Pearls of Wisdom: What to Know When Selling Your Business!

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Earlier this year, the NewBridge Group Team compiled a list of lessons we’ve learned during the past 20 years while representing more than 650 funeral home businesses in their exploration of a sale. Here are a few of the top tips from our experts:

• It is better to sell from a position of strength. A business is more valuable if revenue has been stable or is increasing, the owner is in good health, and high-quality employees are in place. If an owner waits too late and has to sell due to poor health, declining revenue, a loss of a key employee, or a new competitor opens up in the market, the value of the business will likely be much lower.

• Know your value before beginning discussions with potential buyers. Have a valuation completed by an industry-experienced consultant. The more information you have about the value range of your business, the better off you’ll be when you begin negotiations with prospective buyers. If you errantly believe the value to be too high, then your expectations could be set so that you’ll never be happy with any offers. And, even more dangerous, if you believe the value is too low, you could unknowingly sell your business for much less than it is actually worth. Know your value!

• Sellers are often selling their legacy, so the dynamics of the sale are often more important than the top bid. The preferred buyer, in the eyes of the seller, is not necessarily the highest bidder, but rather the one who has the best intentions, the best chemistry, and/or the best credentials.

• Have high-quality financial statements. Make sure your financial statements are well organized and logical. Expenses that are recurring should stay in the same line item each year. Clarity and consistency give buyers comfort. The extra dollars required, if any, in preparing strong financial statements comes back several times over in the purchase price.

• If possible, prepare the business for sale one or two years in advance. This is best done in consultation with a succession planner who has industry and financial experience. But, if you’d prefer to do it alone, you can start by putting together a business plan, clean up your financial statements by incorporating an easy-to-follow chart of accounts, change your company’s tax structure if necessary, update your funeral home décor and paint, and ensure that your business is operating as financially efficient as possible. This will provide a history of operating success that will encourage a buyer to pay more than if you had no plan in place. Also, this will allow you time to put employment agreements in place with key employees.

• You should avoid the introduction of a lawyer into discussions with principals before the elements of a business deal have been completed. As soon as the one party introduces such an expert into discussions, the other party will do likewise. Since such individuals must protect the technical aspects of their client’s positions, more transactions have failed by the premature introduction of such specialists than have been made.

• Don’t be inflexible on deal structure. In order to obtain the best possible deal, you should begin the process with as few mandatory demands as possible. Inflexibility can lead to a transaction not happening or a structure that is weak in other areas. Having said that, there may be some items that you view as non-negotiable, such as an asset sale versus a stock sale, and, if that’s the case, you should clearly communicate these requirements to potential buyers as early in the process as possible.

• Do not be afraid to hold a Seller Note with a qualified buyer. Often, in order to obtain the highest price possible, an owner may need to hold a note receivable from the buyer. This structure serves a few purposes. First, it can allow a transaction to be completed at a higher price. Second, it allows other lenders to be comfortable with a transaction knowing that the former owner is willing to keep an investment in the business. And finally, if structured correctly, this structure can be a tremendous investment for a seller by allowing a deferral of taxes and receipt of interest income on the pre-taxed portion of the sale price.
• Maintain the highest level of confidentiality. One of the challenges of representing yourself is that you need to keep the conversations confidential. If you’ve hired a representative, conversations with buyers can be managed from your consultant’s office, so you don’t have potential buyers calling the business. The last thing an owner wants prior to selling is the word being spread through town that their business is for sale. A representative can greatly help in keeping your sale exploration confidential.
• As a seller, be aware that many buyers will view the value of a Subchapter  S Corporation or LLC to be higher than if the same company were a C Corporation. Most buyers prefer to make asset purchases and avoid liability issues and negative tax complications associated with a stock purchase.

• Selling out doesn’t mean saying goodbye. To fetch top dollar for a business, more owners find that they prefer to stay involved in the business going forward in some capacity after the sale. And, buyers typically prefer to have owners around to help with the transition for at least a short period of time after the sale.

• Don’t neglect your business while you’re. Exploring a sale, remember your business needs to continue to perform well while you’re thinking of selling. Families still need to be served, employees need to be managed, and funeral averages need to be maintained. Don’t get so distracted negotiating with buyers that you lose focus on operating your business.

• Don’t negotiate directly, but through an intermediary who can mediate, act as a buffer, and carry on “sidebar” conversations. Don’t let too much time elapse between meetings with an interested buyer. Make sure that your intermediary pre-qualifies any possible buyers so that all conversations have true potential to reaching a goal. When you structure your agreement with your intermediary, make sure it is success fee based and that there is incentive for your sale price to be as high as possible.

• Act with absolute clarity in all of your negotiations so that the potential deal-breakers surface as early as possible and can be worked through in a timely and thoughtful manner, rather than rushed through in a stressful and potentially deal-killing manner at the eleventh hour.

• Keep the momentum going. Deals that drag don’t close. Energy and zeal are critically important in successfully selling your business. Once the process starts, keep it moving, or you may lose momentum and affect your business and the morale of your employees.

• In negotiations, start with the less confrontational issues first. Win/win negotiating makes use of the principle that handling easier topics at the beginning encourages yes answers with the habit of saying yes continuing through to a successfully completed transaction.

• Businesses get stale after being on the market for sale for too long or if the owner backs out of deals multiple times. Buyers get leery of owners who are hesitant in what they want to accomplish in a sale. It is paramount that owners go into negotiations with reasonable goals and are ready to sign the documents if those goals can be reached. Changing your mind in the middle of negotiations will generally hurt the value of a business in the long-run.

• Don’t negotiate with people who don’t have the financial capability to buy the business. There is just no plausible reason for sellers to enter into conversations or negotiations with individuals or companies that can’t prove their access to funds prior to negotiations. We’ve been called into transactions dozens of times over the last few years to try to resurrect a transaction only to find out the proposed buyer has almost no funds of their own to invest. Buying a Funeral Home without having at least some money of your own is extremely unlikely and negotiating with this type of “buyer” is almost always a waste of time and energy.

If you follow these guidelines you stand a lot better chance of achieving all your goals and being content that the business you’ve spent your life building, has been sold at a fair price and is in good hands with a new owner that you trust.

NewBridge Group provides financial consulting, intermediary and succession planning services exclusively to the funeral industry. Call our office at (404) 249-9582 or visit our website www.Newbridgegroup.com to get information on receiving a free consultation. Stay tuned for more Pearls of Wisdom from the experts at NewBridge Group.

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