May 15, 2017

What To Know When Selling Your Food Business (PODCAST)

Some of us start food businesses and never give a thought to selling it while others enter the business with an exit strategy in mind.  Regardless of which camp you fall into, knowing what buyers are looking for can help you make the decisions now that keep your options open in the future no matter what you ultimately decide.

TRANSCRIPT:

Jennifer:Today we are talking to Bryce Hansen of Hansen Business Advisory who helps owners of privately held businesses navigate the challenges of selling their business. Specializing in privately held business of one million to twenty million in annual revenue in the Pacific Northwest, Hansen Business Advisory bridges the gap between the buyer and the seller’s unique needs, acting as a quarterback for the process. After identifying the clients goals, Hansen Business Advisory helps repair the business for sale, locating qualified potential buyers and finally negotiate and close the sale.

 

I realize that many of the listeners may not have businesses that are in the one million to twenty million dollar annual revenue range, however, Bryce is able to share a lot of information with us that is applicable to you if you are thinking either now or some point down the road you might look to sell your business.

 

Jennifer:So Bryce, as we get started today, I was hoping that you could tell me, based on your experience, what have you found that entrepreneurs think about as they think about selling their business? What drives this motivation to sell something that they dreamt about and were so passionate about and have worked so hard to build?

 

Bryce :The priority reason that I come across and it depends on the size of the businesses you work on, but in the space that I work in, a primary driver is business retirement. They have been working on these business their whole life, they really love it, it’s their baby, but they may not have kids who are interesting in taking over the business or they may have kids, quite frankly, that they aren’t sure should be taking over the business or they can’t afford to take it over and the parent who is wanting to retire needs the money for retirement.

 

Sometimes we see people who are exhausted, they’ve just been working in their business a long time and they’re, quite frankly, exhausted and so sometimes that’s a reason. Occasionally, they’re entrepreneurs that have lots of ideas. I don’t want to use the clinical term of ADD, but they tend to be, they’re really all over the place and so they occasionally are bored with the project and they have a new project that they want to work on and sometimes larger companies, they just want to cash out or maybe it’s beyond the skills that they have and they know that they need additional skills to keep it growing.

 

Jennifer:Oh, absolutely.

 

Bryce :But, retirement is a big part of it.

 

Jennifer:Okay, that’s interesting. With regards to new project ideas, I like to joke that that’s called “Shiny Object Syndrome.”

 

Bryce :Absolutely, absolutely.

 

Jennifer:A new thing to do.

 

Bryce :Yeah, yeah. They just find something new or the business they started has morphed into a place that they didn’t originally think that it was going to be and it works. It works really well, but they’re maybe more passionate about one part of it that the business didn’t morph into.

 

Jennifer:That’s a good point. In talking to some entrepreneurs who have sold their businesses, sometimes, at least what I’ve seen is that these are people who like starting the businesses, but once it gets to that point where it’s really smooth sailing and the processes are down and everything else, it’s not necessarily as exciting to the entrepreneur anymore.

 

Bryce :That’s absolutely true.

 

Jennifer:To cut to the chase, the biggest question most entrepreneurs have when they’re thinking about selling their business is, how do I determine what price to put on this? How much should I be asking for this? I know that this is not necessarily a question that you can answer easily and succinctly and tell everybody, just do X and you’ll get Y, but what are some the steps you go through to determine a business’s worth?

 

Bryce :Well, we say that valuing a business is an art. There are certainly mathematical steps that you can take to evaluate a business, but it’s a big part an art. We also say that the value is in the eye of the beholder, so what I mean by that is, the seller might have an idea of what they want for it and how they came up with that could be based on an amount of time they’ve put into the business, could be based on the amount of energy they put in, the dollars and then it could be as straight forward as sentimental value. It’s been with the family for a hundred years or 50 years, so they really think it’s worth a lot and those are usually what people think that it is worth and occasionally we find people who actually think it’s worth based on the cash flow of the business, which is one way of measuring the value of a business, but it’s pretty rare that they actually start that place.

