Advice On How To Sell Your Business With Plan For The Sale

IMG_7302* The Plan For The Sale product is no longer available, but I thought it would be a good idea to keep this 2,000 word post up as a great source of information from a blogger who sold his site Bargaineering for millions and for those who want to sell a business. 

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. 

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Mike Hunt says

    I have experience selling a small business where I was one of the hired hands and the company was owned by a major US based investment banker / private equity. In our case the model of the PE’s is to buy a business and then try and turn it around and then flip it for a profit, usually in 5-7 years. We sold after they held for 6 years, after the downturn of 2008 we sold in 2010 and since we cut so hard, when the revenue came back we were very profitable… the sale of the company was based on the multiple of that years profitability…. as it turned out, it was the peak and even though I continue to work for the larger acquiring company, we are still pushing for more growth. BTW, the current company is also majority owned by a very large US based private equity player!

    -Mike

      • Mike Hunt says

        The seller was happy since they sold at peaks earnings with a multiple based on that… still working hard to make the new buyers happy!

        Always two sides to every deal and the key is to figure out how to make both happy!

  2. says

    There are many reasons to sell! For me, it was similar to any investment, I had an end date in mind. I knew I wanted to make “X” from the investment and it was time to sell when I reached my goal. There are cycles in real estate and there are other factors in businesses. Now is a great time to buy real estate and yet I have no interest in becoming a landlord again. My interests have changed and I am looking in different directions. I want things that do not require day to day management.

  3. says

    Is there an existing advisory market at all for businesses this size…say, small businesses $5 million in EV and under? Seems like Jim’s onto a profitable niche here; I would imagine there are tons of small businesses too small to need/afford dedicated assistance with many of them owned by boomers ready to retire. I saw an article recently about how my generation isn’t as interested in taking over mom and pop’s shop as generations before. I troll through BizBuySell.com fairly frequently (businesses for sale site owned by Dow Jones) and it seems like there would be a fairly good business in small-scale PE/advisory.

    A big congratulations to Jim for selling his business and having no regrets. I think it’s a smart move, really. Lots of concentration risk in owning one business that makes up a big part of your net worth and current income.

  4. says

    I’m in the homestretch of selling a business. It isn’t a $5million deal, but did gross in the low seven figures last year. My main motivation is burn out, but I’m not willing to give it away either. I think it was the perfect combination of my lack of motivation plus willing buyers and being in a decent financial position where I can have options to try some new things without fear of debt payments overwhelming me. Maybe it might be worth more in then years, but where would I be emotionally? It also could be worth nothing. It’s always a gamble, but I think it’s the right time. We tried hard to be done in 2012, but financing could not complete the deal due to some last minute issues. I’ll pay more in taxes this year, but still should come out in a good position.

    • says

      As I like to always say, you can’t lose if you lock in a win!

      Burnout must be a huge reason. Disinterest as well given everything gets kinda dull after doing it long enough.

      What so you plan to do with cash and your time after you sell?

      • says

        The million dollar question. My sale happens in two parts. I split the main office from the smaller, satellite location. I will get cash for the smaller office and take a down payment and carry the balance of the loan for the buyer on the bigger office. Some risks for sure, but I will get 6% return if it all goes according to plan.

        I am going to follow your advice and hold the money at least until we see how much Uncle Sam wants. Then we’ll pay off the rest of our student loans. After that, I could not work at all and live on the payment for the next fifteen years while my daughter is at home and then go back to work, but I don’t like that idea.

        I’m going to continue working part time. Contract optometrist can do pretty well as far as salary, and we’ll most likely invest the payments I receive from the business sale and continue to live on our incomes. We currently have two rental properties, one commercial and one residential. I’d like to get two or three more while they are cheap, and then we should be able to quit our day jobs in 6-12 years if we want. That’s the plan for now anyway. And I’ll keep on blogging, of course. Worst paying job I’ve ever had so far, but it is one of the most fun things I’ve ever done.

        • says

          15 years is great! Work on that windfall’s Money Strength in the meantime.

          Lending a buyer money to buy your business is an interesting strategy. Not ideal, but as you said, if it comes through, it helps grease the transaction and provides you a 6% return while you wait.

          Good luck! The best is working when you don’t really need to work.

  5. says

    I’m suprised to see that 1/3 of business owners plan to sell their business over the next 3 years. As you said that alot of different things that are moving around. Plan for Sales looks like a great course.

  6. says

    I’m with Brett, I’m pretty surprised to see 1/3 of business owners planning to sell their business in the next 3 years. Could it be burn out or is it the ultimate goal to build it up and sell it – sort of like flipping a house over time.

  7. nbsdmp says

    I’ve considered it, but honestly when somebody is only willing to give you a 4.5~5.5 times multiple, and you have a very strong profitable business that you still enjoy…it is not worth it. Consider you are going to put your money into investments that trade at a avg. 13-17 times multiple. Altough it is risky, having control of your investment is much in my opinion. If you already have a backstop of cash to live your life the way you want…keep the business, live in a state of semi-retirement, try to work with customers you like & avoid the ones that suck. One day when I get tired I’m sure I’ll exit and it will probably be for a 5 times multiple, but in 10-15 years I’ll have been able to “sold it” 2-3 times with dividends paid out over that time period…and still own it. Good problems to have : )

    • says

      That’s a good point about selling at a 4.5-5.5X multiple, but then using the proceeds to invest in much higher multiple companies. Seems kind of backwards. Who knows our companies better than ourselves?

      • nbsdmp says

        The real difference is essentially liquidity. You can sell your GE stock with a push of the button, selling a business is a whole lot tougher! Having recently purchased another small company under $5M, there is always some hesitation to understand “why the heck would this guy or group sell this thing”. That is where the leap of faith and understanding of the marketplace comes in. Fun stuff actually, keeps things exciting!

        • says

          Exactly. I ALWAYS ask myself why the seller is selling. Does the seller know something that I don’t? Whatever I’m buying, I ask myself this question over 10 times and systematically suss out reasons.

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