This is part 3 of Lamar Rutherford’s interview with Exit Story: What to Know When You’ve Decided to Sell Your Business.
Why Aren’t There More Women Selling Businesses? We don’t hear as many stories of women who’ve built, scaled, and sold businesses. That’s mostly because the majority of people who get ready to sell are older. They’ve been in the business for a long time and in the baby boomer generation, women didn't tend to own businesses as frequently.
Women may own a business because their husband has passed away, or the business was in the family and was passed on to them, but that’s less common. More frequently it’s a man at the helm of the business.
It’s also true that entrepreneurs tend to be egotistical – often in a good way. They have to believe in themselves and their ideas enough to get through the storms. And it's not an easy road. Successful entrepreneurs have often persevered for years through many challenges before they were successful. The founder of Xerox worked on his idea for over eight years before he made a dime. Perhaps being ego-driven is more of a male personality trait, or, maybe because historically men were more business focused then women. (But these are generalizations.) Regardless, my experience has been that more entrepreneurs ready to sell now are male than female.
There are so few women who are business brokers as well. So, for the women entrepreneurs who are out there, a lot of them come to me when it’s time to sell.
Women don't always think as big. They're much more conservative when it comes to financing. I know I'm personally this way. I don't like to take on debt, but debt can grow a business. There are pros and cons to it, but risk takers can grow and fail -- or they can grow and succeed.
I certainly try to encourage women entrepreneurs to think big. When I taught entrepreneurship at UCSD for 8 years, I noticed in every class that the men were more vocal. They were much more likely to raise their hand and give answers.
But the women were much more likely to have better answers on their homework! Often in entrepreneurship, there isn’t one right answer, but there are better answers.
The women know the material, but they're just less vocal about it somehow. When I was in grad school and working on my MBA, I also noticed this dynamic in groups. If my group had two women and five men, the women would have answers as good as the men. But the men wouldn't even hear those answers until a guy said them. Is it a respect thing towards the women? Or is it a competitive dynamic, where men are so used to competing against each other, they are the only ones they hear and see? It mystifies me to this day.
How to Be Prepared to Sell I've seen so many situations where people have left hundreds of thousands, if not millions of dollars on the table because they didn't prepare, or they didn't understand a term, or they didn't do things right.
As an example of not understanding a term, a business was being courted by a potential buyer. We said, “Get them to put a number on the table.” The owner talked to the buyer and got them to put a number on the table. I think it was seven or eight million, which seemed like a good price to the seller. But when we took a closer look at the terms, it turned out they were leaving 5 million in the business in net working capital.
So net net, they were actually getting two million. If you don't understand those terms and how they work, it can really make a difference in what you actually walk away with.
I think there are different phases of preparing. You want to: · Understand what the value of your business is · Understand where you want that value to be · Determine what that means in terms of investing that money and having a revenue stream from those investments
I always say do the math and make sure you include the after-tax part. (As a consultative broker, we can walk owners through that or help with that, because that's part of what we do.)
A lot of owners don't realize the ego part of selling. Sometimes, the buyer is motivated to get a lower price, so he or she is going to point out all the flaws in your business, effectively telling you your baby's really ugly, which can be very uncomfortable. This is one reason why I think it's good to have a broker or someone in between. You want someone that can help negotiate for you and buffer some of the emotional reactions both sellers and buyers can have through the process.
If you're a sophisticated seller, your attorney can help, but remember, they charge you hourly. Most brokers or M&A advisors get paid mostly on commission at close.
And working together afterwards is really important. If you don't like the buyer after the transaction, that can be a challenge, and detrimental to the success of the business for the buyer. Some sellers say they don’t care what happens to the business after the sale, but often they really do care. Not only do they have some pride in seeing their “baby” succeed in the future, but it also impacts their former employees, customers, and suppliers, all people with which they’ve had relationships, often for many years.
Also, owners need to make sure they are emotionally prepared for what they’re going to do after they sell. I had a deal fall through because the seller just didn't know what he was going to do with himself if he sold. He didn't want to hang out with his wife at home all day. In his mind, the terms were never right, but it really wasn't the terms. It was really that he just couldn't part with his business.
So that's the first step -- make sure you're prepared with an exit strategy.
Second, sellers should always look at what percentage of their portfolio is wrapped up in their business, because it can be a huge part of their net worth. That's not necessarily a bad thing, because if they're running the business, they’re in control and it seems like a lower risk to them. But things like COVID can happen and it can change their world dramatically. Sometimes being a little bit more diversified is better so they don't have all their eggs in one basket.
Step three, look at your business from the lens of a buyer. Things like recurring revenue are very important for buyers. Make sure the business can operate without you -- having that next layer of management, also having processes and procedures in place. Good accounting. All of those are really important aspects to sell your business.
I had a seller who was debating about selling or turning the business over to his kids, and the business was way under-invested in technology. If an owner invested what was needed in technology, it took a lot of the profits away. If he sold to an external buyer, he would be turning the problem over to them, so they're going to pay a lower price. If he decided to give his business to his children, how will they pay for that investment in the future? Not investing in the needed technology impacts them as future owners as much as it would another buyer. Either way, the next owner is going to have to make the technology investment to make the business successful.
Owners also have to make sure that any investments in the business make sense. I had one seller invest a couple hundred grand in technology, but his business was only worth a hundred grand.
Any owner should have advisors that can help them understand the different types of buyers, deal terms, the risks related to different terms, and what they can negotiate.
So, make sure you have advisors lined up -- a broker or M&A advisor, good attorney and a good accountant that all are familiar with M&A deals.
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