 

Usually it’s something else that they say, well this business is worth X because of Y and then on the other side of the coin is, what is a buyer willing to pay? The value of a business is only what the market’s willing to bear, so somebody can say it’s worth … I want X for it, but you might not be able to sell it for that, so you really need to see what the market is going to bear for it and the market is really determined by how many people are looking at the business.

 

If you have a family member who says, I want to pay this much for it, you’re not really seeing what the outside world’s looking and if you’re working with an MNA Advisor or broker and they only have a certain reach, a geographical reach or a certain industry reach, they may only get certain people to weigh in on the value. If you’re working nationally or internationally, you are going to get the whole world to value in on it. Now, those may not be the buyers you’re looking for, but it really does come down to, who’s looking at it and who wants it? Sometimes people are willing to pay more than the math says and sometimes they’re willing to pay less for it.

 

Jennifer:So, what happens ’cause I imagine if it’s somebody wants to pay more than, let’s say, the math says, that’s a great position to be in, but what happens if, again, the entrepreneur has a, or the business owner has a price in their mind based off of some of those intangibles that you talked about and what if the reality of what the market will bear and is willing to pay for that isn’t necessarily what the business owner had been hoping for, then what?

 

Bryce :Yeah, yeah, so usually as an intermediary like myself, or other folks who are helping people sell, we try to work with the business owner to explain the math side and I didn’t really mention that, so I’ll mention it briefly and it can get fairly complicated and detailed, so I’ll keep it very high level in the sense that there’s three approaches that we use to value a business. One is call the asset approach. One is called the income approach and one is called the market approach. Assets is basically, what are the assets of the business minus what are the liabilities for the business and that would be a value. That’s usually used for businesses that aren’t producing or have a whole lot of assets, but aren’t producing much cash flow.

 

The next step is the income method and that’s really based on cash flow of the business and that’s where a lot of businesses are valued that way and then the third is the market approach. What are other businesses like that business sold for, so we look around and say, this is a similar business to X that recently sold or here’s ten businesses that were in the same realm and they recently sold for this, so we can expect roughly X for the business and so we work with the owners to explain that and say, this is kind of where we are coming from, even if it’s not what you were looking for and what we’re finding in the market, we start with that a benchmark.

 

If that doesn’t help and if they still say, we need more than that from this business or we think it’s worth more. If we think it’s worth more, then that’s usually a time when we say, okay, we’re going to have to maybe try a different strategy and often it’s maybe just the right fit. We need to find a different broker who does think it’s worth that much. If it’s just not enough for their needs, for their retirement and their other interests, then we come back to, how do we grow value? How do grow the business to be worth what they need? Sometimes it’s tweaking the business to improve profitability or top line revenue and other times it may be bringing on a partner or merging with someone else.

 

Jennifer:So, it sounds like sometimes it may be the case of, I don’t want to say going back to the drawing board completely, but saying, okay, let’s rework some stuff and potentially revisit selling the business six months, a year, at some point down the timeline a little bit, is that right?

 

Bryce :Yeah, absolutely. Ideally, we’re talking with a client three to five years before they’re ready to sell.

 

Jennifer:Oh wow, interesting.

 

Bryce :Yeah, that’s ideal. It’s like with any tax planner or with a wealth manager, sometimes banking, legal, the more time you have, the more time you have to plan and so when we’re putting together financials for the business, we want a least three years of good history to be able to work off of and so if they don’t have that … We’ll get a call, hey I just bought a house in Palm Springs and I’m ready to retire, I want to sell my business and sometimes it works. Sometimes the business is ready to go, but more often then not there are some things that need to be done and we’ll work with them to improve the business. Sometimes there’s a missing employee, a key person in that business, there’s a variety of different things. There could be a complete dependency on the owner and it’s not really sellable at this point because if the owner goes away, all the relationships go away, things like that.

 

Jennifer:Yeah, I think that last point, I feel especially with food entrepreneurs, I know I’m guilty of that myself, where the business is all … Yes, you have business plans and you have things documented, but really the business is all in your head and if you go away, there’s not always necessarily a lot left there, so getting the business to the point where it can be transitioned to another person or another team can take some time.

