Essentially, if your company has been profitable enough to pay a buyer a reasonable wage to himself, and still hypothetically generate sufficient free cash flow to cover debt service with a margin of safety, then you may be able to sell your company as a Going Concern, in which case this How To Booklet is written for your benefit. The difference between selling your House Cleaning company as a Going Concern, versus selling it as an Add-On Opportunity is more fully explained in a separate How To Booklet, “How to Value Your House Cleaning Company.”
We sold our own house cleaning company, Denver Concierge. That experience, combined with our preceding transaction experience in finance form our foundation for writing this Booklet. We started Denver Concierge from scratch six years ago. We never intended to own that company for life. In fact, we began planning to sell the company well before we ever started it. While six years is not exactly a flip, neither is it so far off the original five-year plan we established before embarking on the venture / adventure.
Our motive for launching Denver Concierge was to build a growing profitable scaled enterprise as a means of creating value which could be monetize through its sale. As part of this goal, we recognized the importance of building a management team and system which would allow the company to operate profitably on an independent basis without our own involvement. I think that’s why we were able to sell Denver Concierge for a significant seven figure sum in the end, because we really did plan ahead–that, and because we managed to grow the company’s profits sufficiently to support such a value. Although we never reached our goal of $40,000 revenue per week, we came quite close in the year preceding sale.
Despite our previous transaction experience in the corporate world, we learned a lot during the process of selling Denver Concierge. I hope some of what we learned benefits others in the industry who might be interested in building a valuable enterprise, and then selling it to fund their own retirements or next venture.
Creating Credible Records and Financial Statements
While the major selling points for your business will relate to systems and the quality of your client base and employees, ultimately your historical financial results will determine selling price. In this respect, the bankers validate the selling price by reviewing your historical results as represented mostly in your recent tax returns.
So, plan ahead by establishing your company as a separate legal entity, such as a corporation, not a sole proprietorship. This will result in you capturing and reporting your enterprise’s results on a separate tax return, instead of reporting them directly on your personal income tax return.
Aside from having a separate return, it’s necessary to show income. If you plan to sell your company, then you have to consider that ultimately, some SBA banker is going to penalize you harshly for any flavorful, trick or treat type tax returns. Bankers prefer plain vanilla ice cream, so a clean return will ultimately enhance the sales price and salability of your company. If you plan to sell your company, including non-business income in your corporate tax return makes you poorer by a multiple of 3x to 4x the amount which you misreport. Think of it as losing one Lexus for every $10,000 of bogus expenses you include in your tax return. Aside from that, SBA lending requirements favor two years of profitability with more or less even earnings. So planning ahead will facilitate the sale of your company for the maximum value.
Aside from tax returns, you’ll ultimately have to convince Prospective Buyers, Business Brokers and Bankers that your financial and operating records support the numbers on your tax returns. So create a clean path, with the minimum number of reconciling items, between your accounting records and tax returns. We accomplished this in QuickBooks by establishing a chart of accounts which precisely matched the lines on the corporate tax return; we even included the tax return line numbers in the account names, just to continuously remind ourselves that we were keeping the records for the purpose of reporting accurate taxable income. So in fact, for each year the QuickBooks financial statements tied precisely to the lines on the tax return. This degree of precision made a favorable first impression on every person who reviewed the accounts.
Creating the Right Reason for Selling
The first question on your broker’s and every Prospective Buyer’s tongue is going to be “What is your Reason for Selling your business?” You have to come up with the optimal, true, one-sentence answer to that question. Your answer has to convince the enquirer that your company is not a rotting lemon, or a ticking time bomb. In that respect, it’s necessary to avoid ever conveying any impression of urgency. You’ve got a great company and, while you are in no hurry to do so, for the right price, you might be willing to sell it.
We took this one step further by indulging in some role playing during all meetings with Prospective Brokers and Prospective Buyers, whereby one of us took the position that we should have waited for the coming year’s results and listed it a year later. Our animated wanna sell / don’t wanna sell discussions made an impression on all Prospective Buyers. And by the third performance, with Hanna and I alternating roles, our Business Broker, came to understand that while the performances may be staged, the message was clear, “We don’t have to sell.”
For many people, finding the optimal Reason for Selling and adopting the right attitude about this topic can be facilitated through some psychological judo. If you can manage to actually fall in love with your company so that you can just barely stand to part with it, then that can help. This contrasts markedly with a fire sale situation where a seller is burdened with an actual compelling reason which forces him to sell by a specific deadline. Agents and buyers are actively seeking, or avoiding, fire sellers, depending on the circumstances. Needless to say, a fire sale will seriously compromise the sale price of your company.
