Strategy: Exit the Stage Right

Selling a catalog business can be an emotional decision. Owners often have an inflated view of what their businesses are worth. So arriving at a realistic price tag can be difficult.

The old adage “For every seller there’s a buyer” certainly holds true. But finding the right buyer for your business — someone willing to pay your asking price — isn’t always easy.

While we at Lett Direct aren’t investment bankers or business brokers, I’ll share with you what we’ve learned during the years from working with catalog business owners wanting to sell their companies.

Timing is Everything

Knowing when to sell your business is directly related to the amount you’ll ultimately get for it. In my experience, most entrepreneurs wait too long to sell. Emotions kick in, and the best time to sell passes. Economic conditions change, or the profit picture changes, decreasing what the business is worth.

A good time to sell is when your business can report three solid years of profitability. It’s not necessarily the dollar amount of profit or percentage of net income from one year to the next that’s important, but rather the consistency of the numbers over time. For example, is business trending up or down, and is the financial performance consistent from one year to the next?

Define the Prospective Buyer Type

Buyers fall into two categories: strategic and financial. Strategic buyers generally will pay more for a business, because they can recast the income statement by leveraging existing overhead structure, (e.g., just one building to rent). Financial buyers care only about growth and profit, so they can sell the business in three to five years for a nice gain on investment.

If yours is a small catalog business with limited or no profits to report, finding a strategic buyer is the way to go. You’ll waste your time looking for a financial buyer.

Be Realistic About Prices

Determining a sale price for the company is extremely difficult for most business owners. They tend to think the business is worth more than it truly is. Partly this is due to emotional variables, and partly it’s because the owner may have lived pretty well off the business during the years. Therefore, when an owner calculates the company’s true value, he or she realizes what the business means (this gets to the question, “Why sell?”).

I often see entrepreneurs put an unrealistic price tag on their businesses. Base your selling price on sound financial criteria — as your prospective buyer will. Test your assumptions about value with people you trust and whom you’d expect to know the answers, such as your accountant and/or financial advisor.

Business owners like to price a company based on past financial results, not on what they think the business can generate in the future. However, past perform-ance often determines the future. What’s more, it’s up to the prospective buyer to determine what he or she can do with the business going forward.

Use Leverage

As a stand-alone business, your catalog company may not be worth much to a financial buyer. But a strategic buyer might be willing to pay a nice price — and continue to employ you for a few years. Strategic buyers see the opportunity to leverage their existing overhead structure. They also can leverage their housefiles — providing there’s synergy between the two.

Do your homework, and know where you stand in terms of leverage before you negotiate price. Regardless of your lack of profits in the past, a strategic buyer who can leverage your business to its benefit might be willing to pay top dollar.

Find Someone to Represent You

Unless your business fetches at least $5 million, it’ll be difficult to find an investment banker specializing in the sale of catalog businesses to represent you. This will limit your alternatives. You’ll need to rely on catalog consultants who often are aware of businesses for sale and/or entrepreneurs looking to purchase another com-pany.

Your personal networking also is important, and you’ll have to play a larger role in this process than you might like. A smaller business may not be as attractive as a larger one. It takes almost the same amount of due diligence to acquire a large firm as it does a small one. Again, rely on your industry friends and business partners to find the right buyer for you.

Play Your Cards

Keep your thoughts close to your chest.

Remember the adage: “A card laid is a card played.” It’s not always good to tell a prospective buyer how much you want for your business. Let the buyer make the first offer.

On the other hand, a prospective buyer wants to know how much you’re asking for your business before he or she even will talk to you. If you set a price in the beginning, you run the risk of setting it too low. Remember, a strategic buyer might be willing to pay more.

Understand Asset vs. Stock Sale

While you might prefer to sell your stock, a buyer will want to purchase assets. A buyer won’t want to purchase your debt. He or she may be willing to assume responsibility for the accounts payable, as long as they’re current and supported by inventory. This will be a negotiable item.

A buyer also wants to purchase assets so they can be revalued on the balance sheet. The new owner may elect to establish a value for the housefile, which typically is an off-balance-sheet asset. The point here is to understand what you’re selling and why. Consult with your accounting firm.

Should You Stay on the Team?

A buyer will want you to sign a non-compete agreement to keep you from starting a competitive business or working for a competitor. As part of this, assuming you like and respect the buyer, negotiate an employment agreement. Most likely, the new owner will see an advantage keeping you on the team for a time period (e.g., one to three years). This can be an important part of any sale, assuming both parties are compatible and get though the sale process amicably.

Do You Want to Work for These People?

You become an employee the day after you sell (that is, if you continue working for the company). Be sure you trust the people you’re selling to if you want to continue working there. Discuss in detail the acquirer’s plans for your business prior to the sale, and find out his or her track record with other acquisitions. Know what it means to management and the balance of employees to sell and work for the new owners. After closing the deal, the work environment at the company will never be the same.

Should You Find an Angel Investor?

Owners of smaller catalog companies say they prefer to find an “angel investor” as opposed to selling. That’s easier said than done. It’s difficult to find an outside financial investor who’s willing to invest in your company. Angel investors generally are family members and/or friends who like and trust you. People outside your core group of family and friends might be willing to invest, providing they have either a vested interest in your company or a passion for your mission. If you find an angel investor, you’ll have to give up a considerable amount of equity in exchange. Is this something you’re willing to do?

Don’t talk to a prospective buyer until you both sign a confidentiality agreement. And even then, do things in order, so that you don’t give out sensitive information before you have to. The agreement you sign is only as good as the people who sign it. Neither party wants to end up in court debating if someone violated the confidentiality agreement.

When it comes to selling your business or finding an investor, be realistic and define your expectations.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He can be reached at (302) 537-0375, or by e-mail via his Web site: www.lettdirect.com.