 

Bryce :There’s a lot of things we do prior to listing the business for sale and most of that is around figuring out, well we are just trying to get in the head of a buyer and say what would a buyer want and if they’re looking at a business that the owner is everything, they’re all the relationships, all the accounting is in their head, the contracts, everything, there’s not a ton of value to that business for a new buyer. There is a value to the owner, but not to a new buyer because they can’t come in and realize that same cash flow and that same business so it’s going to be a tremendous amount of work in which case they don’t want to pay that much for the business.

 

We look at suppliers, do they have many different suppliers they’re working with or do they just stuck with one person who is supplying their business? That’s a pretty big risk. Are their customers … Around the northwest here, we have a lot of Boeing customers and I could imagine in your line of work, maybe Food Services of America or something, someone who’s selling just to one person and if that relationship goes away, the business goes away, so we’re looking for, do they have diversification of their suppliers and their customers and can the business run a month without the owner? That’s a test we always ask, if you went on vacation and couldn’t talk to the business, would it survive a month with you being away?

 

Jennifer:Alright, now a month away, definitely could not be done on my end, but that just sounds so wonderful.

 

Bryce :It depends for every business. Not every business needs that. There’s a lot of different structures out there and how they operate.

 

Jennifer:You had mentioned a little bit about three years of financials and then some of these processes in place so that, let’s say, that key person could be away from the business, are there any other things that the business owner or entrepreneur should be thinking about in terms of documentation as they get ready to sell their business, so before they’ve even gone out and tried to find a buyer, what other things do they need to basically have ready to go?

 

Bryce :Well, I think the first and most important part is the financials. That is kind of the bedrock of selling a business. Many people are in business to make money and to do that. A lot of people are in business because they are really passionate about what they do and they enjoy it and maybe the cause that they are going for, but when they turn to sell a business it really is often about the numbers unless they get really lucky and find someone who’s super passionate and willing to pay whatever they’re asking for, for their business, so having strong financial statements that have been looked at by a CPA, hopefully, with a review or an audit, that’s not as common in these size businesses, but potentially an audit. Documentation on how people operate. Job descriptions are great, processes and procedures around establishing new products and what margins should be and some of the performance indicators of the business, so the new owner can have an idea as to what they’re getting into.

 

Jennifer:So, I assume and correct me if I’m wrong, but if you’re going to be sharing all this information with the potential buyer that there’s an NDA or a nondisclosure agreement that’s in place?

 

Bryce :Absolutely.

 

Jennifer:Okay.

 

Bryce :Absolutely and the way we operate is that we prescreen potential buyers before we even share anything with them, so we will set up an NDA and then we really have a conversation, a deep conversation about what they’re looking for and why this business may work. We’re looking at their financial ability to pay. Are they bankable? Is the business bankable, we look at prior to even taking on the engagement, but is the buyer able to finance the business? That’s a big part of what we are doing and finally we run it by the owner and say, hey, it’s this type of person or it’s this business that’s looking at you, are you comfortable because in our space, the owners often care more about who it is they’re selling to and what they’re about then necessarily the person that will pay the absolute most.

 

Jennifer:So, yeah, you fed perfectly into my next question, which was going to be around this idea of fit for the new buyer, so you just stated to many buyers that is a big deal and that is part of their process in choosing the right buyer, so what sort of things should the seller be asking questions about or be thinking about with regards to potentially where the buyer sees the business going in the future so they have the best chance of getting that right fit for their business?

 

Bryce :Absolutely. One of the things that we like to do is set up weekly meetings with the buyer and seller once we get to a point, once we have a letter of intent, we actually want them to talk to each other and I know that’s not common on the larger sale businesses or sometimes is not common, let’s put it that way, but we want them to have those conversations. How do you handle your employees? How do you treat your employees? What are your benefits like? What’s your working culture like? How do you look to work? Are you outgoing and out talking to the people on the floor or are you more kept to yourself? Do you want this business as just an investment and it’s just churning dollars for you or are you actually going to be actively working in it? What are you passions and why would you get into this business? What’s your background?

