, or lack of access to capital. Of course, plenty of business owners manage to build profitable little businesses that support their families and a few employees. What you've accomplished is far more difficult: You've constructed a viable middle-market business with loyal customers and a stable workforce. Over the years, you've refined systems for keeping the books, collecting revenues, training employees, and servicing customers. Perhaps most impressively, you've developed a company that can survive without you - the business won't fall apart the moment you leave. That's how real wealth is created. If you plan the exit properly, you'll be financially secure and set for whatever you want to do next, whether that's retirement or some other endeavor.

This book will help you understand and gain confidence in navigating the mergers and acquisitions (M&A) process. I'll walk you through both the art and science of selling a middle-market company. Granted, some complex technical skills, such as building financial projections and structuring the deal terms, are important, but success in selling a company is just as much about psychology, relationships, timing, and instincts. You need to market the company in a way that creates excitement without overpromising. You also have to keep your employees in the dark - but do so in a way that maintains their respect and loyalty once the transaction is announced. You need to manage your own roller coaster of emotions throughout the process. And you need to come out of the deal knowing you got the best deal possible. That's what this book is designed to do.

I'M HERE TO HELP

Doing it yourself is tempting, I know. After all, you know the company better than anyone. And you made it this far by relying on your own instincts, hard work, and an ability to figure things out. You're an expert at running your business. However, you're probably not an expert in selling it. The business world is a cutthroat place, and those who are unprepared or overmatched rarely come out on top.

So, why should you devote your scarce time to what I have to say? I began my career at a major Wall Street investment bank, and when I started doing middle-market deals, I quickly realized it's an entirely different world with different sets of deal types, processes, valuation methodologies, and tactics. Given the smaller deal teams and the unique attributes of founder-owned businesses, middle-market transactions have a variety of multidisciplinary challenges. As an M&A advisor (to minimize repetitiveness, I will use the phrases M&A advisor, investment banker, and banker interchangeably), I specialize in selling middle-market businesses. This book focuses on the specific needs and challenges of the founders/owners of these companies.

LET'S LEVEL THE PLAYING FIELD

Do-it-yourself sellers put themselves at a severe disadvantage when transacting with seasoned repeat buyers. You can bet your buyer and their advisors have negotiated many deals. Any number of sports analogies apply - and they're all variations on the theme of the enthusiastic amateur going up against a seasoned professional. If you occasionally play a round of golf, you wouldn't expect to compete with a professional golfer and come out ahead. The pro will almost certainly win. He has top-shelf equipment. He practices his swing obsessively. The elite player employs a coach to analyze his mechanics and follows a strength-training program and flexibility regimen designed to maximize his innate talent. In addition, the professional plays in tournament after tournament, going up against elite competitors and performing well. He has learned to control his nerves at stressful moments and to master his emotions as the pressure mounts. Even if you shoot the round of your life, you're still likely to finish well behind the pro. The pro will dominate you throughout the competition while quietly noting all the gaffes in your strategy and cataloging the many holes in your swing. Your flaws aren't obvious to you, but they're abundantly clear to the expert. The same applies to all sports - an amateur has essentially no chance against a professional, well-coached player.

You can level the playing field by arming yourself with information and surrounding yourself with a team that will give you competent professional advice. In fact, I'll share the factors to prioritize when selecting the best advisors for your business.

So, exactly what will you learn by reading this book?

• Context regarding the why behind important elements of the process.
• Framework for selecting the optimal time to sell.
• Respective roles and expectations of the various deal team members, expected fees, and factors to prioritize when selecting them.
• Prioritized questions to ask yourself and your advisors to make informed decisions.
• Understanding your counterparty's (i.e. buyer's) perspective and typical strategies.
• Negotiation tactics and the underlying psychology behind many of them.
• What to expect from yourself psychologically/emotionally and how to best prepare.
• Things that can be done today to make your business more valuable/sellable.

Given the emotional excitement and pride that owners have in the businesses they built, many expect buyers to view their business as special and anticipate unrealistically high valuations. In his book Walk Away Wealthy, financial planner Mark Tepper aptly summed up the unrealistic hopes of middle-market sellers: "Many business owners stubbornly cling to fantasies about selling their businesses easily and for big money. They're certain that they will (a) find multiple high-quality suitors for their company as soon as they put it on the market, (b) get several quick offers worth many times their company's [earnings], and (c) walk away rich and happy without having done any serious exit planning in advance" (Tepper 2014, p. 3).

If only it were that easy. The truth is that selling a company is exceedingly hard. Most business owners I meet are woefully ignorant of what it's going to take, how long it's going to take, and the likelihood of success. Here are the harsh facts:

• Just 20% of businesses of any size successfully sell to a third party. The success rate is probably more like 50% for middle-market businesses - but a 50% chance of victory doesn't sound very good when your life's work and net worth are on the line.
• Private equity (PE) firms close on approximately 1% of all businesses that they review. Statistically, there's a better chance of getting into any of the Ivy League universities.
• Depending on the reported source, only 25-50% of signed letters of intent (LOIs) result in a closed transaction, with many of those at terms materially lower than the initial agreement (Beshore 2018, p. 92). The absolute highest close rates I've encountered among professional buyers are around 80%.

FORGET WHAT YOU KNOW ABOUT SELLING PROPERTY

Many business owners mistakenly assume selling a business is similar to selling real estate. You've probably sold a few houses in your day and perhaps a commercial property or two. Yes, those are complicated transactions - but they're child's play relative to selling a business. There are a number of key differences:

• While a property transaction can be completed in 30 days or less, the total timeline to sell a business is 5 months at a minimum, and frequently in excess of a year.
• Real-estate sales require little of your time, and the process is all about the property, not about you. In an M&A transaction, seller owners and their staff commit significant time and resources to the process - typically more than 1000 hours.
• Businesses are much more complex, involving processes, organizational structures, and human dynamics.
• When a buyer purchases a business, they are buying its people, with a particular sensitivity to dependencies on you as an individual.
• Given this complexity, the diligence process is more thorough and intense, involving multiple professional advisors reviewing thousands of pages of...