Cost of selling could be substantial



Gary Miller

Many owners plan to sell their businesses someday. Often, they think about their retirement and dream about their lifestyles based on the money they will make from the sale. But, more often than not, they have not anticipated the costs involved or the time it takes. This is not surprising, since most owners have concentrated on building their businesses rather than selling them. I find most owners, at first blush, are shocked at the costs incurred and the time necessary to prepare a business for sale. Negotiations with potential buyers take time and the legal, accounting and consulting fees needed to complete the transaction cost money. Often it takes from six months to two years to prepare a business for sale and another two years to sell a business. Once owners grasp the scope of work and associated costs, many try to avoid outside transaction experts to save money. They use their business accountants and corporate attorneys either having no, or very limited, “transaction” experience.

Research indicates owners who use an experienced transaction deal-team often realize higher multiples, better terms and conditions and sell their businesses more quickly than owners who do not. This is a result of being better prepared and having your company in pristine condition before going to market. For example, if an industry’s selling price multiples range from 4 to 8 times EBITDA (earnings before interest, taxes, depreciation and amortization) and the average is 5.2, it will sell at the higher range of those multiples if it is well prepared. Companies that are minimally prepared will sell at the lower range of the multiples — if they sell at all.

Below, are some general guidelines and cost ranges to consider if you are selling your business in the next five years. The guidelines vary significantly depending on the size and complexity of the company.

If you are an established business, there are three stages to go through in selling your business: 1) Preparation to go to market; 2) Identification of potential qualified buyers leading to a Letter of Interest and, 3) Due, diligence, negotiations, purchase and sale agreement and closing documents. Prepare to incur costs for each stage.

The most important decision a business owner makes is the selection of his “deal team”. The most important criterion for selection is transaction experience.

The first member of the deal team is a transaction consultant who specializes in mergers and acquisitions. The consulting firm’s first job is to address preparing the firm for market and leading the other deal team firms throughout the transaction process. The cost of the consulting firm can range between $100,000 to $350,000, or more, plus expenses, depending on the size and condition of the company, time it takes to sell the company and company complexities.

The second deal team member is the transaction wealth management firm who can guide you in wealth preservation and tax avoidance or deferral (not tax evasion).

The final three deal team firms are the transaction law firm, the transaction accounting firm and the investment banking firm, all of whom can work together with the wealth management firm to negotiate the best deal structure, price and terms while at the same time minimizing your tax liabilities.

Costs for a strong transaction law firm team can range from $75,000 to$350,000 or higher, plus expenses, depending on time and complexity of the transaction.

Costs for the accounting firm can range from $50,000 to $400,000 or more, plus expenses, if they have to audit your last three years of financial statements.

Costs for an investment banking firm include an up-front retainer fee ranging from $60,000 to $300,000 or more, plus expenses and a “success fee” for completing the transaction. Success fees range from 3.5% to 10% based on the size of the total transaction value of the sale. While much of the above may sound complex and expensive, business owners who use experienced transaction teams more often than not win more than they lose.

Gary Miller is founder and CEO of GEM Strategy Management Inc., a national firm focusing on strategic planning, raising growth capital, M&A, planning exit strategies, preparing companies for sale and post-integration processes for middle-market companies. Reach him at gmiller@ or 970.390.4441


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