 

We have people who have come from executive backgrounds and sometimes the owner will go, well what do they know about my business and it turns out that they have some sort of hobby or incredible interest in that area and they’re passionate about it and they’re not looking at this as a goldmine for them, they are actually looking at it as a second career to their life and they’re really more looking for enjoyment out of it.

 

Jennifer:Interesting. Again, that’s a good point that you bring up that it’s not just about the financials for many people and for some people it may by and again that’s great, but for a lot of entrepreneurs who have built this business up from the ground up a lot of it is being driven by passion, so you want somebody who can carry that on and potentially even carry it further and beyond where you were ready to.

 

Bryce :Sometimes we get … People say, I want to be able to have my grandchildren be able to see this business and know that I used to know that business. I started that business and look at it today. Certainly financials are important and like I said, having a solid accounting system in place there and then having solid financial recording to come out of the business is really important because a bank is not going to help support you depending on what the buyer’s financial abilities are. Most often they are going to be bringing in a bank and the bank’s not going to loan on a business that doesn’t have a strong financial backing, so there is certainly that component to it, but often there’s a lot more of a soft side to the transaction then most people think.

 

Jennifer:So Hansen Business Advisory works with businesses primarily that have over a million dollars in cash flow, which is not necessarily where all of our listeners are, so my question then is, can those businesses that have less cash flow than that, is there still a market for them to be sold, or are buyers only interested in businesses that have bigger revenue streams?

 

Bryce :No, absolutely. There is definitely a market for businesses with less than a million dollars in cash flow. The challenge is often how are those businesses set up and how do we find the right buyer for those businesses? The banks often will have more challenges times, again it comes back to reporting and some of the numbers oriented things to lend on a smaller business and the SBA, Small Business Administration, has great programs out there for people to be able to borrow in those situations.

 

There’s certainly business opportunities out there for those sellers and for buyers because not everybody has that kind of money to buy a business and I think even more so those businesses are around passion and the buyer and seller are just like, hey this is really neat business that has a great opportunity to grow and maybe it doesn’t, but it’s just fun and I really enjoy it and I like the cause that it goes toward. A lot of people are very interested these days in cause-oriented businesses that don’t necessarily make a lot of money, but they fulfill a need within the community or within the world, so certainly opportunities out there. I would have to say they do become more challenging to sell in a traditional business sense, but they can be done for sure.

 

Jennifer:That’s great to hear because like I said, I think that there’s potentially some listeners who would be under that one million dollar revenue mark who might be thinking of exiting their businesses, hopefully to your point earlier in this podcast, be thinking out, pushing out that timeline and saying, okay, maybe three, five or plus years beyond that and preparing their businesses for sale at that point.

 

Bryce :Yeah and I would encourage the listeners to think about, don’t think about your business as a small business, think about your business as a big business and howw are you treating things like a big business would? Are you getting financial looked at? Are you having someone prepare you taxes and review them? Are getting professional advice from attorneys and from CPA’s and from bankers? Are you doing all those things that will help you to grow and be an established sophisticated business because that’s really where someone will be interested in buying.

 

If the cash flow is smaller and total revenues are smaller, but the business is really well set up and it’s a unique business and maybe the owner just hasn’t got there yet, they just haven’t got to that size yet, there’s a wonderful opportunity for someone to come in and for whatever reason they’ve decided to get out, it may be a great opportunity for someone to step in and take it to the next level.

 

Jennifer:I love that idea of, you know, we always talk about that we’ve a small food businesses, but yeah, we should be thinking like we’re big businesses and putting the things in place that need to be put in place, so that we are thinking of ourselves as a big business.

 

Bryce :Yeah, I have a client who the first thing they were talking about was, well, I haven’t really got to that yet and they’ve been in business for ten years and haven’t really got to the whole financial … Getting good financial statements and reporting and it’s a big business now and it’s one of those things, I think everybody needs to take seriously early on and a lot of people start businesses without even thinking whether some day they want to sell it, but then they get to the point that they need to sell it or they changed their mind and say, actually I do want to sell the business and it sometimes takes a few years to readjust the business to become sellable, but they didn’t really have that intention in the first place, they just said, well let’s just see how this goes.

