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The Right Way To Sell Your Small Business 

Pamela Dennis, Sell Your Small Business

With Pamela Dennis, Author of Exit Signs: The Expressway to Selling Your Company with Pride and Profit

Management consultant, Pamela Dennis, has worked with some of the most successful business people in the country. She also built and sold her own business and shares her knowledge in a book titled Exit Signs: The Express Way to Sell Your Company with Pride and Profit.

Top Two Questions Business Owners Must Ask Themselves

Selling a business that you’ve built through years of dedication and hard work contributes significantly toward your financial future and retirement but also brings emotional issues into play.

In Exit Signs, Pamela lists a few important questions that potential sellers should first ask themselves: How committed are you to selling your business? Are you really ready to sell?

If you can’t honestly answer those questions, it’s best to not upset your organization, your customers, and your family by starting down the road to something you’re not sure about, especially where it impacts multiple stakeholder’s lives.

She notes that of the 22 million small and mid-sized businesses in the country, less than 15% have an exit strategy.

Demographic Tsunami Of Business Owners Hitting Retirement

In Exit Signs, she speaks of the demographic tsunami of about 12 million baby boomer business owners turning 70 in the next five to ten years, of which only 25-30% will be successful in transferring ownership.  With small to medium-sized businesses making up about 48-50% of the private sector payroll, millions of employees and stakeholders are impacted when businesses do not successfully transfer ownership.

Shae adds that emotional issues often come in the way of planning an exit strategy because owners often don’t want to face the consequences of what comes next.

Key Factors In Successful Business Exit

When deciding to sell, owners focus on the company’s financials, customer base, contract terms, etc., to assess long-term revenue and income growth for valuation. In addition, owners must look at organizational factors such as bench strength, process reliability, and operational efficiencies that will sustain the company after the owner leaves.

Valuing Your Business

When estimating valuation, an owner may start with a price in his/her head, but to get to a realistic valuation, owners should subtract for, say, a mediocre management team, inconsistent earnings and financials, lack of reliable recurring revenue, and other negative factors.

Owners should also consult their tax advisors on whether the sale is ordinary income or a capital gains transaction.

Realistic Sale Timeline

A well-executed sale, where owners get close to full price, takes two to four years, so owners who want to sell should start the process early and be realistic about time frames or risk leaving 30-50% of the business’s true value on the table.  Company preparation includes getting business finances in order, grooming talent and laying down processes to ensure operational continuity, solidifying customer relationships and assuring customers of continued service after the sale, etc.

Upfront, owners should also think of the end game—whether they plan to run the business for income in their lifetime or plan to build and sell to generate returns, which can be very substantial.

Advisory Team

Pamela adds that you cannot be an expert in all the aspects of getting your business ready for sale, so besides doing a good reality check and putting a tune-up plan at work, it’s important to get a great advisory team.  While advice is not cheap, it will help you not leave 30-50% of your business value on the table.  Spending $50,000 – $75,000 to net a few additional million is worth every dollar!

Push Yourself Out Of Your Comfort Zone

Finally, in Exit Signs, Pamela Dennis writes that there are three “first steps” in moving forward: Be honest with yourself about whether you really want to sell, be clear about your long-term goals, and do a reality check on your business.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Management consultant Pamela Dennis has worked directly with some of the most successful business people in the country, including Jeffrey Immelt from GE, Mary Barra from GM, and Eric Schmidt from Google. She has also built and sold her own business and has recently shared her knowledge through her new book entitled Exit Signs: The Express Way to Sell Your Company with Pride and Profit. Pamela, welcome to the show.

Pamela Dennis: Thank you very much.

Steve Pomeranz: So selling a business that one has worked in for many years not only can count as an important part towards a person’s financial future and retirement or otherwise, but it can be tied up with so many emotional areas of your life. So what are some of these areas that one has to address even before they make a decision to sell their business?

