Help clients sell their companies

We specialize in the sale of privately owned companies and get a lot of interesting questions.

During the past several months, I’ve noticed a significant increase in inquiries from investment advisors as baby boomers look at retirement options.

Advisors are asking what’s involved in the sale of a privately owned business. Most IAs twig quickly to the fact that if a client sells his business, there will be substantial proceeds from the sale; and they’ll need to be managed.

Read: Sell a business and reduce taxes

Most of our clients sell their businesses to allow them to retire. Their children either aren’t interested in running the business, or aren’t qualified. So the parents decide it’s best to sell. Other reasons for sale include shareholder disputes, illness or death.

Read: Help business owner clients sell out

These are the 10 questions I get most from investment advisors regarding client business sales:

• How do I know if my client has a company worth selling?
• How long does it take to sell a private company?
• What is my client’s company worth?
• Who will buy my client’s company?
• What is involved in the sale process?
• What should my client do to prepare to sell his business?
• Do you specialize in specific industries?
• What are the biggest causes of deals not closing?
• How can my client maximize the value of his business?
• What does a typical deal structure look like? i.e. how much of the business value is paid in cash on closing (free to invest) vs. held back as vendor financing or an earnout?

In a series of articles, I’ll answer these questions. Here’s the answer to the first:

• How do I know if my client has a company worth selling?

Read: Prepare to sell your business

Several factors determine the answer; foremost is the size of the business.

If the company’s annual sales or revenue are less than $5 million, it might be salable but probably isn’t large enough to warrant the services of an M&A advisor like my firm. Since the most likely buyers are larger companies in the same industry or wealthy people, there is a minimum size that they require to make the exercise worth their time.

As important as revenue size is profitability. The more profit a company makes, the more it is worth. And if there are strong indicators that the company will continue to make solid profits — and preferably increase them — this will boost the value of the company.

Read: Clients selling their companies?

Software companies are the exception to this rule due to higher growth potential. Their valuations are often based off revenues rather than earnings.

Buyers will analyze a company’s sales and earnings trends of the past several years. If those metrics are consistently increasing, that company is worth more than a company with flat or decreasing sales and earnings.

Recurring revenue is another factor in determining a company’s saleability. If a company does contract work and is always looking for its next client, that business is less attractive than one a company that has repeat customers year in and year out.

Read: Succeeding your business

I always refer to the insurance industry as a great example of a recurring revenue business: Most people renew their insurance policies with the same company year after year. Building maintenance companies with long-term contracts also have recurring revenue. Software as a Service is a relatively new business model where users pay on an “as used” basis. This can turn into a perpetual revenue stream.