Sell Your Business Even if Others Can’t

In reading about the issues facing small businesses in the United States since the recession began in late 2007, I have heard about many sectors that have fallen behind historical performance levels. One that I hadn’t considered very much until this week is what is called the “business-for-sale” sector, which has seen a huge drop-off in comparison to all metrics known prior to the recession. While many have spoken about the large amount of private equity not in circulation, many of the reasons it is being withheld translate to other types of business buyers.

Whether you are representing an equity firm or your own personal business interests, it is likely that you have been trying to figure out when the economy may turn around. In classic business theory, it would be ideal to buy at a deflated price right before the economy picked up so that your investment could piggyback onto the general trend of successful recovery. Such market timing could make your investment produce very high–perhaps unprecedented–returns.

Since the economy appears to have stabilized, though not surged forward in a demonstrable way, what are these people who would otherwise be buying small businesses thinking? Observers of the business-for-sale sector wonder when they will see a positive change. They are anxious to see more acquisition activity.Buy sell dice

Hindrances to Business Sales

Whether you listen to political pundits, talk show hosts, or economists, all would concur (at least publicly) that small business is key to the overall recovery. Yet, if small businesses are not churning ownership, it is hard for them to obtain the necessary working capital to fund growth and operations. conducted a survey of 260 business brokers from around the country to attempt to determine whether market conditions were improving. A whopping 70 percent indicated that financing for business acquisitions has not improved since 2011. These findings and percentages are consistent with survey results from last year, showing a trend of stagnation.

With commercial loans harder to come by (according to the survey), many buyers can’t get the financing they need to do deals.  Business brokers say that banks have made the loan process even more difficult in 2012, decreasing the chances thereby that buyers will begin investing in businesses for sale. Mike Handelsman, group general manager for and, reports that borrowing is particularly difficult for new or young entrepreneurs. Since banks and similar entities have taken the position that a track record of success is one of the top determinants of future success, newcomers to the small business arena–either startups or acquirers–are handcuffed. 

Handelsman cited other factors of concern to business brokers from the survey. Concerns about the U.S. national debt,  political deadlock (re: the fiscal cliff), long-term unemployment and small business/personal tax rates (14%) also appear to diminish buyer confidence. However, he did offer some tips for sellers:

Seller financing is not necessarily the right strategy for all business succession scenarios. But under the right circumstances, a seller’s willingness to finance a portion of the sale can dramatically increase the number of potential buyers and create more advantageous sales terms (e.g. a higher sale price). Sellers also need to plan for the sale, and make their businesses as attractive as possible to buyers.

Here are a few ways to plan for the sale and make your business attractive–

  • Install an outside board of directors, with positions filled by non-competing entrepreneurs rather than the typical CPA, attorney, banker, and family friend.
  • Stop paying executive perks out of business accounts–clear separation will help show your commitment to professional management.
  • Document the tasks and procedures performed by the executive team. When it has been documented, the business is worth far more money because it is no longer dependent on the personalities.
  • Have a CPA review your financial statements–audit if you can afford it–especially if you have never had it done before.
  • Work with a transactions attorney to advise on deal structure and terms so that you can think through tax implications that may cause you to accept certain types of offers.

Chin up! If you follow these best practices, you will be one of the first ones to sell your business, regardless of whether many others sell theirs at the same time.



Add Value to Your Privately Owned Business

Most corporate governance articles, presentations, and conferences are focused on publicly owned businesses. With corporate and executive scandals galore occurring over the past few years, there have been outcries for better controls, systems, and oversight guidelines. Yet, the same emphasis and attention is grossly lacking in the privately owned business community. One of the areas in which governance best practices could be applied is in the realm of mergers and acquisitions. Nick Miller of Clayton Utz law firm in Australia offers some insights below for this unique situation:

Increasing the level of formal governance can assist in reducing risk, identifying issues that might emerge upon a sale and generally enhancing the credibility with which the business presents itself to potential buyers. Perhaps even more powerfully, governance is a means by which, both in fact and in perception, a business can present as less dependent on the involvement of its founders than it would without governance. This can add very significantly to value.

Many private business owners think that the absence of governance procedures makes them more flexible, more adaptable and more opportunistic. That may be so, but the benefits of that should be weighed against the benefits of formal governance when planning a sale. 