Pamela Dennis: You know, in my book, I say you have to start with the first question. And the first, most important question is how committed are you to selling your business? Are you really ready to sell? And if you can’t honestly answer that question, then please don’t upset your organization, your customers, your family with starting down the road. Because too many small and medium-sized businesses think they’re ready to sell their business and they get into the negotiations and realize, “No, I don’t. I don’t like that guy.” And they’ll come up with 42 different reasons why that’s not the right buyer. So, I say start with are you really ready to sell your business? And therefore, you understand what your goals are, your objectives and your timeline. You know, 13% of, I don’t know, there are 22 million small and mid-sized businesses in the country. And less than 15% of them have an exit strategy.

Steve Pomeranz: Yeah. So, what do you think? They’re in denial or they’re just expecting something to pop out of the woodwork? Or are they just going to work it until they can no longer work anymore and then close the business and sell off the furniture?

Pamela Dennis: Kind of. Actually, there’s some really good research on the sources of why this planning isn’t happening. And the first is people say, “I’m too busy. It takes me away from what I do best, which is running the business and growing it and working with customers and inventing new products and so on.” And second they say, “Oh, wait a second, it’s too soon.” And it’s too soon because the urgent always trumps the strategic. But also, they just think they have a lot more time than they really do. And we know from the tsunami wave of small business owners turning 70 in the next five to ten years that it’s a race for your life to be able to be the company that people want to buy amongst all those companies that are going to be available.

Steve Pomeranz: Yeah, so that brings up an important point, is that there is a demographic dynamic here, which you point to, that says there’s going to be a lot more competition for the sale of businesses as these 12 million baby boomer business owners start to sell in the next nine years or so, right?

Pamela Dennis: Right. Yeah, and historically, maybe 25-30% of businesses are successful in transferring ownership. So, if you think about that small to medium-sized businesses are about 48-50% of the private sector payroll, imagine the number of people impacted by that 25-30% that sell.

Steve Pomeranz: Yeah, it’s a big deal.

Pamela Dennis: And the 75-65% that don’t sell. And what percentage of those simply close their doors. I think there’s a third reason why people don’t do their planning. And it adds the whole emotional issue that you raised earlier which is they kind of have their head in the sand. They don’t want to face it because it’s a lot about mortality and what do I do next?

Steve Pomeranz: Well, if you’re going to sell, if you’ve made that decision to sell, what are some of the key factors you have to look at and checklist or particular areas that are going to be important to a buyer? For example, how do you keep your key talent and your key customers when you’re selling a business?

Pamela Dennis: Yeah, other than first commit to the journey, which is the first antidote to procrastination. The second one is you have to do a really strong reality check on your business. And that is how sellable is it? What’s the organizational health of it? So, a lot of people will look at all the financials, the customer retention, the diversity of the customer base. They’ll look at a lot of really important aspects having to do with the stability of the company and its potential for growth. The flip side of that same coin for salability has to do with organizational factors like bench strength and process reliability and operational efficiencies that exist that are laid down and if the owner leaves, the company keeps going.

Steve Pomeranz: Yeah. It’s institutionalizing your business. I think I’ve heard that term, right?

Pamela Dennis: Right.

Steve Pomeranz: So, you have a very interesting page that describes a price, I guess, would be very, very high quality. Let’s just call it a perfect business, that’s X. And then you look at certain factors that may subtract from X. For example, a mediocre management team would take X dollars off of that best price. Inconsistent earnings and inconsistent balance sheet and financials would also subtract, and not considering the taxes when you sell. Are you selling it as ordinary income or as a capital gains transaction? All of that’s going to subtract from the amount that you receive. Is that correct?

Pamela Dennis: Right.

Steve Pomeranz: So, what does a person need to then concentrate on? How much lead time would you say a person should have between the decision to absolutely sell and the actual sale in order to get their house in order?

