10 Concepts We Can Learn About Selling Your Business From How2Exit's Interview W/ Jim Afinowich, Managing Partner IBG Fox& Fin W/ over 1100 deals E109 Watch Here
Here is what my team and I learned from this interview: (These are notes from team members, writers, sometimes AI, and even listeners who submitted what i learned loosely edited and shared here) - If it seems a bit unrefined, you're reading our notes, so. yeah. -Ron
Concept 1: Interest Rates Affect Value
Interest rates have a profound effect on the value of a business. When interest rates are low, businesses are able to borrow money at lower rates, which in turn increases their value. Conversely, when interest rates are high, businesses are unable to borrow money at lower rates, which in turn decreases their value. This is especially true for businesses that are looking to be sold.
Take Jim Afenowich, for example. Jim is the managing partner for IBG, Fox and Fin and has been in the business of mergers and acquisitions for over 35 years. He explains that when the Small Business Administration (SBA) looks at a business for a loan, they want to make sure that the business can cover its debt service. They do this by giving it a coverage ratio of one dollar and thirty-five cents for every dollar of debt service after certain expenses. This means that when interest rates are low, the amount a business can borrow is higher, which in turn increases its value.
Conversely, when interest rates are high, the amount a business can borrow is lower, which in turn decreases its value. This is especially true for larger transactions, such as those involving private equity. Private equity firms get their money from investors, and when interest rates are high, they have to lower the multiple they pay in order to get the same return they did when interest rates were lower. This means that businesses that were looking to be sold last year may now regret doing so, as the value of their business may have decreased significantly due to the rising interest rates.
In conclusion, interest rates have a profound effect on the value of a business. When interest rates are low, businesses are able to borrow money at lower rates, which in turn increases their value. Conversely, when interest rates are high, businesses are unable to borrow money at lower rates, which in turn decreases their value. This is especially true for businesses that are looking to be sold, as private equity firms have to lower the multiple they pay in order to get the same return they did when interest rates were lower. Therefore, it is important to be aware of the current interest rate climate when considering selling a business.
Concept 2: Prepare For Sale Early
It is also important to prepare a business for sale early. This is because the value of a business is very volatile, and it is impossible to predict what will happen in the future. For example, we had a client selling a business in February of 2020. He decided to wait a little bit longer, expecting the value to go up. Unfortunately, the COVID pandemic hit a few days later, making the business unsellable. This illustrates the importance of being prepared to sell a business at any time.
In addition, it is important to consider what would happen if the owner of a business passed away suddenly. If the business is dependent on the owner to sign checks and make decisions, it is unlikely to continue running without them. Therefore, it is important to have a plan in place in case of an emergency. This could include putting someone else in charge of the business, or having a team of professionals ready to step in and take over the business until it can be sold.
When preparing to sell a business, it is important to think of it like selling a house. It is important to make sure that the business is in good condition, and that any problems have been taken care of before the sale. This includes making sure that the financial statements match the tax return, and that all necessary expenses are accounted for. It is also important to make sure that any gray money or questionable expenses are accounted for, as these can raise flags for buyers.
Additionally, it is important to make sure that the business is in an inclining state, meaning that it is growing and doing well. This will help to ensure that the business is able to fetch the best possible price. It is also important to make sure that the business is ready for sale at least two or three years in advance. This will ensure that the business is in the best possible condition and that it can fetch the highest possible price.
In conclusion, it is important to make sure that a business is prepared for sale early. This includes making sure that any problems are taken care of, that all necessary expenses are accounted for, and that the business is in an inclining state. Doing this will ensure that the business is in the best possible position to be sold, no matter what the future holds.
Concept 3: Sell While Business Is Growing
Selling a business while it is growing is an important part of the process. It allows the seller to maximize their return on investment, as buyers are more likely to pay a higher price for a business that is in an inclining state. Furthermore, it allows the seller to demonstrate that their business is in a good position and that it is capable of continuing to grow. It also eliminates the risk of the buyer perceiving the business as a risk, as the seller is able to show that the business is doing well and is likely to continue to do so.
