Charlie Burckmyer and Scott Noll want to buy a small business.
Ideally, the Boston MBA grads would like to buy a small service business with $10 to $30 million in revenue. "We've cast a little bit of a wide net," says Burckmyer, 33.
They thought they'd reeled in a promising catch recently when an investment banker approached them with a company for sale in the online pharmaceutical space that had modest top-line revenue growth but robust profit growth. The company was "quite profitable," Burckmyer says.
A meeting was arranged, and the two young sellers told their story. Well, sort of. "They were very ambiguous on questions we had about the nature of their business, who their customers were, why customers bought and so forth," Burckmyer recalls.
The sellers were also cagey about why they wanted to sell. "The story we got was really sort of inconsistent and nebulous," he says. "It was sort of 'I don't want to work very hard. It's a very easy business to run; you'll do much better with it if you work hard.' And that was sort of the extent of the story."
The cloud of uncertainty got Burckmyer's and Noll's red flags waving. "To us, [it] smacked of desperation," Burckmyer says. "That there was something that wasn't favorable about the business that they wouldn"t share with us, and they were eager to unload it as quick as they could." The deal fell apart.
To date, Burckmyer and Noll have scrutinized more than 100 small companies for sale. "We're still looking," Burckmyer says. "We've been looking for 14 months at this point."
Buy My Company, Please?!
Unfortunately, stories like Burckmyer's are more common in the Great Recession, which has created a subset of anxious entrepreneurs prone to selling themselves short to potential buyers. Entrepreneurs "can demonstrate a desperateness to sell," says Thomas Olson, a management professor at the University of Southern California's Marshall School of Business.
Sunk costs, both psychic and monetary, are fueling this air of desperation in some entrepreneurs. "The psychic [aspect] might actually be the more powerful," Olson says. "They've essentially given it their all, and they're not feeling as successful as they'd like to be. Because of that, they don't see too many ways out."
M&A deals are still getting done but at lower valuations, says John Warrillow, author of the new book Built To Sell: Turn Your Business Into One You Can Sell. He sees a massive gap between the desire to sell and the ability to execute. "Over 50 percent of small businesses want to sell, yet only one percent successfully do so each year," he says.
The successful sellers are creating cash-flow-positive companies with self-directed sales teams that sell a scalable product or service. They're setting boundaries around the projects and clients they'll accept, and they're forging long-term employee incentive plans that aren't based on equity that could require potential buyers to negotiate with each employee.
In other words, successful sellers are building companies that run well without them and transfer ownership easily. "As long as the business is dependent on the owner, there's nothing to sell," Warrillow says. Entrepreneurs who don't cut the apron strings could get lower valuations and less cash upfront, and they are more likely to sign earnout agreements where they'll receive a payout after meeting specific goals over a period of time.
"Earnouts are the enemy," Warrillow says. "The job of the entrepreneur when selling the business is to get as much of their cash upfront [as possible] because every dollar that is in an earnout is at risk."
Russell Glass is CEO of Bizo Inc., a 16-employee San Francisco company that sells business demographics to customers including IBM, Verizon, HP and Microsoft. The company projects sales of more than $7 million this year.
But back in 2002, Glass was a young entrepreneur running a small technology company called AGEA Corporation. The 2001 recession had reduced AGEA's headcount from 60 to 10 employees, and the company had seen "major, major cost-cutting," says Glass, 33. With venture markets on the decline, "the prospect of raising money didn't make sense," he says. The other option was to sell the company.
Then along came a potential buyer. Glass was flattered. He also felt self-imposed pressure to sell. "I was eager, for sure," he says. "After all the ups and downs we'd had and all the cost-cutting we had to do, this was a great opportunity."
The buyer was "very aggressive" in getting the deal done quickly, Glass recalls. It was then that he started to see "significant undisclosed issues" in the buyer's firm. By September of 2003, the buyer was bankrupt. "They acquired us for our balance sheet," Glass says. "It's hard not to look back on that and have some regret."
Selling without selling out starts before an entrepreneur approaches the negotiating table. This means knowing the company's valuation, setting a price floor and gauging the buyer's ceiling price to create the negotiating parameters. Entrepreneurs should also be prepared for the buyer to lower its offer at the last minute after they've committed emotionally to selling. "It happens all the time," says Stever Robbins, a Boston-based business consultant and executive coach.
Letting go of the outcome can be tough for entrepreneurs who are competitive by nature, but it's important to put things in perspective and remember why they sold the company. Robbins suggests writing down the reasons for sale and filing them away for future reference. Warrillow encourages regretful entrepreneurs to visit sites like Kiva.org, where they can lend money to struggling micro-entrepreneurs around the globe. "I challenge entrepreneurs to lend $25 and see if they still feel the same way about their deal," he says.
Glass wishes he had dug deeper to discover why the buyer was so eager, but he doesn't dwell on it. "I certainly think that experience made me a much better entrepreneur," he says. "I'll be a lot smarter the next time I go to sell a company."
Burckmyer, meanwhile, is optimistic about buying a small business this year. "We've got a bunch of interesting companies that we're discussing," he says. "Owners feel more confident about getting into discussions now." How sellers will present themselves and their companies in these discussions, however, remains to be seen.