Our Reason for Selling proved convincing: We had a competing interest in the form of another business. Managing the two businesses simultaneously was impairing our effectiveness, as well as our lifestyle. Since the other business didn’t have an independent management team and was less profitable, we had decided that it might now be time to sell the cash cow.
Choosing a Business Broker
Hire the most successful Business Broker in the city who will take your listing. We identified candidates by monitoring the Business Opportunities section of the newspaper to identify which Business Brokers consistently advertised the most. We started monitoring advertising and interviewing brokers two years before we listed the company for sale. We began by inviting four of them for a visit, “We’re not listing our company now, but we’re interested in meeting some business brokers to learn about the process of successfully selling our company.” Based on that proposition, business brokers lined up to meet with us like we were giving away free money.
Based on our experience, if your company manages to clear $75K per year, the brokers will meet with you, cap in hand. If your company manages to clear 5 times that amount, then the brokers will knock each other over to bid for your listing. No broker ever refused to meet with us, and most of them continued to call regularly for years until we ultimately chose one of the brokers and listed our company for sale.
Business broker professionals are not like real estate brokers , because real estate brokers can make money without finding new listings by showing buyers homes listed through the Multiple Listing Service (MLS) which are offered for sale by other brokerage firms. In contrast, Business Brokers focus on selling their own listings and generally do not sell or even know much about other brokers’ listings. A Business Broker once confirmed to me that, for this reason, listings represent the key to a Business Broker’s success and profitability.
If your company is large, don’t try to sell it yourself to save the brokerage commissions. The Business Broker will find more Prospective Buyers than you possibly can, and the pickup in your selling price resulting from showing your company to a larger pool of Prospective Buyers will more than compensate for the Broker’s commission. Aside from that, your Business Broker is going to do some actual work for you, as well as pay to advertise your company. Finally, having your Business Broker serve as an intermediary between Buyer, Seller, Landlord, and Bankers can make the difference in closing the transaction, or not.
Negotiating the Listing Agreement
During the initial meeting, each Broker will ask to see your tax returns and an asset list. Initially, all Business Brokers we met asked for an identical 10% commission. Of course, it was necessary to create a competitive environment throughout the listing process, but we found that those Business Brokers who were most excited about the prospect of selling our company were willing to negotiate the listing terms and commission rate, to as low as 6% to 8%. Your selection process must consider more than just the commission rate. The round of first listing agreements included some truly obnoxious provisions, so we recommend that you ask for a draft of the Listing Agreement early on in the selection process, in order to keep your listing options open as you negotiate the terms.
Sign a one-year listing agreement, because the agent will cut you a better deal if you do, and because you should plan on it taking a year to sell your company. Make it clear from the outset that if you don’t sell in one year, you will reevaluate Business Brokers.
Managing Business Brokers
The Business Broker’s role is to represent your transaction to Prospective Buyers, and implicitly, Bankers. So there is no reason to tell the broker anything you wouldn’t tell the others. That means you should be in your best “sell mode” every time you meet your Business Broker. He will appreciate this as it will demonstrate your ability to sell, and will also make it easier for him to represent you well to other parties.
Consider taking this one step further by treating the broker like he is the Buyer’s agent, not your agent, especially throughout negotiations. Since there are typically no Buyer’s Agents in business brokerage, once you have signed a listing agreement, your Business Broker has to fill the void, and he does this to the extent possible by sort of posing as the Buyer’s good buddy pseudo agent.
It’s easy to understand how this happens if you think about the process of prospective Buyers peddling around from one broker to the next, peeking into each broker’s pool of exclusive listings. While a prospective Buyer may be asked to sign a confidentiality agreement, there is typically nothing binding the Prospective Buyer to a particular Business Broker. In fact the Prospective Buyer remains free to roam all the way up until closing. The Business Broker must find one buyer and one seller to close each transaction and earn a commission. So, as soon as you sign a listing agreement, you become meat in the freezer, in contrast to the Prospective Buyer who requires incessant non-stop schmoozing. Of course schmoozing is a dirty job, but that’s what you’ve hired the Business Broker to do.
The Business Broker will try to convince you during the listing process that he wishes to sell your company for the best price possible so as to optimize payouts for both you and him. This glosses over the fact that the probability weighted payouts for a listing and prospective transaction experienced by a Business Broker and Seller are asymmetrical. For the business broker, there is a value of zero associated with failing to sell your company before the listing agreement expires, because you are going to list it again with a different broker. In contrast, your probable payout after the expiration of the listing agreement is still more or less the listing price. Again, the likelihood that you will shuffle agents exists because changing agents enhances exposure to a wider number of buyers which is relevant since there exists no MLS. This subtle difference in probability weighted payouts creates, an asymmetrical urgency on behalf of the Business Broker to try to sell your business before the expiry date at any price. For him a 40% discount will seem reasonable.
