Selling a Small Business? How an “Interpretive” Advisor Can Help
In 2020, the United States saw exponential growth in the number of new business startups. According to the Census Bureau, 4.4 million new businesses debuted during the first year of the global COVID pandemic, up nearly 25 percent from the previous year. While some businesses are large, many are small, with nearly 70 percent of entrepreneurs starting their businesses at home. Bootstrapping is common, with many business owners using their personal credit cards or funds to finance their startups. With so much focus on keeping their business afloat, business owners often don’t think about selling their business until they have to – and then they’re unsure where to turn for help.
In my experience as both a financial advisor and an entrepreneur, I’ve seen first-hand what it’s like to sell a business, and the process can be daunting — especially for a small business owner with a localized customer base. While online articles may recommend enlisting a business broker, the cost benefit of using a broker may not make sense for a niche business. However, if you work with a financial advisor who understands your unique needs as an entrepreneur, you may be able to enlist your advisor’s help to position your business for a sale and potentially keep more of the proceeds for yourself and your family. In my opinion, it all comes down to having an “interpretive” advisor – one who not only understands your situation but who is with you on the journey to financial well-being and works collaboratively with you to help you evaluate your best option.
Financial Advisors: One Size Does Not Fit All
In my book, “The Entrepreneur’s Guide to Financial Well-Being,” I discuss the importance of finding – and working with – a trustworthy advisor who will place your interests first. But – as is true with other professions — not all advisors are created equal. In his book, “Being Mortal,” author and surgeon Atul Gawande describes three types of doctors. The “paternalistic” doctor tells patients what to do. The “informative” doctor sits down with you and goes through all of your options regarding your health issue but doesn’t assist you in making decisions. The “interpretive” doctor gives you information and helps you understand and focus on making the best decision for yourself. I believe financial advisors could be categorized in the same way.
For an entrepreneur looking to sell a business, a paternalistic advisor might “prescribe” getting a formal business evaluation, enlisting the help of a business broker, and going through a formal process to make the sale. An informative advisor may present several options to the business owner but leave it up to the entrepreneur to call the shots. An interpretive advisor would explore all the options with the business owner and work collaboratively to help the business owner implement the best option for their situation. Let’s take an example, using a hypothetical situation:
Selling “Mary’s” Business
Mary owned a boutique gym and had built up a local clientele over 10 years. But during that time, she married, and her husband had recently accepted a new job in Alabama. Mary needed to sell her local, niche business so she could join her husband. The income Mary made from the gym wasn’t necessary for the couple’s financial success, but it was impactful. Mary’s clients were very loyal, so it didn’t make sense to sell to an outside party because clients wouldn’t know or trust the new owner.
Mary’s advisor, Tim, understood Mary’s business and had even attended classes at the gym over the years. Tim and Mary explored what a formal business valuation would cost, as well as what she might have to pay a business broker. Ultimately, after calculating the net present value of future cash flows, the two settled on a valuation that Mary could use with a potential buyer. Tim and Mary also discussed the need for clients to know the buyer, and Mary decided to offer the business to her long-time employee, Sharon, a personal trainer who had her own clientele at the gym. Before entering into a serious discussion, Mary asked Sharon to sign a non-compete and a non-disclosure agreement to prevent her from poaching Mary’s clients and moving to another business.
Sharon loved the idea of buying Mary’s business but wasn’t sure she could afford to buy the gym on her own. Mary and Tim explored the idea of Mary granting Sharon a loan; however, Tim counseled that because Mary would be taking a large risk, she should be compensated with a more favorable deal. Ultimately, Tim suggested that Sharon might qualify for a loan for women-owned businesses through the Small Business Administration. Sharon applied and received a loan, and she and Mary reached a deal that was fair for both of them.
What Mary Learned
As Mary explored selling her business with Tim, he worked to help her understand the different ways she could value her business, the cost benefit of working with a broker, and how to help a potential buyer get funding. She also learned the importance of making sure her buyer was creditworthy and willing to sign documents prior to negotiations that would preserve the value and integrity of the business.
Of course, not every business sale is as simple as Mary’s. The sale of a larger business, for example, may involve a different type of valuation – one based on multiples of “EBITDA,” or earnings before taxes, depreciation and amortization – as well as more complex legal terms, which could include earnouts or clawback agreements, among others.
In this hypothetical example, Mary was fortunate that her financial advisor knew her business and was willing to work with her to find options that best fit her situation. If you are considering selling a business, ask questions to learn whether your advisor understands your situation and will work collaboratively with you to find your best solution. Doing so could potentially make a huge difference in your experience — and your net profit.
This is intended for educational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.
Wayne B. Titus
Financial Advisor / Managing Director