When It’s Time to Sell Your Business: Four Steps to a Pay Out
About four years after founding her business for mothers Bump Club and Beyond, Lindsay Pinchuk had a moment of reckoning: she realized it was time to sell her company. Bump Club and Beyond was built to serve pregnant women with infants. Pinchuk had been in that situation when she started the company but wasn’t anymore. “My kids were 8 and 11. I was no longer in the baby life stage,” she said. So, she decided to sell.
The realization that it may be time to sell the business strikes many entrepreneurs. But here’s a chilling reality: selling a business is not easy. In fact, many find it impossible. By some counts, 90% of startups close, and a key reason for that is no buyer could be found.
How did Pinchuk succeed when many others failed? Because she understood that “getting acquired does not happen overnight. It is really hard,” she said. That means you have to work at it, maybe as hard as the work involved in starting a new business.
You want to sell your business and have the same happy ending as Pinchuk, who eventually had three companies seeking to buy her out? Below are four steps that just about every business that sells will have to take and two mistakes that will likely kill all sales prospects for a company. Use this as your road map for a perilous journey.
The Four Keys to a Business Sale
Have a realistic selling price in mind for your business. “Most owners come up with a figure based on something they heard from someone else. There is a lot of misunderstanding,” said Tabetha Sheaver, founder of PlusDelta, a St. Louis consulting firm that has worked with many small businesses seeking to sell. Setting too high a price drives potential buyers away; setting too low a price takes money from your own wallet. Do real research to find a realistic price. What did comparable companies sell for? Keep asking until you have a number you can defend and also live with.
Know your assets. There are many reasons buyers buy a business. Some are acquiring talent, others are looking to add customers, and many want to buy a business where they believe their expertise and contacts will allow for fast, profitable growth. Know where your business is especially attractive and work to make it even more attractive in that regard.
Case in point: Bump Club and Beyond had a particular draw, Pinchuk realized. She had developed partnerships with big-name retailers — for instance, Bump Club and Beyond put on events in Target stores. That proved crucial in selling her company. “My biggest competitors did not have [this], and ultimately my buyer informed me they bought me to get in with Target.”
Get your financial books in order. Absolutely, many startups keep their books on the backs of envelopes. That may even work — up until there’s a desire to sell. Then the business needs neat, clear, honest books that an outside accountant can look at and quickly decide how the business is doing. That last is critical because just about any legitimate buyer will want their accountant to look over the numbers before sealing a deal.
Have a history of success. In a fourth step, David Jacobs, a Silicon Valley business broker, adds that not only do the finances need to be well organized but there also needs to be a repeatable pattern. He notes, “When you sell a business, the buyers are looking to acquire your cash flow. This means that the cash flow must be predictable and continue into the future after there is a change in control.”
Just because the business booked $1 million in sales last month doesn’t mean a buyer will figure that in their offer, not if most months over the past two years saw the company struggling to book $50,000 in business. A repeatable pattern is key to how buyers value a business.
The Deal Breakers
And then, of course, there are the dealbreakers, mistakes that make a business unsalable. Spot a dealbreaker now, and typically it can be remedied. But the first step is recognizing that your business is afflicted with these problems.
Maybe the biggest, most common dealbreaker is what Jacobs calls “owner dependency.” Many small businesses revolve around the owner, who is involved in every decision — maybe right down to what to order for lunch today. That is an immediate deal-killer in most cases because, commonly, the buyer has a plan for an orderly separation of the former owner from the business. But when the whole organization is owner-dependent, it just can’t happen.
A sure cure: build a team of good, reliable employees who know their jobs and are capable of independent thought and action.
Another deal killer: big surprises. Lou Haverly of Enhanced Leisure elaborated: “When selling your business, buyers will immediately zero in on anything that jumps out. This means any unusual revenue or earnings declines require you to explain in a simple and concise manner. If you can’t explain something or it seems like you don’t know your business, investors will run for the exits.”
Remember that $1 million bonanza month? It definitely needs an explanation or possible buyers will likely vanish. What if it’s a sale that had been pursued for several years — and there’s an email trail to document that hunt? Most buyers will accept that. It’s mysteries that scare buyers away. When they know what happened, they probably can accept it.
Time to Sell Out
Ready to start selling your company? One last warning: a lot of selling a company has to happen in secret, said Sheaver. An owner does not want to spook employees — who might decide to leave if they know a for-sale sign is on the business’s door. Existing customers, too, might take their business elsewhere if they hear a company is for sale.
How do you maintain that secrecy? Silicon Valley’s Jacobs advised working through a business broker and, yes, that is his line of work. But hear him out. Maintaining secrecy is easy, he said, when you “work with an intermediary who will keep the identity of your company anonymous until the potential acquirer has signed the NDA and been approved by the seller.”
A broker isn’t necessary. Most sales happen without one. But however you go, seek to stay in a stealth mode.
How to attract interested buyers when you are selling quietly? The building blocks are simple: get a rep as a top competitor in your niche. Nobody wants to buy the segment’s lowest performer. Also, get a rep for having high-quality products or services, and build a reputation as a company people want to do business with.
With that foundation, start ramping up the awareness. Mike Chappel, a co-founder of FormsPal, fers the formula: “Make a lot of appearances, and you'll get noticed. Determine which trade exhibitions and conferences [possibile] acquirers attend. Recognize what they've read. Then show up and be visible. Consider serving as a speaker on panels … and so on. Get your business mentioned in the blogs and newsletters that they read.”
The louder the buzz, the better. Let the offers flow in.
You have an offer — is it time to seal the deal? Not so fast, advises Andreas Grant, founder of Networks Hardware: “Not all the offers you receive will be real. Anyone can give you a call and pretend to give you an offer. You have to learn to weed out these offers by doing proper research.” What’s up with these bogus callers? Some may be competitors seeking intel about your operations (What’s your biggest customer? How much do they pay?). Others may be people with fantasies about owning a business that will never be real. Save your time and protect your business secrets by talking only with verifiable buyers. Do due diligence on them before opening your books to them, just as they — if they are serious — will do due diligence on you.
After the Sale
Do you have a legit offer in front of you? Don't think you’ll take the money and run. It may go exactly that way, but usually, it goes the way it did for Bump Club’s Lindsay Pinchuk. Her story left off when she sold to a suitor, but she did not immediately walk away with bags of cash. In fact, she stayed two and a half years with Bump Club after the sale — her payout amount was determined by the company’s performance in that period — and both of those facts are common in many business sales.
The entrepreneur frequently stays on for a time, often two or three years, and a big part of the purchase price is paid when the entrepreneur leaves and specified targets — sales or profits are common measures — have been met. (A non-disclosure agreement prohibits Pinchuk from disclosing her payout.) Definitely have a lawyer carefully scrutinize the payout terms. Some, Sheaver warns, will never be met — and that entrepreneur will not get the payout they have dreamed about.
But then there are the Lindsay Pinchuks. She formally left Bump Club in July 2021, about 11 years after she started it. Afterward, she quickly started a new business where she helps other companies build communities, much as she did with Bump Club. Her first client: Bump Club, she said. And now, she is helping many more companies grow in the same ways she grew Bump Club.
About the Author
Robert McGarvey, a veteran journalist who has long covered startups and small businesses, created and hosts the CU2.0 Podcast for credit union and fintech executives which is at 120 episodes and counting.
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