Our experience illustrates the point. In the initial weeks following the signing of the listing agreement, we received upon separate occasions two low-ball offers representing as little as 60% of our offer price. We refused them, and were amazed at how hard our Business Broker pressured us to accept each of them. Following our second rejection, we received a lecture by the Business Broker explaining how two prospects had now come and submitted similar offers, thereby validating the lower price as being representative of the market’s view of our company’s value. In the most colorfully direct manner we ordered him to find us serious buyers with cash. And then he did.
Our reactions to those initial offers saved us hundreds of thousands of dollars. Even so, at the time, especially with pressure from the broker, it was difficult to hold firm on price. Had we been less confident in our own valuations, or felt compelled to sell, it would have been impossible to resist the pressure.
Finally with respect to managing Business Brokers, I must say that they are unlikely to be so foolish as to actually ever lie to any party. That notwithstanding, upon two occasions we had the opportunity to compare notes with Prospective Buyers and in doing so identified some unexplained omissions to elements of our replies. Given the legal risks associated with any perceived misrepresentations, we found this alarming. Subsequently we adopted a policy of bypassing our Business Broker and responding directly to Prospective Buyer inquiries, in writing when possible.
Creating a bidding environment
Irregardless of what Business Brokers may tell you, there is no way on Earth any Business Broker is going to willingly allow a bidding environment for any listing to occur. Prospective Buyers are just too valuable to allow them to bang heads over buying your company. Absent any distractions of an auction, two Prospective Buyers will optimally buy two listed companies from the Broker. Aside from that, auctions bolster Sellers’ confidence and can make them act even more confidently. So an auction for your company is not going to happen . . . unless you make it happen.
The value of competing bids to a seller cannot be overstated. To us, it ended up being worth hundreds of thousands of dollars. We managed to create an auction by collecting business cards during every meeting with Prospective Buyers, and maintaining direct contact with every one of them, absolutely without the Business Broker’s consent. In fact there was nothing in our listing agreement precluding us from directly contacting Prospective Buyers. Even so, there were indignant protests from the Business Broker. We were strongly warned. We were reprimanded. We endured tantrums. We ignored those, and just phoned and sent emails to Prospective Buyers as we determined beneficial. It was so easy; it was so effective.
By contacting parties whom we had been told were not interested, we were able to assemble three interested prospects simultaneously, and then two competing offers with similar expiry dates. And once we managed to organize this, we were able to close in on getting real offers similar to our original listing price and terms.
When you consider advisors, think of FEES. While most parties in a transaction cannot avoid them, it’s beneficial to understand the leverage which they can create. When you think of advisor fees, think of a teeter totter on the playground. The Prospective Buyer and the Business Broker want you to commit advisors to any prospective transaction as early in the process as possible. Doing so positions you as the person in the up position on the teeter totter. If the person in the down position jumps off, then you get a big jolt, since you’ll be left holding the bag of legal fees, with no proceeds to fund them.
The second important point about Advisors is, whatever you do, never allow your Advisors to meet the Prospective Buyer’s Advisors, or your Business Broker, or even each other. This might seem obvious, but if you both have Attorneys, for example, the Business Broker is going to suggest a meeting. The attorneys are dying to spend hours arguing every inane detail in the Purchase and Sale Agreement and when they are done, you and the Prospective Buyer will be stuck at the top of the teeter totter with a huge bill, both staring down at the grinning Business Broker and two grinning lawyers.
It’s hard for me to provide more advice than that about managing advisors because we mostly don’t, and during our transaction, we simply didn’t. We flew solo from start to finish. We were able to manage this because of our previous experiences as accountants, bankers and in private equity. In contrast, the Buyer hired advisors early and often: a very nice accountant, and a wily capable lawyer. As a result, in final negotiations, the Buyer found himself fully committed to completing a transaction during the closing phases of negotiations. We don’t really advise others to hire no advisors, but we do recommend as a point of leverage in negotiations that you incur fewer advisory fees than the Seller.
The Ooey, Gooey LOI
Business Brokers love something called LOI, which is short for Letter of Intent. It’s a disreputable legally unenforceable pseudo document riddled with escape hatches. The Business Brokers try to get both parties to sign it as early as possible, because it is quick and painless and doesn’t involve attorneys before signing. The Bankers might provide a non-binding indication of interest for lending based on the LOI, but mostly it just represents the Business Broker’s best efforts for entrapping a Prospective Buyer, because the Business Brokers lack any other means of doing so.
