CONSIDERING SELLING YOUR COMPANY – PART A

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Welcome to the first of a two-part series on considering selling your company. 

I never thought I would sell my company. It had a great design, and I thought that it was going to be something to keep long term. That was my strategy when I first started the business. I started Bankers Mutual, a mortgage banking company that predominantly focused on apartment financing, in the bedroom of my parents’ home. I built the company for twenty years, believing I would have it until I retired.

I’ve mentioned before that two of my primary goals in starting my business were financial independence and time independence. Therefore, I established early on that building a strong management team was essential to achieving these goals.

I succeeded, and for the last six years I owned the company, I was able to be away from the company for approximately six months every year. I had the best of both worlds, and the company’s revenue continued to grow. You can see why it never crossed my mind to sell the company.

In September 1997, the winds changed, and within 30 days, it became clear that selling the company was the best option. I started a T-chart (learn more about T-charting here) and ended up with twenty-eight reasons that supported selling the company. I took these thoughts to my strategic planning team, who owned 17% of the company. Although they were initially in shock, they quickly came around. The team realized selling made sense not just to me but also to them. 

The industry and the values of the industry were changing. When we first started, the industry used to reward detailed, quality underwriting. Unfortunately, over time, we watched it shift to a focus on competitive loan amounts with little emphasis on service or terms.  Ultimately, this change didn’t align with my views or values. 

With everyone on board, I was fortunate enough to get a quick study on selling the company, which led to some good ideas with a decent profit. 

Through this process, I learned a lot about how to maximize your profit and be successful in the process. In this blog post, I would like to share with you key lessons I learned throughout the entire process.

UNDERSTAND YOUR ORGANIZATION’S POTENTIAL

One of the first points to consider, even if you don’t think you will sell the company, is to work to understand its full potential. Is your company marketable for sale? Secondly, what can you do to the asset to make it more marketable? 

This process is about adding value. Adding value to your company is a wise thing to do, and if you manage your company in a way that it is more valuable and attractive to somebody else, even if you never sell, it will be more likely to pay you dividends down the road.

If you build something that’s sellable, you always have the option to sell it at some point and pursue a different life.

PRIORITIZE WHAT YOU WANT TO GET OUT OF THE SALE

Once we established that we wanted to sell Bankers Mutual, we needed to answer two questions:

A. What did I want out of the sale?

This was on a personal level, and I spent considerable time on this. However, this was not an exercise I did alone. I sought wisdom from friends and counsel too. I needed to be clear and identify what exactly I wanted out of the sale, as it was one of the biggest decisions I had ever made. I wanted to minimize the odds of regret as much as possible. Therefore, it was paramount to establish not only my “why” but what I wanted out of it too.

B. What does the company want out of the sale?

Secondly, we needed to be clear on what the company wanted and needed out of the sale. It’s important to look at it from a shareholder and employee perspective. For the team that will remain, what are the items they want out of the sale? For the members that would opt to leave because of the sale, what is it that they want? 

Break it down into different categories, list them all, and then prioritize each one. How can you establish a win-win? Doing a T-chart is a valuable exercise as one can identify the negatives and knowing them upfront gives some real opportunity to mitigate as many of them as possible. 

Fortunately, what I wanted and what the company wanted were well aligned. I wanted to be free of the company and did not want to work for the next company. I had built a strategic management team that ran the organization for six months a year without me, and this decision served me well as I was able to demonstrate that the buyer didn’t really need me.

The team, on the other hand, all loved their careers and wanted to stay, so we wanted to sell in a way where the entity wasn’t going to be dismantled or taken apart but allowed to continue as a whole. If you are exiting like I did, there are a lot fewer negatives. But if you’re staying, you have a whole new relationship, scenario, and potential challenges.

Our ideal buyer was someone who wanted the company as a whole and would keep it intact.

It is important upfront to identify what it is that one wants out of the sale and what the company wants out of it as well, and how it can all be accomplished.  

UNDERSTAND THE TAX RAMIFICATIONS

Before you sign any documents of sale, “Letter of Intent,” or even hire an organization to represent you in the sale, it’s important to have your tax accountant model the sale and get a clear understanding of the tax ramifications of the sale.  

Model various assumptions and projections and identify the tax strategy that will work best for your sale. Model how it will affect you personally both before and after the sale. Model what it means to the shareholders and employees. 

