Thursday Thoughts for SMEs: You want to sell well, then buy first.

There is a very big difference between selling a business well and selling a business. 

For many of our clients the sale of their business will likely be one of the largest transactions in their life. It will be the culmination of years or sometimes generations of hard work and will conclude their time running their own business. 

Selling a business is hard. It is emotional. It is taxing. It is exhausting. But if you do it well it can be hugely rewarding, empowering and fulfilling. 

My advice is if you want to sell well, then buy first. 

It sounds contrarian but until you have sat on the other side of the deal you do not understand why questions are asked or why buyers are concerned. 

I think there are 3 reasons why all SME owners who want to sell should buy first. They are: 

1. You can understand the buyer's position. 
2. You get to know the process; and 
3. You get to see the issues. 

Buyer’s Position 

Many SME owners that we have dealt with have never sold or bought a business before. It is a ‘virgin’ experience for them. Their expectations are either set by their friends' experience or by what they read on the internet. 

Until you have gone through the rollercoaster of an acquisition or a sale, you cannot begin to understand the other party’s position. 

For example, we often see sellers question why information is needed or get defensive as to handing over information to potential buyers. This is madness. Information is required in order to make an informed decision as to whether the business is investment grade or not. It is like buying a car sight unseen without any idea of warranties or condition. The seller has all the information because it’s their business and the buyer just wants to get enough to make a decision. The seller has a bias toward “good’ whereas the buyer has a bias toward “bad”. Until information is given to confirm either one, the chasm is extremely large and unsurpassable. 

If a seller has bought a business, my experience is that they understand why information is required and the extent of information that is required. 

If you place yourself in the position of the buyer you can understand and contextualise their information requests. 

The Process 

M&A is a process. It is unique and requires experts to be part of the deal team. It is not something you can just decide to do without the right people in place if you want to get a great result. 

The sale process is arduous and long. It involves commercial negotiation, investigation, documentation, financing, completion and post completion amongst a bunch of other tasks. Each of these tasks can be enormous and extremely time consuming. 

My experience is that if either party has the wrong deal team in place then these stages can take longer, cost more and ultimately become a roadblock for a deal to be completed. 

If a seller has ever bought a business, they have likely been through this process. They would be familiar with the time and the stages. They should have a deal team in place and should have adequate people ready to act and advise on their behalf. 

Understanding the process helps the seller understand why the buyer is asking certain questions or wanting certain things. 

Key areas where the inexperienced get it wrong:

• Working capital calculations 
• Pre settlement dividends 
• Deal structuring 
• Warranties & representations 
• Whitewashing; and 
• Financing compliance. 

If you have walked the walk before, you know what is to be expected and where the dangerous aspects lie. You can therefore prepare yourself and the business for them. 

The Issues 

Every SME owner has more information in their head than they recognise. They also believe that their business is perfect and should be bought straight away. “It’s a good business” is possibly the most often heard statement in meetings I have with possible sellers. 

The reality is that a seller’s reality is distorted. There is a bias towards good as I have previously outlined. If the seller has not gone through the buying process then they will not understand what the seller’s bias looks like. 

If you want a good exit, then you need to go through the buying process. You can identify what is good, what is bad, what is unexplained and what needs to be in place to stop value erosion. 

If you have this information you can apply it to your business. If you take appropriate steps to address the key questions, processes and issues then you can present your business in the best possible light. 

If you know that financials will be required, get them ready. If you know that a lease is key, review it and get it ready. If you know you have key person risk, work out a strategy to de-risk the business. If you know the equipment is aging, perhaps look at options for new gear. If your purchasers want contracts, look at implementing contracts. 

Selling a business well is like eating out. Nutritionally the food at a fine dining restaurant and a local restaurant are probably the same but the price is vastly different. 

This may be because: 

• The ingredients are better (contract revenue vs non-contract, client concentration or client quality) 
• The front of house is better (employment contracts, risk management frameworks or documentation); or 
• The experience is stronger (processes and procedures, key people, sales teams and branding). 

People will pay a premium for quality. This is no different when buying and selling businesses.  

If you understand the issues, you can address them at an appropriate time. You can take a good business and make it a premium business with the right process in place. 

If you understand the issues in a possible sale or purchase you can understand what the buyer is concerned about and make appropriate changes. 

Understanding the issues is key to understanding why your business may or may not sell. 

Conclusion 

If you want to sell well, you should buy first. 

Ideally you should look at a small ‘tuck in’ business which would be beneficial if it goes well but not catastrophic if it goes poorly.

It will help you as a seller understand the buyer's position, the process and the key issues which in turn should enable you to address each of those in the sale process resulting in a much better sale.