There are a range of ways to adopt some greater formality in governance:

  • without changing the make up of the board of a company, the company could implement a more structured system of monthly meetings. These may or may not be formal board meetings, but should nonetheless involve the directors and those who report into the CEO;
  • a company can set up one or more committees. These can be formal board committees or more informal, but they are set up to address areas of need, to bring in expertise and focus on how risk management can be improved and issues for the business addressed. Examples are an audit and risk committee, a brand development committee and an employee policies committee, to assist in developing those aspects of the business in readiness for sale. These committees might have outsiders on them and they might not, depending upon the need and the expertise available in the business;
  • an advisory board could be established. Properly structured, members of an advisory board will not carry director duties and liabilities and this can be a sensible stepping stone towards a more fully independent board;
  • one or more outsiders can be brought onto the board. This can be very beneficial, but it needs to be right for the business; and
  • governance can also be improved by developing appropriate governance policies and procedures.

Corporate buyers and private equity see many poorly organised privately‑owned businesses. They will take the opportunity to highlight the possible risks to them in undertaking an acquisition of a poorly organized or more risky business. Some investment in governance can dispel most of these apprehensions, and allow private business owners to defend the level of risk in the business and so achieve higher value for a seller. Nonetheless, formal governance should be introduced carefully, to ensure the owner’s ability to drive and control the business is not unduly impeded.

In summary, shareholder value is enhanced in privately owned businesses through better corporate governance. Opinions of value are enhanced by checks and balances, independent processes, and a decreased dependence on the founder(s). Make the necessary adjustments to your business. You will make better decisions, increase the market value of the business, and create an environment wherein others can grow in their roles and responsibilities.


Advice For Entrepreneurs RE: Succession

Sometimes, big company practices need to trickle down to the SMB world. Whether the subject is a hot start-up with co-founders who must one day shed decision-making authority or family-owned businesses, the selection of successors is a critical topic. Without true outside boards of directors, these decisions often become volatile and can ruin relationships as well as cause collateral damage to the company and its valuation. Having seen the drama play out more often than I’d like, I read extensively about ways to “head off at the pass” struggles that need not become an entrepreneur’s undoing.

A law firm client of mine has a nice boutique corporate practice with a penchant for corporate governance topics. Though I subscribe to Google alerts on corporate governance, I also rely on content curators like Beverly J. Conquest (@bconquest) to follow feeds that I cannot daily read. Conquest came across an HBR blog post recently, “Advice For Boards in CEO Selection and Succession Planning” that featured some superb insights from David A. Katz and Laura A. McIntosh. Their original work was featured in the New York Law Journal. Certain excerpts are featured below:

Selecting the chief executive officer and planning for CEO succession are among the most important responsibilities of a company’s board of directors. In ideal circumstances, the succession process will be managed by a successful and trusted incumbent CEO, with the board or a board committee overseeing the process, reviewing the candidates and providing advice throughout. However, in exceptional circumstances, such as when the board lacks full confidence in the incumbent CEO or when a crisis occurs and the normal succession process cannot be utilized, the board will need to take the lead in managing this crucial task…In 2011, the CEO turnover rate increased as compared to the previous two years…Directors facing these challenges should keep in mind that the attitude and smooth functioning of the board are crucial to a sound process and good result, and that the fates of the board and its chosen CEO often are inextricably entwined.

Process Is Key

CEO selection is, first and foremost, about the future. As the adage goes, one picks a general for the next war, not for the last one…We advise that there be a comprehensive discussion at least annually regarding internal candidates and planning for emergency circumstances…Breakout sessions of the independent directors should include regular discussions of the succession plan, so that the lead director can hear the views of the other independent directors privately. Boards should be active in identifying talented leaders so that there is a bench of qualified internal and external candidates at the ready. The directors may wish to seek first-hand exposure to the company’s most promising executives at board and company functions and may consider working with the CEO to establish policies and procedures for the development and evaluation of internal candidates…

In order to set priorities and find candidates who meet their requirements, directors must first establish a well-designed selection process, which may include the advice of counsel and other external consultants. A sound process will enable the board to achieve its goals while at the same time providing a roadmap to keep the directors on course through the inevitable difficulties they will encounter. In the event of disagreements, the process stands as the neutral, pre-agreed path to which the directors and any advisors can return in order to continue progress toward the final selection.