We had a great team of CPAs and legal and tax counselors who helped us fully understand where we were potentially heading. Getting some of the answers upfront allowed us to make any necessary changes and adjustments. Modeling was critical at this point. It helped us understand where every dime would go and the implications of it. We also modeled out the potential of future earnouts.  Keep in mind that minimizing the income/capital gains tax is of paramount importance.

Completing these models was a collective effort. However, I encourage you to lead the process and stay involved. It’s critical that you do this because you will more than likely have specific goals and sharing them with your team of experts will help find the win. Without modeling, you would not be educated enough to make many critical decisions. 

Don’t be stingy with hiring the best legal and tax professionals to help you with the modeling. Although you may have a good relationship with your accountant or lawyer, you will need advice from someone who does mergers and acquisitions on a daily basis. There is a cost implication, so remember to monitor them and pay close attention to the fees

Identifying the right tax strategy will then help you determine how best to market your company.  This exercise ideally should start as soon as you decide to sell.

Do not have your company appraised. An appraiser only looks at what your company is worth today based on its history. Often, the other elements I am explaining that will raise the price are not looked at by the appraiser and will ultimately lower the profit you’ll be able to make. Also, it is important to never verbalize to anybody in the process what you think your company is worth.  

CHARITIES

One other area to think about before taking any action to sell the company is to predetermine if there are any charitable gifts that you want to give. Depending on the tax laws in your area, you can sometimes exclude the donated portion of your company as long as you donate it before listing it or signing documents. 

Seek expert advice before you do anything and explore the tax laws to identify any valuable strategies.

HIRE PROFESSIONALS

Once you have gone through the first steps, you should then move to hiring a professional to help you understand what your company is worth and how to best market the company. 

There are professionals who specialize in selling companies in your industry that you will learn a great deal from. Spend time with them, listen to their advice, and get input on any changes you are considering. Some of these changes can take time to implement, so understanding them as early as possible allows you to plan better.

When we were selling Bankers Mutual, we interviewed four different companies and had each of them make a presentation on how they would market the company. We chose an organization we thought had the best ideas on how to achieve the highest sales price with an excellent marketing strategy. They were extremely smart and helped us not just in valuing the company at present, but also put together a forecast of what the company would likely be worth in the future.

The professionals we brought in helped highlight not just what we had previously accomplished but the potential of where we are going. Buyers typically bring a lot to the table that will allow your company to do a better job – whether it’s capital or access to a market. Being able to understand and forecast it allowed us to ask for a price based on a multiple of future earnings rather than just historical earnings.

At Banker’s Mutual, we knew our company well, and through modeling and forecasting we were able to show a clear indication of the future of the business. However, we were not experts at selling the business. What the professionals will do is show a realistic picture of opportunities you have and package and market the company in a way that makes you attractive to possible buyers. They know how buyers in your industry think, and they know how to sell a company.

Based on our goals and objectives, we knew everyone except me wanted to stay at the company. So we needed to sell to an organization that would keep Banker’s Mutual intact and retain the team. The professionals we hired identified the right candidates for us and took us to them. It was not a blanket ‘For Sale’ sign that we put up. But because they were able to identify the companies who would be great partners, we marketed only to them.

The experts also brought in a variety of perspectives we had not thought about. For example, they provided the idea of synergies. Whenever a company acquires another company, there are certain synergies that are part of that deal and that make the new combined entity better. 

Synergies are the benefits of two companies becoming one that positively impacts both companies. The professionals we hired were able to identify many different synergies, understand the motives of a buyer, the benefits to the buyer, and helped us add those elements to the model and our marketing package. 

Buyers have a good understanding of the various synergies, but as the seller, it works to your advantage to identify them beforehand and build them into your presentation. In doing so, you can get paid for a portion of what the synergies are worth.

I believe hiring the professionals was one of the reasons our sale was seamless and happened in record time. We made the decision to sell at the end of September 1997, and in mid-November, we hired the professionals. In early January 1998, we began to market the company. By February, we had signed an agreement, and we completed the deal at the beginning of April 1998.

I have always believed in hiring the best professionals for important things I am doing. Whatever the service is, I am going to hire the best and work hard to get the best results possible. Don’t be cheap when looking to hire. Spend money if you have to—sound advice is well worth it.

I have always found the right professionals have earned me back so much more than the fees paid to them.  

ACTION STEPS

No matter where you currently are on your business journey, I want to encourage you to start thinking in this direction. Even if you don’t sell, your company still benefits greatly from the thinking and additional strategy.

In the next blog, we will cover another six lessons I learned when selling my company. Do you have an experience related to what you have read? Please share it with us in the comments section and help others learn too.