When we speak to people about starting up businesses, or when we speak to Business Owners that are thinking of selling, invariably they will ask when they should get the business ready for sale.  The answer is the same:  You start the sale process when you first start the business!

At any time we are asked to list a small business for sale, one of the very first questions we ask the Seller is:  When we get you a Buyer, and you walk out the door at the moment settlement ends, what happens to the business?  Forget the signs, the widgets you might sell, forget the number of years in the business and the good will; is the business so tied to the name, the face and the personality of the current Owner, that any Buyer is going to find the business slumps, sometimes fatally when the Seller leaves?

If it is a business that is highly dependent on personal sales activity, and that sales activity is closely aligned with the current Owner, there is potential trouble for a Buyer.  When you start a new business, frequently the Owner IS the face of the business.  There may not even be another face in the place, except for that of the Owner.  But if the Owner does not turn over that responsibility to others, he/she can become unquestionably attached personally to the success of that business.

Companies with names of the founder – such as Frank Smith & Company – can have the same difficulty; but over time, if Frank Smith turns the public representation over to others, it does not run the same risk.  Clients do not necessarily need to know that Frank Smith is there.  If they are not dealing with Frank Smith on a day-to-day basis, they may not care, at all.  What they really care about is the person with whom they work on a daily basis; the person the Customer feels knows them and their needs, and will take care of those needs with the most care.

If they were first introduced to the Company’s services by Frank Smith, and gave all orders to Frank Smith, turned to Frank Smith for any problems they incurred with the products or services they ordered, so that good ol’ Frank personally dealt with any complaints and their resolutions, then Frank becomes indispensible to the continuance of the business, itself.  You, as the new Buyer potentially have a tremendous difficulty in overcoming this.  When John Unitas left the old Baltimore Colts, he was such an icon that everyone was going to hate the new guy, no matter how good he might have been:  He was just not John Unitas!  The same happened when Brooks Robinson retired from the Baltimore Orioles.  Sean Connery was such a great movie James Bond, that no one has ever achieved that same allure.  Sports fans and movie goers felt some kind of a connection with these people, and the analogies really have merit.

This does not have to kill a deal.  But careful planning by both Buyer and Seller is crucial.  If a Seller has not established a separation between him/herself and the business, it can mean reducing the price to anticipate losses that are inevitable, when such a Seller leaves.  Sometimes it means a long transitional period, where the Seller stays on to give the Buyer a chance to catch on with the Customers.

In some instances, an “earn-out” is appropriate.  This is when the price is more or less set at a maximum, or in general terms, rather than as an absolute dollar amount.  Payments are then usually made on the basis of the actual performance of the Company after the sale, perhaps on a percentage of Revenue or Gross Profit.  This is typically done over a three (3) to five (5) period, on a declining payment basis.  For example, in the first year, 50% of the agreed amount is paid; in the second year, 35% is paid; in the final year of a three (3) year payment system, the last 15% of the agreed payout is made.  If the business erodes because of the Seller’s disappearance, so does the total amount paid.

This is common in service businesses, where the Principal is an active part of the business and his/her presence is a major factor in its success.  In this situation, business retention is not something that can be taken for granted, as it might be in a Gas Station where the brand and location are more important than the Owner.

One of the biggest deals we have done in this way was a company that was the largest Real Estate Brokerage in its service area.  In that case, the issue was that the Real Estate Agents were not guaranteed to stay with the Company, since they are Independent Contractors and are free to move among other Brokerages, at will.  If they decided they did not want to stay, they could have left en masse, and the Buyer would have been left with nothing but a big, gorgeous, empty office.

The earn-out demanded that the Seller remain with the Company, at least on a superficial basis, sometimes working actively with the Agents in the beginning, then tapering his activities slowly over the three-year payout period.  The earn-out made him a participant in the success of the transition.  Large Hair Salons can be sold on the same basis, because the individual Hair Stylists are also Independent Agents who can leave at any time, for any reason and take their “books” of business with them.

A business with an Owner, who is the key to the historical success of any business should be viewed in the same way.  Understanding how sales leads are generated, how transactions to the business are closed and who and how customer relations are handled are key to understanding whether this is an issue, in your purchase.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

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