LOS ANGELES — Are you the owner of a small or medium-size business in the creative of media industry who dreams of “getting out” and retiring, writing a memoir, or simply getting away from it all? Thinking about selling your business? In today’s economic climate, selling your media or creative business can be a complicated and daunting experience.
The skills and knowledge you acquired by running a successful business are not necessarily the same skills you will need to sell it.
Here are 10 things to consider:
#1 - Am I REALLY ready to sell my business? One of the most important questions a buyer has is, “Why are you selling?” Selling your company is a life-changing event, with both positive and negative effects on your financial condition. Your mental and physical health may also be affected. You need to know if you will have enough money, moving forward, to live the way you choose. It is a very big decision. …And you need to be able to answer the question for potential buyers as well as for yourself.
#2 - Can I sell my business to a new owner? Is it transferable? If I go, can someone else take my place? It’s not just your creative skills that may need to be transferred; it is also the relationships that mean business for your business. Can a new buyer do what you do and maintain and attract business? You may need to stay on board for a while to make a transition work properly. Sometimes the choice to stay on helps you to build the financial base you will eventually need to retire.
#3 - What effect will the process have on my clients, my employees, and my daily operations? There are some real challenges in the process of selling a business. It is important to keep your confidential information from the public. You must make sure that the impending sale does not create concern and problems with your employees and your clients. Your relationship with your landlord, if you have one, needs to be handled with care. During the process of meeting, qualifying and negotiating with buyers and the complexities of a sale, you must still be able to keep your focus on the continuing operation of running your business.
#4 - What is my business really worth? Valuation of a creative/media/entertainment business is based on several key factors:
A - How much money can a buyer expect to earn after taking over?
B - What are the barriers to entry that might stop the buyer from starting his own similar company?
C - What is the value of your assets, equipment, inventory, improvements etc.?
D - What are the risks and growth opportunities of the business?
For businesses under $10 million, the multiple of earnings method is the most common basis. The adjusted earnings of the business is multiplied by a general index for that industry and type of business, and then adjusted by financing issues, growth potential, inventory, asset value, etc. A well-priced business is critical to buyer attraction and critical for the seller in getting the value he has built.
#5 - Should I use a broker? Once you decide to sell the business, whether or not you use a business broker should be a priority consideration. In the media related and creative businesses, any representative you choose must have industry experience. A great deal of knowledge, work and time goes into valuing, promoting, marketing, qualifying buyers, negotiating, financing, completing a transaction and effectively transferring the operation of a business.
A broker who understands, or has been in your industry will realize that they are seeking a truly special kind of buyer. He should have the ability to find and attract that buyer. A broker who is active in the industry will already be working with active buyers and can identify potential strategic buyers for the business.
Well marketed, priced and negotiated deals may often net the seller more than if he pursued and arranged for the company’s sale by himself.
#6 - What kind of buyer is capable of taking over this business? Ideally, you want a buyer who is genuinely interested in this business, one who has the skills necessary to run it, and the financial wherewithal to make this purchase.
Because the “right buyer” at the right price will sometimes be a one of a kind find, you must be prepared with all of the information that a qualified buyer will demand. The good buyer will be asking lots of questions — this is perfectly normal and necessary. The “right buyer” will respect your confidentiality, and will agree to sign a “Non-Disclosure Agreement.” However, the “unqualified buyer” can become a very expensive waste of time.
#7 - How do I market the business? The first thing to be done is to compile a complete information package, which should include the history of the business, description of the industry, competition, clientele, marketing, opportunities/threats, products and services, etc. It should also include at least three years of financial information and analysis of discretionary earnings, equipment and inventory.
The normal process for marketing a business is to post it for sale on the plethora of listing sites on the Internet, to contact known buyers interested in this kind of business, or to go directly to targeted strategic buyers who may include competitors, related businesses or aggregators in that industry
#8 - How do I make a deal? These negotiations are based on a balance between the buyer’s perceived value of the business, (his or her potential, earnings, ROI, future value, the ability to pay for the business or operate the business, earning a living wage and paying off financing if any) and the seller’s perceived value (does the purchase price replace my salary, is it enough to give up a business I have built, is it worth more to the buyer than it is to me?)
Negotiations require objectivity, an understanding of your own valuation and a willingness to structure a win/win situation. Often third parties such as business brokers can take the emotional spin out of the deal making.
#9 - What about financing? A business acquisition can be done in any combination of cash, seller financing, bank financing, earn outs, etc. Earn outs are typical in deals where the seller and buyer need to cooperate to make the future earnings happen.
#10 - Structuring the ACTUAL SALE. How does the seller go about with the transfer of the business assets, including inventory, equipment, goodwill, intellectual property, brand equity, customer data bases, etc., into a new or existing entity for the buyer? There are many ways to accomplish the actual sale, but for most small and medium sized businesses the process can be done in California through an Asset Purchase Agreement. As such, all of the assets are transferred to the buyer in an escrow process, which is usually as manageable as the sale of a home. If you need to sell the actual entity as in a stock sale, you will need quite a bit more guidance.
The sale of your business, especially one that you have built and run for a long time, is a life-changing event. The business is usually the most valuable thing the seller owns. The purchaser is often using his life savings or leveraging his possessions to make this happen. This is serious business and should be given its due care and consideration. You need to be guided by your trusted advisors and be prepared for all of the exigencies of the process. At best, it can be the financial realization of a life’s work.
Stuart Gross is a media business sales & acquisitions expert with more than 30 years of experience in business, film and television production, entertainment, and media. As founder of Harmony Pictures, Gross executed one of the industry's first IPOs for a television commercial production company. He can be contacted at sgross@bizex.net.