One question that I hear often in social settings with industry peers is something along the lines of, “Are you glad you did it?” The real question being asked is, “How does the process of selling your brokerage work? Do you just throw a number out there and get a check, or what?”
As my friend Steve Murray, a partner with RTC Consulting and senior advisor to RealTrends, will tell you, there are as many ways to complete a transaction as there are participants in that transaction. Yet, it can best be described as: involved. VERY involved.
Imagine your company being stripped bare, and every nook, corner, and cranny examined with a magnifying glass — multiple ways, multiple times. That’s it in a nutshell.
Pride wastes opportunity
Failing to grasp this concept when the unsolicited offers began arriving undoubtedly led to the failure of other deals with potential suitors. I took the questions personally, as if my character were being assaulted, yet in truth the inquiries were completely unrelated to that intent. Pride wastes opportunity.
For any entrepreneur who has invested years of blood, sweat, tears into building a business, one of the hardest things to do is emotionally separating the business from one’s personal self-worth. With the final suitor, my heavy preparation in understanding the process negated that personal chip-on-the-shoulder. I now understand that it really was just about business. Knowledge capitalizes on opportunity.
The transactional process all starts with the cultural meeting of the minds that I discussed in the last writing. Once that is clarified, there comes the signing of a very tight Non-Disclosure Agreement (NDA). Simultaneous with the execution of the NDA, the buyer will want to see three calendar years of Profit & Loss statements, the last three year’s balance sheets, and a rolling 12-month P&L. It is only after this verification of earnings that the prospective buyer can determine any sort of offering price.
How they determine an offer price
An offer price is based on many elements but generally there are three main attractors: EBITDA, the company performance trend line (going up or down, and why), and does the company have recurring revenue that is sustainable, and relatively separate from the seller’s own labor inputs.
If these three elements are strong, the price offered to the seller is strong. If these elements are not strong, your price is not strong.
Typically, the offer number is a multiple of EBITDA. Not to sound vague, but that multiple can be anywhere 2X to 5X, depending on the quality of the company and industry market conditions. Poorly managed companies with a mess in their back office, obviously, sell for less. Plain and simple.
Once all that data is verified, then and only then is a Letter of Intent (LOI) issued by the buyer. That’s when the negotiations begin and, just like all things in real estate, everything in the LOI is negotiable. Since the LOI is non-binding, either party may throw their hands up and quit at any time. So, by signing an LOI, you haven’t really agreed to anything except to walk the investigative journey together under a general set of criteria.
While discoveries during due diligence (DD) can alter the terms of the LOI, the buyer will generally want to stick with the original agreement as closely as possible. Give a little here, take a little there, still, the LOI serves as the main roadmap for the transaction.
Its why preparation is the key – no one likes surprises.
One thing to stress is that you must have good counsel. A good attorney and a good CPA who understand and know the process and have experience with it are key. Your attorney cousin who runs the title company down the street may be a great person, but not your best choice for this transaction. Likewise, the bookkeeper who has managed your books for many years may be loyal and knowledgable, but this is not their area of specialty. Never scrimp on who you hire to protect your interests.
The purchase agreement comes next. It details what the buyer must do, what the seller must do, what the seller must provide as part of the DD, conditions for closing, and among other things, representatives and warrants for both parties. A list would be exhaustive and every single thing you know about your company; the buyer will want to know. EVERYTHING. For example, the final version of my purchase agreement ran 70+ pages, with the disclosure schedules another 75-100 pages, all based on a DD process that took about six months.
Space is simply not adequate to allow a full description of the many twists and turns of this process to be compressed into a single article. So, all I can say is no, you don’t just throw a number out and get a check. Not even close. Buy me a beverage at the next industry event and I might share more.
Phillip Cantrell is the CEO and Founder of Nashville-based Benchmark Realty. United Real Estate – a division of United Real Estate Group – announced its merger with Benchmark Realty, LLC in 2020.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
To contact the author of this story:
Phillip Cantrell at phillip@benchmarkrealtytn.com
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com
