The financial planner can be invaluable to a client considering selling his or her business or being approached about doing so, but only if you can help the client through the process. (Also see "Valuation Strategies" located at the end of this article).

How can you add value to your role as a trusted advisor with your business owner clients? Simple: become knowledgeable about the single most important day in every business owner's life-the day he or she sells the business. When you counsel your clients as to how they can better prepare for the big event and of the basic problems and mistakes they will no doubt encounter, you expand your relationship as their personal advisor.

Advisors are usually trying to save their clients a few points on fees or get the highest return from mutual funds, but they can be oblivious to the mistakes made and dollars left on the table during the sale of their clients' businesses. This article points out the eight most common mistakes that many owners make when attempting to sell their business. It behooves you to understand how to avoid these problems, and forewarn your clients before that big event is at hand.

Mistake 1: Not Being Prepared
In today's market, every business owner should consider him or herself an acquisition target. Even though it's very flattering to be approached by someone who wants what you have, this is an extremely risky environment. The problem is that most owners proceed emotionally with the sale of their businesses without expert advice and end up leaving money on the table. Don't let your clients get seduced into discussions unless they are committed to selling and have made the necessary preparations.

Your clients' answers to these simple, preliminary questions could be pivotal to their response to an unsolicited approach:

• When is the right time to sell?
• Do I want to stay with my business after the sales?
• To whom should I sell?
• What is my business really worth?
• What kind of help do I need?

Additionally, advise your clients to create an executive summary that describes the business and opportunities.

Mistake 2: Talking Too Much
Loose lips sink ships. Contemplating the sale of any business should remain confidential. Discussions should not occur with any buyer at the office of your client's business. If employees find out that the owner is willing to sell the business, significant concerns and widespread insecurities arise about loss of jobs and what the future may bring. Even when your client obtains confidentiality agreements from potential buyers, people talk, and the results can be detrimental:

• Valued employees, usually loyal but now unsure of their futures, could begin to pursue other employment, and have discussions about the sale with other people crucial to the business.
• Customer relationships could begin to suffer from inconsistent service.
• Competitors will also approach and inform the customers that the business is being sold, hoping to gain an edge.

Any of these situations will reduce the value of the business and the ability to continue performing as it has in the past. Suggest that your client use an intermediary and conduct the discussions with the prospective buyers at their office or another neutral offsite location.

Mistake 3: Not Checking Out the Buyer
Don't let your clients dilute their focus on their business and suffer the emotional strain of entering into discussions about selling their business if the buyer is not serious or capable of closing the sale. The owner is entitled to review the buyer's financial statements and access to capital.

Moreover, the buyer's financial situation is not the only issue. Most owners feel a strong bond to their businesses and want to see the products/services, employees, and the company itself continue to thrive. Therefore, the owner may want to learn the buyer's corporate strategies and culture and the strengths and weaknesses of the buyer's existing products and/or marketing systems. If your client wishes to stay with their business, the buyer's management practices and personalities, as well as the future location of the business, could be crucial.

Help your clients understand the need to recognize a strategic buyer, as compared to a financial buyer-and the impact that difference may have on the price the buyer may be willing to pay. Your client will get the best value, both from selling price and long-term compensation, with a buyer who can optimize the business to achieve its next level of success.

Mistake 4: Talking to Only One Buyer
The only way to be satisfied that a business was sold at top market value is through the generation of multiple buyers who represent different reasons to acquire the business. Explain to your client that, as a business owner, he or she is at a disadvantage when there is but on potential buyer, because that single buyer can control the transaction-price negotiations, terms, and, finally, the definitive agreement.

An intermediary, or merger and acquisition specialist, would be instrumental either in locating additional buyers, or identifying the value of the creative strategies and financial benefits to a specific buyer. Also, if an intermediary is conducting the negotiations, the chosen buyer is usually aware the seller has backup offers and that there is another buyer waiting in the lobby who wants his or her seat at the negotiating table.

Mistake 5: Talking With Competitors
Counsel your clients to beware of competitors that express an interest in acquiring the clients' businesses or merging with them. Such interest by a competitor can provoke the client to reveal proprietary information about the business. While the reduction of competition is an obvious added value to the selling price, the risks of talking to head-to-head competitors are huge. Once a business has identified its margins or customers to a competitor, the value is compromised and the seller becomes locked into a precarious transaction. If the negotiations fail, the competitor can use your client's proprietary information, such as procedures or client lists, to their advantage.

However, a competitor could be contacted once acceptable offers have been received: but this is another situation where an intermediary would be ideal to maintain anonymity of your client for as long as possible.

Mistake 6: Understanding the Value of the Business
Most owners don't know how to determine the value of their businesses. The first place they look to evaluate is past data, but that's only one part of the equation. Value is different to different buyers. A strategic buyer may be acquiring a new customer base, patents or applied technologies, product add-ons, or even key employees. A financial buyer may value only a current income stream, or future expectations.

A market-driven valuation is a number that is arrived at through competitive forces: more than one buyer, including buyers who want the business for strategic reasons. Let the market-not a sole buyer, appraisers, or past data-determine a business's value.

Mistake 7: Disclosing Prematurely
In their enthusiasm, your clients may be compelled to provide information to a buyer prematurely and/or not know the difference between descriptive information and the type of information provided only during the due diligence process. Your clients should be warned not to provide any information to a buyer until they have executed a confidentiality agreement.