An organized, careful process is necessary to undertake the substantive evaluation of candidates’ capabilities. There is no better guide than past performance; however, in many situations, red flags from top executives’ pasts have been ignored by boards in their selection process, and the choice has, to some extent predictably (in hindsight), been a mistake. When boards feel rushed into selecting a new CEO—which can happen when the company faces a crisis or lacks a succession plan—due diligence can suffer. The board should look for examples in each candidate’s past that bear directly on how the candidate will cope with the future challenges identified by the board.

Two Elements to Consider

There are two key corporate-governance related elements that should be near the top of a board’s list for evaluating potential CEO candidates, particularly when the board is not able to rely on the incumbent CEO to lead the succession planning process. The first is that the new CEO should be a good fit culturally with the board and the company…The tone set by the CEO helps to shape corporate culture and permeates the company’s relationships with investors, employees, customers, suppliers, regulators, local communities and other constituents…The second key element is that the CEO should have a long-term vision for the company that accords with that of the board. A crucial aspect of this is the ability to resist the powerful forces of short-termism…

Healthy Board Dynamics

A healthy board dynamic is essential to an effective succession process and positive result…A 2009 working paper published by the Harvard Business School’s Corporate Governance Initiative observed: “As a practical matter it is difficult, if not impossible, to find directors who possess deep knowledge of a company’s process, products and industries but who can also be considered independent.” This lack of deep experience and expertise can make it more difficult to identify and evaluate candidates from other companies in the relevant industry or even from within the company…

CEO selection is one of the most formidable, as well as one of the most consequential, decisions a board must make. Using a thoughtful selection process, a well-functioning board that has taken the time to consider CEO succession on a regular basis will be in a good position to identify its top priorities and the best-suited candidates should a crisis present itself. 


Un-Madoff Your SMB

Even if a business has strong financials, talent is not enough – integrity is needed. Master investor Warren Buffett’s position on business performance has been: “In looking for people to hire, you should look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.”  Given his track record, good corporate governance seems to be an essential part of long-term business success. Whether we go back to Michael Milken and his securities fraud, or more recently to Enron and Bernie Madoff, we have a wealth of examples of how poor checks and balances led people with intelligence and energy to behave in ways that clearly lacked integrity and cost many other people millions of dollars.

A 2003 joint Harvard and Wharton study entitled Corporate Governance and Equity Prices found that companies with good corporate governance generated superior future returns and higher profits and sales growth. The study created a “Governance Index” (G-Index) for each company based on the number of these 24 anti-shareholder provisions the company possessed. The higher the index score, the worse the company’s stock performed. Using data from 1990-1999, the study found find that companies with a low G-index score (i.e., a “democracy” portfolio) outperformed companies with a high G-index score (i.e., a “dictatorship” portfolio) by a statistically significant 8.5 percent every year. By 1999, a one-point difference in a company’s G-index score was associated with an 11.4 percent drop in a stock’s market value. Further, firms with weak shareholder rights were less profitable and suffered lower sales growth than comparable firms in the industry.

2009 joint Yale-Harvard study finds that the outperformance effect has waned in recent years as investors have learned about the importance of good corporate governance and adjusted the stock prices of good and bad companies accordingly.

In other words, bad corporate governance is now discounted in stock prices. Small-cap stocks and privately held businesses, where data is less available, seem to dodge the scrutiny of the large-cap stocks and purchasers of their stocks can take a “ding” on the regular.



How can we change the pattern in small to medium businesses?

  1. Better corporate governance measures in privately held businesses should include a progression towards true, independent boards.
  2. The boards should be evaluated on an annual basis (check out the Center for Board Excellence.)
  3. Matters such as compensation, family members in the business, succession plans, etc. need to be discussed in board meetings and action plans developed.
  4. Organizational development principles should lead to better talent management and the assignment of shared decision-making outside the CEO’s office.
  5. Internal controls need to be examined and improved to mimic best practices of a public company in a Sarbanes-Oxley environment.
These are a start–what would you recommend?