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"That is the Way, We Have Always Done It"
BUSINESS TIPS FROM THE EDITOR
March 2025
Richard T. Hendee, Editor
The Silver Fox Advisor
“That Is The Way, We Have Always Done It”
Over my years in working with all sorts of businesses, large and small, for-profit and non-profit, when I have been asked to help to improve policies, procedures, ways of doing business or just general processes, I usually try to understand why and how things are presently being done the way they are. Then, based on my experiences, I might suggest some ways or techniques of doing things differently. One of the biggest push backs I hear is – “Oh we can’t do that, we have always done it the way we are doing it now”!!
Change is a very difficult thing to accept and sometimes even harder to even talk about. But, in today’s fast moving business environment and with the rapid changes in technology more often than not if changes are not made, then the business may actually be taking steps backward by doing nothing.
Making changes was on full display during the COVID pandemic. Workers who never participated in a virtual meeting became Zoom meeting experts. Restaurants focused on take-out orders and cut back on the dining-in experience. Supply chain issues caused many businesses to find alternative products and materials and sources thereof. So, changes can be made if it comes right down to it.
I am not saying you should make changes for the sake of making changes, but if you can improve efficiencies, save money, cut expenses and/or save time, shouldn’t consideration be given to at least trying something different? Further, if you are afraid that a change wouldn’t be perceived well by your customers, vendors or suppliers, than don’t make a wholesale change, but rather try making the change with one client or one vendor and see how the change is received. That way you will be able to make an educated decision rather than the wrong decision or not making one at all.
If you need help with making changes in your business, I would recommend you seek an experienced business advisor, coach, consultant or mentor with a financial or business background for your Company: Contact a Silver Fox Advisor. Remember, having experience on your side always helps.
We encourage you to visit our Website at www.silverfox.org or www.silverfoxadvisors.com to select a Silver Fox Advisor and also to learn more about the Silver Fox Advisors and their businesses, as well as our great programs and community outreach endeavors.
Selling your Business
SELLING YOUR BUSINESS
“When is the right time? How do I do it?
What will I do after I do it?”
or maybe, “Darn, what a mess you left me!”
PART #1
by Gerald Merfish, Silver Fox Advisors
Prelude – This article ran in our October 2023 Newsletter and we have had many requests to rerun the article. This time around it will be run in two parts. Part 1 this month, March 2025, and Part 2 in the April 2025 Edition.
One might rightfully wonder; what kind of title is that and what are you talking about? I am referring to the thoughts one may have when contemplating selling their business and what happens when the business leader unexpectedly becomes ill or passes away.
When is the right time to sell one’s business? That is a question only the business owner and their family can answer. The obvious dilemma is that one cannot predict the future, so the best time is when the business is doing well, when the owner has developed leaders in the business that can run the business in the owner’s absence, the owner wants to do something else at that point in their lives, or the owner has fallen ill or passed away, are just a few of the reasons it is time for a business to be sold.
The truth is that not all businesses are easy to sell. If the business is properly prepared to be sold and a diligent effort is made to find a buyer, then it is reasonable to believe that every business can be sold, however, the price the business sells for may not always be the price the seller wants. The businesses that generate the highest price are usually those where someone other than the owner can run the business and can serve the new owner.
I was in this predicament as a 61-year-old owner of a family business. Our children had decided not to go into the business, each having professional careers. My motivation to sell was driven by my recognition that if I was disabled or passed away unexpectedly, the business would be worth much less and my family would be challenged with running or liquidating the business in my absence. Our family’s largest asset was ownership of the business, which in and of itself, motivated me to seek more financial diversification. Fortunately, a Private Equity firm bought our company, I reduced my ownership to 20%, achieved my goals, and remained the CEO. With the Private Equity firm’s assistance, we grew the company further, increased the value, and sold the business to a strategic buyer some 9 years later.
Selling one’s business is a personal and emotional decision, impacted by each seller’s personal situation. My belief is that one should realize that there is a time to sell and a time not to sell. As I grew older, I realized that my window to choose the right time to sell was becoming shorter. By this, I mean that as I grew older the likelihood of a health event occurring within an industry down cycle was more likely as there were not going to be a lot of cycles left in my remaining years.