Our Broker was pushing his library copy on Prospective Buyers who would take them home and hatch their own little Frankenstein LOI’s to be submitted at sunrise to dismayed Sellers. Once attorneys get involved, they nullify the Letter of Intent and replace it with a Purchase and Sale Agreement. Up until that time, the Business Broker waves it like flypaper.
As the LOI’s pile up, the Business Broker uses information gathered during discussions with each prospect to methodically close in on all of the Seller’s lowest acceptable positions. We discovered this over time as we began to notice each concession with any Prospective Buyer popping up in future LOI’s submitted by altogether different new Prospective Buyers.
A particularly cynical Seller might even wonder whether the Business Broker might gain some advantage in staging some LOI’s by fake Prospective Buyers, as a means of softening up a Seller and understanding the Seller’s flexibility regarding price.
The Purchase and Sale Agreement
Executing the final Purchase and Sale Agreement at closing is the ultimate goal, and until that is signed everything remains tenuous. So it makes sense that this document should be the central focus of your negotiations. If you don’t have any experience with previous agreements, and if your prospective Buyer has a lawyer, make a suggestion during every conversation, “Can we see your draft of the purchase and sale agreement?” The Seller has more pressure to finalize this document than you, because the bankers will also be asking him for it.
Sellers typically carry a note for 10% to 15% of the transaction amount. So, aside from the Purchase and Sale Agreement, the bankers will ask you to sign a stand-by letter which makes their note senior to yours. All this will be done simultaneously at closing, based on a timetable determined by the Bankers.
Negotiating to the end
If you have ever bought and sold companies, you know this, but if you haven’t, then you may be surprised at how elusive the end can be. For one thing, the Bankers have quite a lot to say about the structuring of any transaction, and when they revise any of the terms, the revisions can have a ripple effect on other aspects of the agreements.
I’m not naturally a patient person, so as things seem to drag on unnecessarily during negotiations, I have to keep reminding myself of the value of setting my own tolerance level well beyond that of the opponent. Of course that can be difficult when lawyers engage in 11th hour brinksmanship by overturning important provisions of an agreement just before signing. Because of this and other reasons, and whatever reasons, and no understandable reasons, we found ourselves negotiating about the most surprisingly basic terms of the sale, right past the previously scheduled closing and long past the original dates proposed in the LOI.
And when you are negotiating the sale of your own company it is different than selling or buying companies for an employer. It’s difficult to extricate yourself from the process even briefly to focus on other obligations. So as long as a transaction remains in process, it creates an inescapable distraction to life in general, and impairs ones all around productivity. There is nothing to do about this, except anticipate it, accept it, and endure it.
Twice during the final phases, “our” Business Broker phoned us up and said, “This is a deal killer, if you don’t cave in, the Prospective Buyer is walking. Both times we strongly refused in a convincing and colorful manner. On both occasions we were left to wonder how much poetic license was being assumed by the Business Broker. Of course, neither time did the Buyer actually walk away. r. Given the incredible fees he had incurred up to that point, especially relative to our own goose egg, we had the Prospective Buyer pegged squarely at the top end of the teeter totter. And as the fees had continued to mount, everybody became increasingly aware that if play really were to end, hypothetically speaking, any Buyer guy in that top position would be in for a good teeth crunching.
The Business Broker’s V-Day Parade finally arrived. Well, everyone but the Business Broker referred to it as “Closing,” but he liked to think of it as his own personal Parade. A surprising number of details were still being negotiated throughout the Parade until the moment I handed my keys to the Prospective Buyer, who just then became the Buyer. At that moment, all our posturing about wanna sell / don’t wanna sell and the psychological judo ended, and the most amazing thing happened: I quite unexpectedly became beset with the most incredibly strong and altogether unanticipated sense of Seller’s Remorse; it remains with me today, even still.
I mentioned this briefly during the Parade, and made the Buyer, all the Buyer’s Boys, the Business Broker, and two Bankers actually blink. Hanna was the only one who understood. I explained it more the next morning to the new owner. It wasn’t so much that I wanted to keep the company, but rather that there seemed so much remaining, potentially, to have achieved, and suddenly I had become powerless to influence the ensuing chapters of what had once been my very own Denver Concierge story. We had over the years prepared the company so exceptionally well for sale, but finally, quite astonishingly I found that I wasn’t altogether so well prepared myself.
And so you can imagine how I felt making my final speech to employees, as I informed them of the purchase, introduced the new Owner, shook some dear hands, and then, after all that, had nothing remaining to do but walk right out. And in the blink of an eye, it was done.