WELLS FARGO BUSINESS INSIGHT SERIES VIDEO TITLE: Preparing your business for sale MODERATOR: Rich Sloan, StartupNation EXPERT: Richard Watson, Business Succession Planning Specialist, Wells Fargo Business Advisory Group VIDEO DESCRIPTION: Learn how to keep the buyer in mind, make your business attractive and determine an appropriate price. RECORDING DATE: November 11, 2008 [Music plays.] RICH SLOAN: If I want to do a fine job of preparing my business for this process, for sale what do I do? RICHARD WATSON: Well, to borrow a phrase from Stephen Covey, let s begin with the end in mind. Let s think about who this buyer is going to be. For example, in Gaston s place here we know that he s interested in possibly selling or transferring or gifting part of those shares to Gabe. And that s important because Gaston may want a lower share price because it s interfamily. But if Gaston were selling to, for example a bakery next door, he probably wants a higher price. So knowing who the buyer is
indirectly impacts things like the installment note. Is it an installment note? The interest rate. Is it a lump sum? So sort of parties to the deal, terms of the deal are all factors. The other thing that we try to do is make the business as attractive as possible to a buyer. So for example we want to dress it up. We want to make sure that the books are in good order. We want to resolve any outstanding legal problems. We want to have a compelling story. Why are we selling this business and why do we think a buyer should buy? SLOAN: And in this process you re going to have to put a price tag, a value on your business. How do you determine that? It s not, it s not obvious to most business owners. WATSON: Sure, yeah. Unfortunately there isn t a universal formula. So what a lot of business owners end up doing is hiring a business appraisal. So they go out and they have a professional evaluation done on the business that generally will come into two different camps. So for example, they might look at the assets in the business, so Gaston for example, has the building. He owns the building. He owns the equipment. He owns the stove and so on, and all the various things inside the business. That s called the asset-based approach. The other thing that the appraisal might do is look at the earnings of the restaurant. So we ll go back
say five years and then we ll go forward and we ll try to project what we think those earnings are going to be. Neither one is really correct, but somewhere in the middle, in practice, is usually where it falls. But what it does is it gives the buyer a high comfort level knowing that we have this independent third party who has made this valuation of the stock and it s just not the seller pulling it out of thin air. SLOAN: And then there must be specific ideas you have in mind on how you maximize the value. In other words you fetch the best possible price for your business. WATSON: Sure. One of the things I think that s most helpful is to kind of change your perspective, so from that of the seller to that of the buyer. We know that for many sellers that this is the single largest transaction that they may have done in their lifetime. But it s also the single largest transaction for many buyers and so it s a very apprehensive, it s a very fearful time, and what we re trying to do is help them sort of get over the bump. There s a couple of things that we can do and that s spend time trying to add value to the business over time. So for example, I have people that I ve worked with that will come to me and say, Richard, I want to transition this business in 30 days. And then I have other business owners that come to me and say, Richard, you know in the next three to ten years this is what I m thinking about doing. How can we get to the next stage and do that?
And obviously I think when you plan more, usually that produces a better outcome obviously than when we do 30 days. The second thing we can do is really something Elly touched on, that s so important, and that s establishing a sound management team. So that usually, for example a buyer, they might want to buy this business as a financial investment, as an investment, they might hire, you know, somebody else to come in and actually manage the business. Or maybe they want to work in the business and they want a paycheck. In either event they want to make sure that this business is self-sufficient and one way to do that is make sure that our management talent is solid. And finally the last thing that we can do is probably the most obvious and something we do when you re selling your home for example, you try to spruce up. You might paint the house. If there are some deferred maintenance things that you haven t done in a while you might actually undertake those things now. You do the same thing with your business. So you try to increase that curb appeal for the business to hopefully again give that buyer a high comfort level. [Music plays.] Discover more ideas and solutions for your business at: www.wellsfargo.com/biz/education/insight For more information, talk to a Wells Fargo banker by calling: 1-800-35-WELLS, ext. 130
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