I was also concerned with the change in my daily activities when I no longer had a business to run. I struggled when people said, “you will get to do the things you love to do.” To which, I would think as a business owner, I am doing what I love to do right now. People would also say to me that “when a door closes another opens”, but I doubted this was true. However, I learned that, in fact, this is substantially true. Of course, it was not the same door that was open when I ran the business and at times it was not easy, but things developed, and doors did open for me. I am enjoying the life I now live, enjoying family, spending time with my friends, and travelling without as many worries. Now, I sleep better at night and can spend more time staying healthy. Many of my friends that own businesses do not sell due to the concern associated with this change. I can only hope for those business owners that they will not leave their family a mess.
Finally, I have heard sellers say, “why sell it when if I keep working, I will earn that much in 4 or 5 years.” Sure, that makes some sense but if you were like me, there was a substantial percentage of our familial net worth tied up in the business and that kind of concentration has risk. As we all know, the unexpected can happen and when it does it can be very ugly. Thus another reason to sell one’s business to achieve financial diversification and reduce financial risk.
There are several questions that seller’s ask so let’s go over them here:
Who is going to buy my business? There are basically only two types of buyers.
Strategic Buyers—a strategic buyer is a buyer that is in the industry or a related industry. It could be a competitor or in a related business that wants to own your business as they see it as a logical pathway to diversification or wants to geographically expand into your market. Perhaps one or several of your employees will gather and do a management buy-out of the business. Usually, a strategic buyer will pay the highest price as they will then have operating costs savings in shared overhead like the accounting department. The odds are that you may already know the strategic buyer but perhaps the strategic buyer will be someone you did not expect to be interested.
Financial Buyers—a financial buyer is a buyer that will buy your company and strategically grow it with the intent to sell it as a larger more profitable company at a higher price at some point in the future. Another term for a financial buyer is Private Equity. If the purchaser is a financial buyer, it is unlikely you will have known of the firm before the transaction. However, when a financial buyer has already bought a company in your industry and they are trying to create size, then they become a strategic buyer. Usually, a financial buyer will ask you to roll over some of your ownership in the business and remain as part of management. This is what happened to me and remaining an owner in the business was an opportunity to get a second bite at the apple, which, in my case, was financially rewarding.
How much is my business worth?
This is a very important question and one every seller wants to know. The two key components in determining the value are the firm’s EBITDA and ROACE, so let me define these two acronyms.
- EBITDA means the company’s “Earnings (net profit) Before Income Taxes, Depreciation, and Amortization”. This is a measurement of the core profitability of the company and is an easy, common metric for a buyer to use.
- ROACE means the “Return on Average Capital Employed” which is determined by dividing the EBITDA by the average capital used in the business, resulting in the ROACE percentage. Average capital is considered the average of the tangible asset value less any non-interest-bearing debt like trade payables. This is a measurement of how efficient the company is in the use of its capital. The higher the ratio the more valuable the company.
These two factors are the key determinants of the value of your business. The value will be a multiple of EBITDA and that multiple will be directly tied to the ROACE of your business. Let’s use the public stock market as an example. The ratio used in public markets is the stock’s Price to Earnings ratio or more commonly called the P/E ratio. Tech and Service companies tend to have high ROACE percentages as they do not need large amounts of capital to produce stellar EBITDA and accordingly their P/E value is high. Conversely, a public steel company, for example Nucor, will utilize substantial capital to deliver their earnings so their P/E ratio will be lower. Even though your company is not publicly traded, the leading indicators of value are the same.
The professionals you choose to help sell your business, be they investment bankers, brokers, M&A professionals, or Exit Planners/Advisors, should have access to a database of private buyers that can be likely buyers. This becomes a reference point for many to determine "comparable" multiples. Hence, depending on tangible and intangible factors, the multiple will fall within a certain range depending on the industry and other factors.
Selling a business at the highest price on the best terms to a qualified buyer is not a fast process. The business needs to be prepared to be sold. Perhaps the owner will incentivize key employees with what is called a “Stay Bonus”, so these employees stay throughout the sale process and go to work for the new owner for a set minimum amount of time, so they earn the full stay bonus. Also, one will want to be certain that knowledge of the possible sale is controlled and does not leak out to competitors and non-key employees. On average, depending on the size of the company and the complexity of the transaction, the sale process might take as long as a year. A seller should understand this and be certain not to become impatient. Please keep in mind it is always easier to buy something than it is to sell something.