 

Jennifer:Oh absolutely, so my last question for you then, around this idea of selling a business, so selling something that you’ve built can be really rewarding, but it can also be strange to wake up one day and no longer be the owner of that business and I say that having sold a business myself, that you wake up the next morning and you’re like, not only what do I do, but so much of your identity is tied up in that you were the owner or the founder or entrepreneur of said business, so what do you recommend to your clients that they do that first day or that first week after sale’s been completed?

 

Bryce :That’s a great question. We want to actually have that conversation before we even engage with them, so we’re asking them early on, what is your plan? What do you want to do? We want to engage spouse, whether it’s husband or wife that runs the business, if the significant other is not involved in the business, bring them into the conversation and say, what are you guys going to do? Where do you want to go and what are you hobbies? What are your interests? Because there is only so much golf that someone can play before they kind of get bored and especially a lot of the clients I work with who are in the retirement years, they’ve been involved in this business their whole life and don’t really have a life outside of it and same thing with their relationship and their marriage or their significant other, they don’t really know how they are going to work together, so occasionally we honestly bring up if there needs to be counseling involved. I’ve had spouses say, I don’t know what I’m going to do when he’s around the house that much?

 

Jennifer:I laugh because, personal story, but when my dad first retired, I think it was about two weeks before my mom told him he had to go back to work.

 

Bryce :Yeah, absolutely. Absolutely. We try to have that conversation very early on to get them thinking about it and make sure that they have a plan in place and then when it finally comes down to the week after, we’re hoping that they’re implementing on that plan, whether it’s starting a new business or a hobby or getting involved in the community or working on boards, those type of people of have owned a business for a long time and have that entrepreneur spirit just don’t sit around well and so we suggest that they get involved in activities and keep themselves busy and entertained and keep their mind sharp and so we say, may as well get started on it. Maybe take a vacation or two to get started, but then really start implementing that plan that we’ve worked on.

 

Jennifer:Perfect, that’s great advice. That’s really great advice. In fact, I’ll kind of pause for a minute, all of it. I keep thinking to sum everything you’ve said today up, it’s having this long range vision. That long range vision for your business. The long range vision for your life and how do you make all of that interconnect in a way that’s going to keep you happy and keep your business growing and thriving and potentially sellable if that’s ultimately where you decide that they business needs to go.

 

Bryce :Yeah, and I say, big or small, you should take a moment if you can’t regularly do it, take some portion of the week and try to work on your business not in your business. Think about those activities about selling the business, about the capital structure as far as your loans are concerned and how’s the business preforming and is it headed the direction you want it to be and is your life fulfilled by it? Sort of take a step back, I don’t know, at least once a month and really look at that so you know where the business is headed.

 

Jennifer:That’s such great council because it is so easy especially for those of us on the smaller spectrum to get so caught up in just the frenetic, day-to-day of the business. I often tell people, but if you don’t step back to that 10,000 foot level and see, is that frenetic work you’re doing, is it getting you where you want? All you’re doing is spinning your wheel, kind of like a hamster.

 

Bryce :Absolutely.

 

Jennifer:Well Bryce, I really appreciate your time today. Thank you so much for sharing your expertise with us.

 

Bryce :Jennifer, it was my pleasure. I really enjoyed it and I hope it was helpful to your clients.

 

Jennifer:Great, thank you so much.

 

Bryce :Take care.

 

Speaker 1:Thanks for listening to today’s podcast and I hope it gave you some food for thought as you think long term about your business and whether or not you may want to sell it one day.

 

Speaking of this podcast series, I would love to hear from listeners about what topics you’d like to see covered. Our next podcast which will air on Tuesday, May 30th, right after Memorial Day, is focused on food service sales. This is a great example of a topic idea that was brought to me by a listener. So what questions to do you have or topics you’d like to see covered?

 

Let me know by emailing info@smallfoodbiz, that’s biz.com or leave a message on the Small Food Business Facebook page at facebook.com/smallfoodbiz.

 

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