Advice On How To Sell Your Business With Plan For The Sale
Did you know that a third of business owners plan to sell their business in the next three years? That’s a lot of money, assets, and accounts moving around. There are a lot of things that can go wrong very quickly too, and deals fall through all the time.
A lot of entrepreneurs describe their businesses as their babies, and that emotional attachment can make them blind or even delusional when it comes to preparing and negotiating a sale. But with the right planning, timing, and execution things can actually go very well.
Jim Wang knows this first hand. He sold his personal finance site to Bankrate for roughly $5 million dollars several years ago. I got to meet Jim last year at a conference and caught up with him recently on his latest venture Plan For The Sale, an online course on how to sell your business. I’ve always found the process of selling businesses to be quite fascinating. I worked in finance where bankers would regularly charge a ~5% advisory fee for acquisitions, mergers, or IPOs. In other words, you can make $50 million on a successful $1 billion dollar transaction if you can get the business.
As you may know, I’m a big proponent of the X Factor. The X Factor is something that comes out of the blue which may tremendously help your wealth thanks to the actions you take now. Some call this, “being in the right place at the right time.” Perhaps you are in the middle of creating your own multi-million dollar business now. If so, this interview will give you some insights.
INTERVIEW WITH JIM WANG, PLAN FOR THE SALE
In the current economic environment, interest rates are yielding practically nothing. Isn’t it better to buy cash generating businesses instead?
Jim: I think it depends on the business and what your plans are. If you’re looking to retire, it doesn’t really matter what the economic landscape looks like. If you want to move on and are sick of doing what you’re doing, you may not be willing to wait a few years for top dollar. If you’ve taken the business as far as you think you can and need a partner, interest rates aren’t important.
There are a lot of factors that go into whether you want to sell your business but I don’t think interest rates play a significant role in the decision making process. Owning a business might generate cash flow but that cash flow is taxed at ordinary income rates whereas a business sale might have a large portion taxed at long term rates, which are much lower these days.
That said, one rate that I do think is important is long term capital gains tax rates. They’ve long enjoyed favorable rates and I suspect many business owners profited greatly in selling their businesses in 2012. I see it a lot like estate tax rates though, it’s often the other drivers that move you to act and the tax rates simply impact the timing of those decisions.
Compare and contrast Plan For The Sale (PFTS) vs a typical investment bank advisory business. How do fees compare and the benefits of going the PFTS route?
Jim: PFTS focuses on educating the business owner on the process and pitfalls of selling your business. I believe the typical bank advisory businesses do that as a necessity, not a focus, because their goal is completing a deal. The fees generated from selling a business far exceed that of what you’d make simply teaching people the process.
That said, I’ve talked to a few brokers (and lawyers and accountants) that are eager to work with us because they don’t want to be teachers. Their expertise is in completing the deal, not educating the client on how the process works, and so they want to focus on their expertise while we focus on ours.
That said, I believe a business owner is better served by learning about the process from someone other than a lawyer or broker. As the old adage goes, a hammer only sees nails and sometimes it’s difficult for a lawyer or broker to see the whole picture because they’re focused on their area of expertise. Also, lawyers are expensive teachers! Why pay a lawyer $300 an hour to walk you through the process when you can pay one flat fee , either for our course or for a book, to learn at your own pace? Our course costs a flat rate of $499 for a limited time.
Who do you think is the primary target business owner who would benefit from your product? Ex. minimum revenue, profitability figures, reach, etc.
Jim: The primary target business owner is someone who is looking to exit from a profitable business with revenues of at least six figures annually. They will get the most out of our program because that’s roughly the minimum size you need before you start working, in earnest, with lawyers, brokers, and other professionals.
That’s not to say it won’t be helpful for someone who has built up a fledgling side business and is looking for an exit. We find that those transactions are often simpler and don’t require as much outside assistance in the form of lawyers and brokers, so much of our material will go into too great detail on those subjects.
That said, we’ve talked to and worked with some smaller business with great success. In the end, I think it’s about education of the process and having more information is rarely a bad thing.
What are the pros and cons of having an incentive bonus structure in the sale contract?
