Preparing an Owner for a Third-Party Sale

Submitted by John Brown on Mon, 11/30/2015 - 4:18am
Preparing Business Owners for a Third Party Sale

In last week’s article we met James, the fortunate recipient of a $19M offer to buy his company. Well, he felt lucky until, as he was about to sign the Letter of Intent, an advisor pointed out that between taxes and the payment structure he’d leave the closing table with $0 in his pocket.

You might wonder (but we don’t) how owners can find themselves that deep in the sale process without an understanding of its basic financial structure. That mystery is second only to the mystery of how not one of James’s advisors had ever asked him (a 63-year-old owner) if he was thinking about one day leaving his business. Not one advisor ever asked what actions James had taken to prepare for that day or whether they could help.  That’s not really a mystery because, as our 2014 Business Owner survey reveals, only 15% of owners have ever had a single conversation with an advisor about their decision to stay in or leave their business.

Advisors trained in Exit Planning do ask owners questions because “basic” Exit Planning encompasses not just third-party sales but all of the paths that an owner might take to exit (a transfer to children, a sale to co-owner(s) or child(ren), or a sale to an Employee Stock Ownership Plan). To distinguish basic Exit Planning from the planning we do for owners anticipating a sale to a third party, we call the latter “Pre-sale planning.”

Why Me?

If you are not a M&A advisor you may be asking yourself,  “Why should I become involved in an owner’s pre-sale planning?” BEI’s Owner Survey responses deliver the clear answer: No other advisor is asking even a single question. If you don’t proactively reach out to owners, they will do nothing to prepare—they don’t know what to do or whom to ask for help.  Simply asking owners what their plans are for leaving their businesses is vital to their success and your first step to becoming involved in their planning. Of course, once you’ve taken that step, it’s important to understand the Exit Planning process as it relates pre-sale planning.

Pre-Sale Planning

When owners schedule a meeting to talk to you about selling their businesses to an outside buyer they usually do so because a potential buyer has approached them. They may already have signed a confidentiality agreement or even a Letter of Intent to sell their company. They want your advice on how to proceed, or perhaps to look over the proposed documents to “make sure everything is alright” before they sign.  At this point it is usually too late to back up and start at the beginning of the planning process—your client is already watching Homes International on television to research prime second-home locations.  

It’s important then to reach out to your owner clients and prospects now to educate them about the merits of pre-sale planning. The greatest benefit is that planning in advance of a buyer’s offer allows owners to first assess how large a future offer must be to meet their wants and needs. If they wait until an offer is tendered, they have neither time nor money to devote to growing business value and cash flow.


The first steps in pre-sale planning are identical to Exit Planning, but differ in some important details.

  1. You and the owner must articulate and understand the owner’s values-based goals. You know, but many owners do not, that there’s more to an exit than cashing out and moving on. You may need to dig to determine if any of the values-based goals (e.g. culture, community, or legacy) are important to your client. If they are, you must help your client realize that a sale to an outside party may not achieve those goals.
  2. It is vital that owners know, before going to market, what the market considers the business to be worth. If you are not an investment banker or business broker, work with those members of your advisor team to assign an accurate valuation.
  3. When one of your clients wants to sell to a third party, you must walk them through the tax impact and other purchase price reductions that nibble (or devour) sale proceeds. You might share the story of James Padgett from the previous article.

Pre-sale planning prepares owners before:

  • Going to market and entering the sale process.
  • Spending significant money, time and emotional energy without assurance that the sale can achieve all of their goals.

Next week we will explore some of the specific Deal Killers that prevent owners from exiting on their terms and conditions—unless you and they are prepared to slay them.