6 Things to “Not Do” When Selling Your Bus or Limo Business
By Dr. Michael L. Lawrence, CTA partner
The following “Six Most Important Things to Not Do”, in order of importance based on the damage I have incurred or witnessed, are from the perspective of the seller or prospective seller. In a future article, I will offer a similar list for prospective buyers. Since sellers tend to be much less experienced in this field than buyers, here are the “watch outs” for prospective sellers.
!1. Don’t deal with someone that you don’t trust. This may seem intuitively obvious to you, but if you are like most people, the closer you get to having the buyers money, the more tempted you will be to overlook warning signs. In one of the earliest deals that I did, the buyers were rumored to have ties to organized crime. Since there was no hard evidence to prove the rumors, and since I wanted the buyer’s money, I completed the transaction. Within one year of the transaction, the buyer had failed to pay millions of dollars of liabilities they had agreed to pay and had fired most of our former employees, some of whom had been with the company for thirty years. Subsequent investigations convinced me, and members of my board, that the rumors concerning the buyers were probably true. In several other deals, the behavior of the “other party” reinforced what I now consider Rule # 1. When your instincts tell you that you are dealing with someone who is not a good person, forget the economics involved and walk away.
2. Don’t let your heart determine your asking price. Most of the companies that I did not buy (the “failed deals”) were ultimately sold for substantially less than what I offered. Multiple lessons are involved here. The amount of money that you need for the rest of your life is not what your company is worth. Your company is not necessarily worth more than what your competitor says he got when he sold his company, especially considering that he is probably lying. It is very likely that your company is not worth what it was worth at the peak of the U.S. economy. Your company is worth what the market is paying today for assets, revenue streams, cash flow history and potential like yours. You should get competent professional help and determine approximately what that value is. If you can’t sell at today’s values, don’t sell. But don’t kid yourself about what your company is worth. And don’t wait too long to sell for a realistic price. Otherwise, you will ultimately get substantially less than the realistic price that your heart would not let you accept.
3.Don’t believe a buyer’s first offer price, especially if you have “gilded the lily”. Negotiating a deal is an imprecise art that is fraught with danger and imperfections. One of the inevitable struggles is that you will probably not want a prospective buyer looking at your most confidential data until there is a signed Letter of Intent (LOI). Examples of information and personal contacts that buyers often do not have access to until an LOI has been signed are customer names, meetings with customers, meetings with key employees, strains in the organization that endanger continuity of management, pricing plans, computer system flaws, unconventional accounting practices, risks involved in operations programs recently (or soon to be) implemented and full details of pending legal problems. Suffice it to say that even well intentioned buyers learn things after the LOI has been signed but before the deal closes that change the buyer’s opinion of what the company is worth. To make matters worse, sellers often do not fully understand some of the risks that their company is facing and even more often are not fully forthcoming concerning the risks that they do see. Suffice it to say, the buyer’s first offer price is usually not the price at which deals get done and the adjustments are usually downward not upward. And, the adjustments are not always the buyer’s fault.
4. Don’t confuse the liquidation value of your assets with the value of your company as a going concern. The most common misconception that I have experienced among sellers of transportation companies is the belief that, after paying off all liabilities, their company is worth the market value of their assets plus the future cash flow potential of the company. Stated most simply, after paying off all liabilities, your company is worth either its value in liquidation or the value of future cash flows, whichever is higher. Of course, the value in liquidation includes the price at which your customer list and trade names can be sold, but it must also be reduced by the cost of liquidation, which is usually more than you expect. Historically, transportation companies were generally worth more based on the value of future cash flows. However, that is less true in today’s depressed transportation markets. You should also be constantly mindful that the taxes owed if you sell assets are probably higher than if you sell the company as a going concern, which is especially true if you structure the transaction as a “stock” transaction. (“Stock transaction” is a legal term describing a deal in which you receive cash or some other form of consideration in return for the common stock of your company. Get competent legal counsel on this subject.)
5. Knowing more than you do on a particular subject does not make someone a competent expert. Understanding the header of this paragraph is very important as you select professionals to help you in your prospective transaction. My favorite examples of “false experts”, although not directly related to deals, are the computer hardware and software people that I have dealt with for the last twenty years. They all knew more about their area than I did, but mostly they gave me bad advice. They seemed knowledgeable, so I listened to them and their advice was often very harmful and sometimes destructive. Similarly, to successfully sell your company, you need an attorney and a CPA who are both highly experienced in Corporate Acquisitions in your state of domicile and with the tax implications of the several alternative legal forms of transactions that are available to you. You will be tempted to choose the same attorneys and CPA’s that have served you historically. If asked, they will probably accept the assignment and they will inevitably know more on the subject than you know and will sound competent. Here is a simple rule of thumb: Have your professionals refer you to five distinct clients that they have personally gotten deals done for. Not five that their firm has done, but five that your professional has done. If you cannot confirm five past deals successfully done, select someone else. And, by the way, you also would be well served to hire a Mergers and Acquisitions consultant who is highly experienced in finding buyers and successfully closing deals in the passenger transportation industry.
6. Don’t count on being a happy employee after someone else owns your company. It is not totally unheard of for sellers to stay with the new owners and become happy, productive employees. However, in the 30+ deals that I have done, it happened four times. Almost always, the new owners make changes and usually the sellers feel like the changes are a rejection of what the seller spent many years of his or her life building. Just as importantly, you became an entrepreneur for a reason and being tired of working for other people probably had something to do with it. It is even possible that you will decide that you like working for the new owners and then learn that they really don’t like you. So, stay and give it a try if you wish or need to. There is a chance it will work. But, don’t base a large part of the price you receive for your company on the expectation that you will be there for the long term.
There are several more “watch outs” that I should share with you, but those will need to wait until there is more available space in another article. In my opinion, the six listed here are the most important for sellers and hopefully they will help you avoid some of my worst mistakes.
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