Counsel your clients on creating an offering memorandum that has all the necessary information for structuring an effective letter of intent. The financials should be recast to eliminate nonessential expenses, excessive owner compensation and benefits, unrealistic capitalization or expense policies, and expenses for non-recurring activities.

The following data is appropriate to include in the offering memorandum:

• Revenue
• Forecasts
• Overall margins
• Details of operating expenses, as recast
• Balance sheet asset values at cost
• Growth rates by product type
• Competitor information
• Organizational structure
• Backlog
• Information on protected technologies
• Competencies
• Uniqueness
• General trends and information

However, clients should be careful to not reveal:

• Customer information
• Supplier information
• Specific product margins
• Trade secrets
• Information about unprotected technologies
• Corporate or marketing strategies
• A detailed balance sheet

Mistake 8: Not Using a Professional
Suggest that your clients consider engaging an intermediary who has a good handle on the whole sales process, including valuation, research, marketing, and negotiations. To obtain the highest price, multiple offers are necessary. It is very awkward to accomplish this without using a professional who has the experience and the acumen to determine the creative and financial benefits to many type of buyers. The buyer is likely to have more experience in doing this than your client. Using a professional will level the playing field.

Furthermore, when a business owner negotiates for his or her own account, it does not provide time to recover from obstacles and problems that must be dealt with at the negotiating table. The owner needs to be close to the transaction, but insulated from the face-to-face confrontations associated with negotiations.

In most transactions, an event occurs which has the potential to collapse the process. For example, the buyer may suddenly decide he or she does not want to buy the owner's receivables or assume the lease on the building. It could be a significant breach of good faith from the seller's viewpoint, and provoke a negative emotional reaction which could blow the deal. A third party, or intermediary, can maintain a cool head and temper the situation. Deals often come apart; it's the role of a skilled negotiator to keep the process on track.

Professional help can come in many forms. In addition to professional intermediaries, there are business brokers, management consultants, lawyers, and accountants. Accountants are excellent for tax advice and assisting with deal structuring. Attorneys present on your client's negotiating team, on the other hand, precipitate the necessity for attorneys on the acquisition team, often leading to legal distractions that impede the negotiating process.

If your client has made the decision to sell, assist the client in selecting a professional who is skilled in obtaining multiple buyers, experienced in transaction negotiations, and capable of providing professional advice to your client throughout the process.

Best advice for the planner: Form a strategic alliance with a business intermediary beforehand. The best way to find a reliable intermediary is through word-of-mouth personal referral. Set up a meeting and discuss the issues in this article. A strong alliance will be mutually beneficial and generate further referrals for both the intermediary and the planner.

Armed with the resulting expert advice, your client will obtain optimum value for the business. You will have played an invaluable role in probably the most important transaction in your client's lifetime. The next challenge is to demonstrate your own expertise in managing and investing this client's newly liquidated assets!

Valuation Strategies

By following this process, a client can maximize the value of his or her business and more importantly, realize it. How can you ensure that the price offered reflects the top market value possible for the business?

There are three basic types of valuation:

1. Balance Sheet Valuation. The least effective type of valuation, this approach is what someone would pay for the business based on the balance sheet alone. A client's company with $10 million in assets might only have $100,000 of book value. This is what it might cost the firm's key employees to set up a new firm next door. The only time that a client should ever consider a balance sheet sale is if he or she is in dire distress.

2. Financial Value. This is attractive to someone buying the business for the income stream it can provide. Typically, such a buyer is interested in income. The valuation is simply a present value calculation of the future income stream discounted for the business risk inherent with a small business. Often, local competitors will make an offer based on this valuation.

3. Strategic Value. In this case, the buyer is interested in dramatically leveraging their profitability with the inclusion of your client's business. Such a buyer needs the business and is willing to pay for it.

How can you help your client? Study the financial statements and determine which aspects of your client's business are a drain. If problem areas are found, advise your client to clean house, getting rid of the problem areas or finding ways to make them more effective. Sort through the junkyard of assets that the business contains. Clean up the books and business operations. The most important element in evaluating the business is free cash flow. Help the client design the business to maximize this prior to sale.

Then, consider recasting the prior financial statement so that it reflects the true earning power. You can show the buyer a financial statement that's different from the tax forms. Most small businesses, if not all, attempt to minimize taxation while maximizing personal benefit from the company. For example, your client might be receiving $600,000 in salary from his or her company, but the cost to replace him or her might be only $200,000.

In recasting, you could show more realistic numbers, and thereby demonstrate higher earnings. In most cases, a buyer will be interested in the earnings prior to income tax, but will also request to se the IRS forms. Substantiate and recast business expenses that have a personal nature.

Examine the client's own compensation. Examine his or her retirement contributions; business ownership through the business of personal cars, boats, or airplanes; any low-interest rate loans; miscellaneous perks; other companies that the client owns where there are transfers between businesses; and company-owned real estate. You can also make some adjustments for capitalization policies, debt services, discontinued product lines, or defunct aspects of the business.

Another technique a business owner can use to increase value is to share the business plan, particularly the vision plan. Most of us have ideas and strategies for taking the company to the next level. The client may document in writing all the opportunities he or she perceives. A file that records every potential opportunity that is being explored either currently or for the future is of enormous value to a buyer. Documentation should include reasons why the client has chosen to do something, or not to do it. Advise your client to research on all potential opportunities and record the findings.

Phillip L. Currie is Managing Partner of Shoreline Partners LLC, a San Diego-based, middle market investment banking firm that handles sales of privately held companies with $10 to $200 million in revenue and acquisitions for public companies. Currie can be reached at 858/587-9800 or via Email.