Nicole Vullo
on
Written by Jarod Bernat
It is hard to overstate how monumentally important selling a business is to a business owner. In most cases, 80% of a business owner’s entire net worth rests solely within the business itself. And other than selling a home, this is likely the largest liquidity event of a business owner’s life. These financial implications, along with the multitude of other factors that go into deciding to eventually sell a business, make it easy to understand why business owners seek expert guidance to help them navigate these situations. But most importantly, it is crucial to keep all your advisors on the same page so they can collaboratively guide you towards the best possible outcome.
A couple of years ago, Foresight experienced a situation where a funeral home owner consulted multiple experts to assist with the sale of their business. However, since the advisors were kept separated from each other, disconnected opinions and guidance caused avoidable delays throughout major milestones in the process. In this post, we will break down where conflicting guidance caused confusion so you can avoid similar stalls and build a cohesive support team to help guide you most effectively through the sale process of your own business in the future.
Milestone #1: Choosing a Successor
Every succession plan must start with deciding who can be the successor of the business so you can decide who you want to be the successor from the list of viable options. In our scenario, the owners, incredibly generous within their family, wanted to ensure their grandchildren who just entered the business were set up for success. This meant determining whether the grandchildren would be better served to purchase the business themselves, or if they would be better off working their way up in the business under new ownership.
First, we needed to establish what the grandchildren could afford (via bank financing or seller financing). In the optimal scenario, considering the sellers’ advanced stage in life, the purchase would be financed entirely through a bank loan. However, due to debt coverage requirements and cash required for a downpayment, this meant the grandchildren would be required to scrounge together more than a million dollars – all while the purchase price would be discounted by close to 20% of what the business would likely fetch on the open market.
This is where the first instance of disconnected guidance entered the process. The sellers’ bank told them that a sale to the grandchildren “would definitely be possible” … However, they had not provided any details of how it would work. In this case, the purchase price would have been required to be discounted even more significantly than expected, and the sellers would have had to carry back a significant portion of the sale price through an uncollateralized loan (meaning if the grandchildren default on payments to the sellers, they would have no recourse to recover real estate or assets to offset any unpaid debt).
Once these details were brought to light, it was determined it would simply be best to proceed with a third-party sale, where the grandchildren would have opportunities within larger corporations – all the while unburdened by decades of daunting debt payments.
Milestone #2: Multiple Offers Received – Choosing the Best Offer
Once the business was marketed for sale, multiple offers were received, and it came time to compare and select the “best” offer.
In this case, after meeting the interested buyers, the sellers narrowed their options down to two buyers and asked for a “final & best” offer from the remaining parties. Once final offers came in, the sellers continued to ask if the buyers could push their offers higher. However, these offers are what were considered “final & best,” meaning there was no additional room to negotiate. Since this became a circular discussion, the seller revealed that they were reluctant to accept an offer as they currently stood because they had two separate outside advisors advising them on what the business might be worth and how much money they would need to meet their financial goals in retirement – both of which the current offers did not suffice.
This prompted a roundtable of the entire advisory team to meet each other, learn about each other’s expertise, and unite forces to achieve a positive outcome for the seller backed by all parties. Turns out, one advisor was suggesting the purchase price of the business should be a certain value based on a rule of thumb – not based on the interest level of the buyers, not influenced by the M&A and economic environment, and not based on operational nuances impacting profitability and financing. A quick education to the group on these topics put everyone’s mind at ease and brought us to the second issue: the sellers’ financial retirement goals.
The sellers’ personal financial advisor stated they had calculated the minimum amount of money needed after paying off taxes and debt from the sale of the business for the sellers to achieve their financial goals in retirement. As it stood at that point, it did not appear that the highest offer would achieve this minimum requirement. The assumptions used to establish this demand came from generous sympathetic uses of funds post-sale due to the sellers’ status as benefactors of four generations of their family. As the sellers did not wish to compromise on these charitable goals, we had to dive into the tax analysis used to arrive at the “net” amount given the conservative nature of these estimates. A tax expert then dove into the details of the highest offer, with support from other advisors in the working group, and concluded that the purchase price offered would indeed meet their financial goals in retirement. No longer facing a roadblock on purchase price, the seller was able to proceed and accept the higher offer of the two.
Milestone #3: Navigating Diligence
Diligence is one of the final steps in completing a sale, where a buyer is looking to confirm the accuracy of the data on which they based their purchase price. That means preneed is properly funded, vehicles are in operating condition, and the staffing is unchanged.
When concerns do arise, your representatives and legal advisors can help you solve these issues. However, if these advisors do not communicate properly, it can cause delays. Unfortunately, in this case, diligence was delayed a couple times due to a lack of communication from the attorneys with both the opposing counsel, and amongst the sellers’ advisors. In each case, however, once these issues were communicated with those who could act on them, they were resolved in short order.
The sale ultimately closed successfully, and all parties involved were satisfied with the outcome. However, the timeline in this sale could have been cut in half if the advisors were working as a cohesive unit from the very beginning of the process. So, remember that expert help is most effective when it is shared openly with your entire group of advisors. This way everyone always has all the information at their fingertips, they each understand your goals, and they can all direct their efforts in unison towards helping you achieve the best possible outcome.