A few years ago, an entrepreneur who I’ll call Barry Franklin got a phone call. “I have a potential buyer for your business,” said the person on the other end of the line. “Are you interested in selling?”
Barry thought for a moment. His business was running well. He had a good management team in place. The company was profitable and had healthy cash flow. Sales were up nearly 30% over the previous year and the business was having its best year ever. “Not really,” he replied.
The business broker persisted and convinced Barry it was worth his time to consider a sale. It would have been a good deal for both businesses and the broker if it had gone through, but a number of issues got in the way.
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Barry wasn’t mentally or emotionally ready to give up the company. It was his baby—he had started it from scratch, nursed it through the tough years, built it up, and put a good team together. Barry liked his customers and employees. He was still reasonably young and energetic. The future looked bright. Why would he give all that up?
His management team wasn’t ready for him to give it up either. Barry was open with them when this opportunity arrived. Selling would have been advantageous to them as well—their jobs would have been more secure, and it could have opened up new opportunities. But as he ought to have expected, they too were resistant to change.
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The business’s books weren’t in good shape. Of course, the company did all the things they had to do to keep CRA happy. They followed the rules, got an outside accounting firm to do year-ends and paid their taxes. But when the broker started digging, there were too many questions that took too long to answer. Barry didn’t really understand some of the key numbers in his business.
Barry didn’t have a clear understanding at the time of what EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was and how to calculate it. He ended up presenting three different numbers to the prospective buyer. This became a real stumbling block, because the buyer thought Barry was playing games. He wasn’t, but it made the buyer question all the other information he was getting. Barry lost credibility.
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The company served a troubled industry, and its revenue was too heavily weighted to a single customer. Customers were not consistent in their purchasing, and Barry didn’t have any long-term contracts with them. While the company’s revenue was good at the time, there was no assurance that it would continue into the future. Barry’s undying optimism wasn’t convincing enough.
After making a reasonable initial offer for the business, the buyer ultimately walked away. At the time, Barry was a little disappointed—but not as disappointed as he should have been.
Although the business that had been on an upward trajectory, it began to go south, for many of the same reasons the buyer declined to proceed.
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The previous year’s success convinced Barry to increase his overhead—hiring more people, buying new workstations and more software licenses, and increasing salaries. Money was flowing, so employees began buying more products in bulk with less scrutiny on office supplies. More incentives were paid out, and Barry improved the benefit plan. But customers in the declining industry continued to cut back on their orders; some were bought out and stopped working with Barry altogether. Then the one customer making up the bulk the company’s revenue began to cut back as well, first by 30%, and then 50%.
Barry’s company went into a tailspin. His senior manager quit. All non-essential employees had to be laid off. Soon Barry was pouring more and more of his own money back into the company in order to keep it afloat and meet payroll. Things went from bad to worse when his biggest customer announced he no longer needed Barry’s company and was going to a competitor.
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Barry had no choice. He closed the business. Eighteen months after having the company’s best year ever and receiving an exit offer that would have nicely supplemented his retirement plan, Barry woke up to realize he was in serious trouble.
There are a number of lessons to be learned from this story:
¢ The best time to sell may be when someone wants to buy. As Tom Deans, author of Every Family’s Business says, “Your business should always be ready to sell.” Get ready, emotionally, mentally and financially.
¢ A business is worth more if it has signed, long-term contracts with customers and recurring revenue.
¢ Diversify your customer base. Don’t have too many eggs in one basket.
¢ Know your numbers. Understand how your business should be valued. Get advice from experts before presenting your numbers to a buyer.
¢ When business is going well, put some money into a reserve fund. Don’t let your employees spend it all.
If someone makes you an offer for your business, are you ready to sell? If you are, you could avoid Barry’s plight and end up with an asset instead of a liability.
Wayne Vanwyck is the founder and CEO of The Achievement Centre International in London, Ont. He is the creator of The Business Transition Coach Forum and the author of the best-selling books,Pure Selling and The Business Transition Crisis. He has been training and coaching business owners for the past 30 years.
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