When considering the sale of a business, it is important to keep in mind that buyers are looking for businesses that are in an inclining state. This means that it is important to make sure that the business is in the best possible position before putting it up for sale. Doing this will ensure that the business is able to fetch the highest possible price and that the sale is successful.
Concept 4: Building Rapport Is Key
One of the most important factors to consider when trying to sell a business is building rapport with potential buyers. Buyers will be looking for businesses that they can trust and that they feel comfortable with. This means that it is important to make sure that the seller is able to build a relationship with the buyer in order to make sure that the sale is successful.
The podcast transcript above outlines a situation in which a seller was able to successfully build rapport with a buyer in order to make sure that the sale was successful. The seller was able to convince the buyer to accept an offer that was not the highest offer, but one that the seller liked the best. This illustrates the importance of understanding what the seller wants to accomplish and helping them get there.
This example also highlights the importance of understanding the culture of the business that is being sold. Buyers are often more concerned with the people and the culture of the business than they are with the numbers. This means that it is important to make sure that the buyer is comfortable with the management team and that they will be able to work together in order to make sure that the sale is successful.
Overall, it is clear that building rapport is key when it comes to selling a business. It is important to make sure that the buyer is comfortable with the seller and that they understand the culture of the business. Doing this will ensure that the sale is successful and that the seller is able to get the best possible price for their business.
Concept 5: Find The Right Match
One of the most important steps in finding the right match is to ask the seller why they want to sell. Asking this question helps the buyer to understand the motivations of the seller and to assess if they are the right match. It is also important to understand the seller's plans for what they will do after the sale. This will help the buyer to understand if the seller is truly ready to sell or if they are just looking for a quick exit.
In addition, it is important to assess the business itself. The buyer should make sure that the business is ready to be sold and that the seller has the necessary documents and information to make the sale successful. This will ensure that the buyer is able to get the best possible price for their business.
Finally, it is important to remember that selling a business is a matchmaking process. The buyer and seller must be compatible in order for the sale to be successful. As a broker, it is important to take the time to get to know the seller and to understand their motivations for selling. This will help to ensure that the buyer and seller are a good match and that the sale is successful.
Concept 6: Keep Bridges Intact for Future deals
When it comes to selling a business, it is important to keep bridges intact for future deals. This means that it is important to build a strong rapport with the seller and to ensure that they have a positive experience. It is important to be respectful of the seller and to listen to their concerns and needs. This will help to ensure that the seller will want to come back to you when they are ready to sell their next business.
It is also important to take the time to understand the business that is being sold. This will help to ensure that the buyer is making an informed decision and that they are not making any rash decisions. It is important to understand the business and to consider what the seller has done in the past. This will help to ensure that the buyer is making a wise decision.
Finally, it is important to consider offering equity to the seller. This will help to ensure that the seller still has a stake in the business and that they will be motivated to help it succeed. This will also help to ensure that the seller will be more likely to come back to you when they are ready to sell their next business.
In conclusion, it is important to keep bridges intact for future deals. This means that it is important to build a strong rapport with the seller, to take the time to understand the business, and to consider offering equity to the seller. This will help to ensure that the seller will be more likely to come back to you when they are ready to sell their next business.
Concept 7: Negotiate Golden Handcuffs
Negotiating golden handcuffs is a strategy often used by private equity firms when buying a business. It is a way to ensure that the seller remains with the business after the sale, by offering them equity or other incentives. This can be beneficial for both parties, as it can help to ensure that the seller will be able to stay on board and continue to grow the business.
When negotiating golden handcuffs, it is important to understand the seller's goals and motivations. This will help to ensure that the seller is able to remain with the business and continue to contribute to its success. It is also important to consider the seller's time commitment, as well as the amount of equity that will be offered.
It is also important to consider the type of equity that will be offered. Equity can be offered in the form of stock, options, or warrants. Each of these types of equity has different implications for the seller and for the business. For example, stock will give the seller ownership in the company, while options and warrants will give the seller the right to purchase shares at a later date.
It is also important to consider the length of the agreement. Some agreements may be for a set period of time, while others may be open-ended. It is important to consider how long the seller will be expected to stay with the business, as well as the terms of the agreement.
