By: Live Oak Bank
Editor’s Note: This is part one of a two-part series taken from Live Oak Bank’s “Guide to Selling Your Business.” The guide is a comprehensive overview for business owners to help them prepare for selling a business. Part two will be featured in the July/August 2021 issue of Funeral Business Advisor Magazine and will cover defining, sourcing and finding the ideal buyer and the transition process. To download the full guide, visit www.liveoakbank.com/fba-guide1
Congratulations, sellers. You have started down a new path. After investing years of hard work to build a business with value, it is now time for you to consider your options. This is an exciting time filled with possibilities, but it can also be a time of stress and uncertainty.
THE CHALLENGE OF SELLING
Throughout this process, there are two primary risks to be aware of: the risk of choosing a buyer who does not align with your company culture and your customers, and the risk that the buyer fails to pay you. Much of this guide will focus on mitigating these two potential pitfalls.
You must be clear and honest — with yourself and with potential buyers — about what is most important to you in terms of who you would consider an ideal buyer, the type of transaction you’d prefer, your vision of a transition, and how you’re thinking about life after the sale. Taking time to prepare now will help you secure the maximum value for your business.
PREPARING TO SELL YOUR BUSINESS
Taking time to research and prepare for selling your business could yield many benefits.
- It increases the odds of getting what you want in terms of buyer profile, price, deal structure, transition, and life after transition. You will be able to negotiate more effectively from a position of knowledge and preparation.
- It can help relieve fears and anxiety in both your staff and your customers and helps you better articulate the timing, transition and benefits for each of them.
- It can help you filter out the noise and distraction mentioned above.
- It boosts confidence that your search will end well and make for a more satisfying transition process.
- Below we will discuss preparations for yourself, your business, your staff, and your customers. Let us start with how you begin.
The first step is a bit of crystal ball exercise. Start with the end in mind and imagine a perfect day after you sell your company to a successor. Knowing where you want to be in retirement helps develop the roadmap for getting there. Next, create a retirement budget to make that end dream a reality. What will your living expenses be like once you complete your succession plan? What are your revenue sources? Will you receive any income from other employment? How much income can you count on from sources such as Social Security, annuities, or your investments? Will your spouse earn income? It’s important to ensure there is not a gap between your projected income and your projected expenses. Use your projections to inform the way you plan for a succession.
You have options when it comes to your succession strategy. A staged succession is one way to preserve the business that you worked so hard to build. The staged strategy allows your successor to gradually step into ownership and provides you with a gentle path toward exiting the business. This strategy tends to create a positive client experience since clients have time to get to know your successor. As a result, attrition is usually exceptionally low.
Selling your entire business is probably the simplest option. This is typically the fastest way to transition the business, and you can invest your proceeds. You may decide to stay on as an employee, or you may choose to engage in your post-succession life right away. If you have an immediate need, health issue or family issue, a straight-on sale can be the most satisfying strategy. Again, you must find your qualified buyer and communicate the change effectively to staff and clients.
PRICING YOUR BUSINESS
It is essential to think through deal structure and determine what is most important to you. There are three key components to any deal structure: price, terms and taxes.
Companies have a price to earnings multiple and those multiples vary. For example, the average price of all homes sold in the US in 2019 was $123 per square foot, according to Realtor.com. That number may or may not apply to your home. The same is true for your business. The multiple is just a starting point, not a valuation.
At Live Oak Bank, we strongly recommend hiring an experienced valuation specialist. You need to know what you’ve got before you go to market. Often, a valuation specialist can give you good ideas for increasing your business’s value as you prepare.
Keep in mind that even the best valuation is not the same as a price — and it typically does not equal the final amount paid. Think about how important your company’s price is to you. Here are
some questions to consider:
• Would you sell to a buyer who does not fit your culture to get a higher price?
• Are you willing to accept a long-term payment plan from a buyer, with all its
inherent risk, to get a higher price?
• Are you ready to take a less favorable tax structure to get a higher price?
It is just as important to think about the deal’s terms as it is to think about the price you want. Deal terms govern how a buyer will compensate you for your business and how the buyer and seller will distribute risk. If the buyer bears most of the risk — by paying for the business quickly — they usually can ask for a discount. If the seller bears most of the risk — by maintaining equity in the business for an extended period — they can usually ask for a premium. How much risk in the transaction are you willing to bear?
Taxes are another critical component of the deal. Some tax allocations, such as goodwill, are subject to long-term capital gains treatment. Other allocations, such as consulting, are taxed as earned income and may be subject to federal and state income tax, FICA and Medicare tax. Are you willing to take a lower price or increased risk in the deal in exchange for a favorable tax allocation? These are important issues to discuss with your accountant and attorney, as well as your spouse or partner. Your accountant and attorney will have a lot to say about what an optimal deal structure for your specific situation and desires looks like.
MAXIMIZE THE VALUE OF YOUR BUSINESS
Buyers are looking to acquire revenue that is affordable, transferable, predictable, and lasting. How your business is structured, your clients’ demographics, growth potential, and other factors will influence your business’s value. You can take steps now that will prepare your business for acquisition and possibly create a premium for yourself.
Start with the mix of products and services — ensure that your products are easy to understand and create recurring revenue. Next, assess your expense structure. Identify any expenses that you can reduce or eliminate so they will not transfer to the buyer. Review your service models and make sure they are easily transferable and efficient. Be sure to document your workflows and other business processes. Some buyers find good business systems extremely attractive and will pay more to learn them and adopt them for their entire business.
These are some of the items that will create a premium for your business:
• Strong business potential
• Accelerating or steady growth
• Ease of transition
• Ease of business
• Efficient, well-documented workflow and integrated systems
These are a few of the items that will create a discount for your business:
• Declining revenue
• Expenses that the buyer will be required to accept (lease,
• Service model that is difficult or expensive to replicate
• Concentration in customer demographics
Courtesy of Live Oak Bank. FBA
Live Oak Bank’s team of funeral home and cemetery loan experts offer a variety of loan products to meet the diverse needs of the funeral profession and can offer small business funding of over $10 million. Their non-commission sales team will work with you to determine which product best fits the unique needs of your funeral home or cemetery. Whether you’re seeking to buy, build or improve a funeral home, their financing expertise and knowledge of the funeral home profession will help you reach your goals and avoid costly mistakes. Visit their website at www.liveoakbank.com/funeral to learn more.