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Selling a company can be fraught with complexities, and it is no different for channel firms. When an owner has decided to sell his or her company, there are several considerations they should make to ensure the best possible deal.
In part one of this two-part feature, Arlin Sorensen, vice president of peer groups at professional services automation vendor ConnectWise, and Michael Corey, co-founder of license management provider LicenseFortress, discuss business valuations, protecting your interests and where to invest energy once the business is on the market.
Read part two for more advice on selling a company.
How do you decide a realistic valuation range for your business?
Arlin Sorensen: Really, the valuation is what someone's willing to write a check for, for your business. We recommend business owners look at their EBITDA [earnings before interest, taxes, depreciation and amortization] or profitability to get in the general area of what the company is worth.
Look at the value of the different kinds of revenues a company has on their [profit and loss statement], with managed services obviously being most valuable. Each has its own valuation. We typically use both methods and come in somewhere in the middle with a realistic number to recommend to [business sellers].
The tip is to know your numbers. We run into a lot of people starting to think about selling their company, and they don't know their numbers. They haven't been paying attention to how they're performing. You have money in your checking account, so things must be OK. That works day to day, but when selling a company, you want real clarity around where you're at.
Michael Corey: It really depends on the size of your company. Once a company gets to be $5 million to $10 million in revenue, there are lists [of sample buyers] you can get. When I sold [database services company] Ntirety [to managed cloud provider Hosting in 2014], we were hovering around $10 million in revenue, so we were large enough that I could go to investment bankers. If you're going to sell a company, you should always get expert advice.
I brought in five to 10 investment banker companies to do 'bake offs' and tell me why I should do business with them. [The company I picked] blew me away with their understanding of the space and what they would do to help me raise the value of my company.
So the tip is: Do a bake off. Make them ... tell you how they're going to be to work with. When I did a bake off, they all did sample valuations of who they thought would be interested in my company and what they knew about the space. That was helpful.
How do you protect your interests when selling a company?
Sorensen: Having a 'non-negotiable' list is definitely a tip I recommend sellers have. It differs for every seller. [Protecting] employees is something I see dealt with. I've sold [businesses] twice, and we had non-negotiable lists for both sales. I was concerned about not only my employees but the customers we served. When we sold [IT services firm Heartland Technology Group], we didn't want the buyer to move out of markets we had already established and were serving. We were from rural America and wanted to serve that customer base. Some people we were talking to were interested in cherry-picking certain accounts and not the rest, so we ended discussions with them.
Arlin Sorensenvice president of peer groups, ConnectWise
Every deal is made up of several components. How much of the deal has to be cash versus an earn-out ... is often on that non-negotiable list. Sometimes there's an equity offer, so you might be offered some percentage of the acquired company. Every transaction has a smorgasbord of ways it can be transacted depending on the age of the seller and their circumstances.
Another [consideration] is what happens to [business sellers] after the transaction? Some sellers want to go away and enjoy the fruits of what they've achieved, and others want to stay involved but probably in a different role if they're a little younger and need to continue to work. That can also be a non-negotiable.
Corey: Everything's negotiable because you're selling. I made the decision that I was going with the sale of the company. It's more valuable if I go with the sale; the question is, how do you negotiate your package? I had my lawyer do it. Let the lawyer be the bad guy, and he or she will push for best deal for me. Don't be a fool and negotiate your own package if you're planning to go with the company. It could sour the deal, and then you're at a serious disadvantage.
So make sure you protect your interests, which may be different from the business'.
Should you invest in enhancing the value of the business?
Sorensen: What you should do is clean up your accounting and get it to what I call a saleable state. A lot of small business owners run their company and their personal life together in some ways. They have lot of things the company is paying for and it's all legal … but it's not really part of the core business of the company. That makes the [profit and loss] and balance sheet difficult to interpret.
So run your company like you're going to sell it tomorrow, and don't put all this extra stuff in there that will cause a buyer to wonder what's real and what's not.
Corey: The minute you make the decision that your business is going on the market, you should stop all additional investment in the company if you're not going to get a return on the investment in the sale. All you're doing is hurting your sale price.