Finally, it is important to consider the terms of the earn-out. An earn-out is an arrangement in which the seller receives a portion of the proceeds from the sale of the business. This can help to ensure that the seller will benefit from the growth of the business after the sale.
Overall, negotiating golden handcuffs can be a beneficial strategy for both parties. It can help to ensure that the seller will remain with the business and continue to contribute to its success. It is important to consider the goals and motivations of the seller, as well as the type of equity that will be offered, the length of the agreement, and the terms of the earn-out. By taking the time to understand these elements, it is possible to negotiate a beneficial agreement for both parties.
Concept 8: Due Diligence Is Key
Due diligence is key when it comes to any negotiation, especially when it comes to golden handcuffs. Private equity groups may use the “trip to Tahiti” tactic, where they offer a large sum of money upfront, then pull out at the last minute after a lengthy due diligence process. This leaves the seller high and dry, without the money they were expecting. It is important to take the time to thoroughly investigate any potential buyer, to ensure that they have the resources to complete the transaction and that they will not pull out at the last minute.
Another tactic used to negotiate golden handcuffs is to offer a lower price upfront, with the promise of an earn-out. This can be beneficial to both parties, as it allows the buyer to ensure that they are getting a good deal and the seller to receive some of their money upfront. However, it is important to consider the terms of the earn-out, such as the length of the agreement and the amount of equity that will be offered. This is where due diligence comes in, as it is important to understand the motivations and goals of both parties and to be sure that the terms of the agreement are beneficial for both.
In conclusion, due diligence is essential when it comes to negotiating golden handcuffs. It is important to take the time to understand the goals and motivations of both parties, as well as the terms of the agreement. By doing this, it is possible to create a beneficial agreement for both parties, ensuring that the seller will remain with the business and continue to contribute to its success.
Concept 9: Negotiate With An Expert
When it comes to negotiating, it is essential to have an expert in your corner. Negotiating with a sophisticated buyer, such as a private equity firm, requires knowledge of their behavior, history, and preferences. Having a broker or advisor with experience in these types of transactions can be invaluable in helping to navigate the process. They can also provide insight into the emotional aspect of the transaction, as selling a business is often likened to giving a child up for adoption. Lastly, they can ensure that the best possible outcome is achieved, as they can provide multiple offers and help to drive up the price.
When it comes to negotiating a sale, having an expert on your side is essential. They can provide valuable insight into the process and help to ensure that the best possible outcome is achieved. By understanding the goals and motivations of both parties, as well as the terms of the agreement, it is possible to create a beneficial agreement for all involved.
Concept 10: Run Your Business Strategically
This is why it is so important to run your business strategically. This means understanding the current market, researching potential buyers, and understanding the key elements of a successful sale. It also means taking the time to negotiate a deal that maximizes the value of your business. Having a knowledgeable professional on your side can help to ensure that you get the best possible outcome.
In one example, a business owner was in the process of negotiating a sale of his company for $6 million. He was contacted by a potential buyer who wanted to buy the business but was hesitant to involve a broker. The business owner took the advice of his lawyer and told the buyer to contact him in two weeks after he had a chance to get his arms around the deal. The buyer was hesitant, but the business owner insisted that they wait.
In the end, the buyer agreed to wait and the business owner was able to get them to increase the offer to $8 million. This was a huge success and it showed the importance of having a professional on your side. It also highlighted the importance of running your business strategically.
By taking the time to research potential buyers, understanding the current market, and knowing the key elements of a successful sale, it is possible to create a beneficial agreement for all involved. Having a knowledgeable professional on your side can help to ensure that you get the best possible outcome. Running your business strategically is essential for any business owner looking to maximize the value of their business.
---- MORE COOL STUFF ---
Are you ready to take your podcast listening to the next level? Subscribe to "DEEPER by How2Exit" newsletter and never miss out on our latest episodes. Join our newsletter HERE
Want to stay in touch with what's happening in the Main Street M&A Space? Subscribe to The Hub - Acquisitions Hub