Pamela Dennis: The rule of thumb is two to four years. And people just cringe when they hear that number. But if you really don’t want to leave 30-50% of your true value of your business on the table, then you need to start early. And that means getting your house in shape financially, getting your house in shape talent wise, process-wise, making sure you’ve really solidified customer relationships.

And for instance, in my business when I was selling, I had to make sure that every one of our large contracts—and we had some very, very large consulting contracts—that every single one where I was the face to the customer, the client, I had somebody joined at the hip for that transfer of that client. That wasn’t something that happened over three or four months. That took a year to 18 months to happen. We started our exit strategy four to five years in advance.

Steve Pomeranz: The name, your business, in essence, was you at first, is that right?

Pamela Dennis: Well, at the very first. The first two years. I had always had the plan to build an equity-based business that I could sell and get a return on my investment. That was always my strategy. And not everybody understands they have to have an endgame when they start the business. Is my business to provide a decent income and when it’s done I close it, wasn’t that great? Or do I plan to leave something that I get a great return on my investment, it continues to go on after me, and I have a sense of what my path forward is after I leave? And that’s a two to four or five-year process.

Steve Pomeranz: Well, financially someone who’s looking towards the day where they’re going to sell their business or start retiring, hopefully, they’ve built up a pension plan within their company and built up sufficient assets or taken the excess profits out or their income is such that they’ve been able to save quite a bit over the amount of their actual cost of living and the idea of building up a nest egg. But yet, the sale, the actual sale of the business can be a very substantial amount and very important part of the final solution. Would you agree?

Pamela Dennis: Absolutely agree. And typically, what I tell folks is you cannot be an expert in all the aspects of getting your business ready for sale. Whether that’s getting your books cleaned up, whether that’s really managing customer relationships as you start to exit, you can’t be an expert in everything, investment banking. So, one of the most important things you do besides doing a good reality check and putting a tune-up plan at work is to get a great advisory team.

Steve Pomeranz: Yeah. That’s not cheap though, right?

Pamela Dennis: No, but it’s not cheap to leave 30 or 50% of the value business, to see that wiped off the table. That chart that you talked about, when you get down to the bottom, the net-net, by not paying attention to some of the items that are on this particular table and seeing that minus sign against the potential value of your business, is 30-40%. I don’t want to leave that kind of money on the table.

Steve Pomeranz: So, if you’re spending $50,000 or $75,000 to net a few million, it’s worth every dollar?

Pamela Dennis: Absolutely.

Steve Pomeranz: Right. So, you advocate taking important actions, especially this very big decision in your life. We only have a handful of really important decisions in our life and this is going to be one of them. How do you push yourself out of your comfort zone to get started? And we’ve got about a minute left.

Pamela Dennis: I say there’s three first steps in moving forward and getting off the dime. And one is, as I said, be honest with yourself, do you really want to sell? So you don’t spend two years going through the motions to come down to the point that, “No, I don’t really want to do that.” Second, really, you have to be clear about your goals. So sit down and actually, either with a significant other or a peer or a mentor or whomever, talk about what your long term goals are. All of your advisors are going to ask what are your goals? Only you can answer those. Now in the book we give some worksheets that say, “So, here’s a ranking, take 100 points, how would you allocate them and they can’t all be 10%.”

So, it’s first of all understanding, “Yeah, I’m ready to start thinking about this. I know I have to. I might as well start now.” People who start six months or less before they think they want to sell leave 40-60% of the value on the table because they haven’t put enough time in it in advance. Be clear about your goals and third, do a reality check on your business. And those are things people can do. Those are all within their control.

Steve Pomeranz: Right. Well, unfortunately, we’re out of time. To find out more about Pamela and to hear this interview again, and to find out more don’t forget to go and join us at Stevepomeranz.com. My guest has been management consultant Dr. Pamela Dennis and the book is Exit Signs: The Expressway to Selling Your Company With Pride and Profit. Pamela, thank you so much for taking the time to help us.

Pamela Dennis: Oh, you’re more than welcome. I enjoyed it.