Photo by Sachin Rai of India, winner of the 2013 Wildlife Photographer of the Year Award
At the bottom of last week’s Monday Morning Memo, I asked, “Does it surprise you that the multibillion-dollar investment funds that used to buy manufacturing companies and mortgages are now bidding to buy successful home service companies at record-setting prices?”
Immediately following my publishing of that comment, a client of my partner Ryan Chute asked him for any insights he might be able to provide about the Private Equity firms that were trying to buy his business. Another Wizard of Ads partner, Stephen Semple, has worked with almost 100 business owners who sold their businesses. Here is what Steve told Ryan:
“There are three problems I’ve seen over and over. The first problem is that there is a due diligence clause in every sales contract that professional business buyers regularly use to lower the price. Here is how it works: the closing is scheduled for Friday afternoon (yes, almost always a Friday.) At noon on Friday the buyer drops the price. They tell you they have come across something that says the price is now 20-30% lower.”
“These business buyers are banking on the owner having already sold the company in his heart. The champagne is on ice and the owner is not emotionally capable of walking away from the closing table. To fight this, the seller needs to remain ready to walk. Walking away is the only power the seller has.”
“The second problem I have seen is this: selling a business is a slow process and the closer it gets to the closing of the sale, the more the business owner mentally and emotionally disconnects from the business. They stop investing in the business, stop growing it. This is a dangerous thing to do because if the sale falls through, they have to get the momentum going again.”
“The third problem is that most business owners don’t actually know what their business is worth. Knowledge is power, and you desperately need the power of knowledge when you are preparing to sell your business.”
“Ryan, my best advice is that you tell your client to run their business like they are planning to own it for the next 20 years. Remind them that their business isn’t actually sold until the check is cashed.”
Ted Rogers owned a cable TV company. When a buyer came along, Ted negotiated the price to be based on the number of subscribers he transferred to the buyer on closing day. Ted was now prepared to spend more per subscriber to acquire new subscribers than he had ever spent before. He ran promotions and offered bonuses to drive up his subscriber count. The buyer was now motivated to close the sale quickly because the price was going up every hour.
The technique that Ted Rogers employed can be used by any seller of any business. All you have to do is base the sales price on a metric that is within your control, not the buyer’s control. It can be top line sales in a rolling 12-month window, or gross profits in a rolling 12-month window, or you can negotiate the closing price to be adjusted up-or-down by the same percentage the company has grown or declined during the due diligence window. Pick a metric that you control.
And then start growing your business as you’ve never grown it before. By remaining fully engaged in your business, you have now stripped the buyer of his power to ambush you at the closing table.
And then, when the deal is done, come to Wizard Academy and tell us your story and we’ll help you celebrate.
Aroo,
Roy H. Williams
For those of us who make our livings relying on effective communications, the most persuasive choice of words is essential. Dr. Per-Olof Hasselgren has studied the relationship between human anatomy and English-language phraseology. Dr. Hasselgren, by the way, is a professor of surgery at Harvard Medical School. Listen in as Hasselgren talks about “Body Language — From Head to Toe,” and shares valuable insights on the 2,000 idioms, words, and expressions that refer to body parts. Where do you go when you want to hear about the new, the exciting, and the different? MondayMorningRadio.com, of course.