Jim: Bonuses and earnouts should be seen as icing on the cake. You shouldn’t come to expect those bonuses, even if you have them written in such a way that it seems like earning them will be trivial. You never know what can happen over the course of doing business so view them as such.
That said, bonus structures can help put the interests of the seller and the buyer in alignment. One of a buyer’s biggest fears is that they’re buying a dud, so being able to integrate some of the purchase price into a bonus structure can alleviate some of those fears. As a seller, you don’t want this because, as I said earlier, who knows what can happen. A cynic would say that the buyer might want to even sabotage the business in order to get out of paying a bonus!
It’s best to treat earnouts as a sweetener and realize that you need to be careful when negotiating these. Here is a case where having a good lawyer, who knows what to look for, is absolutely crucial.
Can Plan For The Sale be used as a good tool for people looking to buy businesses?
Jim: It was built with a business owner in mind but there are resources that can help a buyer understand what they should expect when buying a business. For example, we talk about due diligence from a seller’s perspective but it can be easily flipped to be interpreted from the buyer’s perspective.
We under the dual nature of our education process and we’ve spent time interviewing entrepreneurs who are on the buying side of the equation, just to understand their perspective in order to educate ourselves as sellers.
What is the most common hiccup when it comes to selling your business?
Jim: The most problems occur during due diligence when you start to really dig into the financial, legal, and technical aspects of a business. There isn’t a single perfectly run business where everything is as it appears to be. Due diligence is designed to uncover those warts and try to figure out if it’s a minor cosmetic issue or something more significant and systemic. So many sales collapse because the buyer starts seeing things that unnerves him or her and backs out.
According to public records you sold Bargaineering for 5 million plus a nice incentive bonus. Why not kick back and just invest the 3 million in after tax proceeds and generate six figures of recurring revenue?
Jim: I’m not one for kicking back. :)
Do you have any regrets after you sell a business?
Jim: There aren’t any regrets once you’re several years removed from the sale but immediately afterwards something does change. For years, you wake up living, breathing and thinking about the business all the time, every single day. It’s your baby, it’s something you nurture and grew. You tinkered on it every single day, with tweaks here and adjustments there, and then one day you stop.
One day the business is on its own with new owners and onto a new life without you. It’s not necessarily depressing but you do feel a sense of emptiness because something that took up such a large part of your life is no longer occupying that space anymore. It certainly took a while to adjust.
I have a young son and honestly I imagine it’s probably going to be something like that when he graduates and move onto college.
Anything you wish you did differently?
Jim: No, I think I was lucky in that the people I worked with were the perfect people for the job and knew everything I didn’t. I remember when I bought my first home and basically let the realtor and the mortgage lender control the process because I felt like I didn’t know enough. I knew enough but I still let them drive and I ultimately made some decisions that were suboptimal. It didn’t cost me too much extra, maybe a few thousand dollars in a transaction of a few hundred thousand, but I promised I wouldn’t let someone drive and make decisions simply because I was afraid I didn’t know enough.
Whereas buying a house is relatively straightforward (once you’ve done it once), selling a business isn’t. There are so many more moving parts and there are so many factors to consider. One thing I did promise myself was to understand the process, understand who should be doing what, and making sure that I was making every decision.
I found that there wasn’t a lot of information all in once place for this sort of thing and written in plain language. Everything was written for an accountant or a lawyer or some other professional. It wasn’t written for the owner of the laundromat who doesn’t have time to research online. It wasn’t written for the guy looking to sell his hobby website and doesn’t know if he should use Flippa or go with a broker.
So I thought, after everything was finished, why not build something that does teach it and empower the owner to drive the process? That’s how we built our course. If you click the link, you can watch a 2:45 second video on the structure of our course. We have CFPs, CPAs, M&A Lawyers, Investment Bankers, Appraisers, and Brokers all part of our network.
FOR FURTHER READING
If you want to get even more tips and insights from Jim on selling a business, check out more Q&A with Jim here: Millionaire Blogger Interview. The questions are more geared towards online property owners.
I hope after reading this interview, everybody is motivated to work on their X Factor. You never know when opportunity will show itself, but if you stay in the game long enough, good things will happen!
Readers, do any of you have experience in selling a business? I’m particularly interested in understanding why folks would sell healthy cash flow business (including rental properties) in this low interest rate environment.