Creating Value

Are you getting the most out of your business?

By 2009, Holly Hunter had had enough. She had worked for many years building a very nice financial services practice. Her business provided a great living, with loyal clients and a nice stream of recurring revenue — all things that many owners of microbusinesses can only dream of achieving.

Then came 2008. The stock market fell, Ms. Hunter was feeling a little older, and she started to think about some other goals she had in mind beyond her business. Among other things, she wanted to spend six months a year living off the grid. She decided it was time to sell the practice. With recurring revenue and few employees, financial services practices can be the perfect microbusinesses to own — but they are not easy to sell. That’s when things get complicated.

Ms. Hunter’s business was typical of others in her industry. Her clients depended on her and relied on the personalized service she provided. Inevitably, when it came time to sell, it would be a challenge to transfer the loyalties of her clients to a new owner. But Ms. Hunter’s problems selling her business, which was based in Portsmouth, N.H., and had $700,000 in revenue, went way beyond that issue. In my next few posts I’m going to show just how wrong a sale can go.

Ms. Hunter’s first potential buyer was a regional bank that wanted to fold her practice into its own. To guide her through the sale, Ms. Hunter hired a friend who had just become a coach. As it happened, this friend/coach had little experience helping businesses sell to outside parties.

One thing Ms. Hunter did right was to ask her coach to sign a nondisclosure agreement. Such an agreement is designed to keep all information that is shared private, and it is especially important when the sale of a business involves a sensitive transfer of clients. When people sign a nondisclosure agreement, they agree not to share information with anyone: not spouses, not friends, not relatives.

This is where Ms. Hunter’s problems began: The coach, she believes, shared the information that Ms. Hunter was selling her business with a relative who happened to be a client of Ms. Hunter’s. She believes that he also recommended that the relative move her assets to another financial adviser. And Ms. Hunter thinks the relative told other clients, who also moved their accounts to different advisers.

Given the run of clients, Ms. Hunter might have chosen to take legal action against her coach for breaching the nondisclosure agreement. Not only did she not do that, however, she continued to follow his counsel in her attempt to sell the business.

While Ms. Hunter was dealing with a potential run of clients, negotiations with the bank did not go well. Unfortunately, her coach was not skilled at putting these types of deals together and there were some technical issues the bank couldn’t get past. The bank decided to pull out of the deal. That left Ms. Hunter without a buyer for a suddenly declining business that she was increasingly ready to leave.

The moral of this part of the story — and it will be a recurring theme in this series — is to be sure to hire advisers who have experience and are competent at what they do. This is especially true when it comes to selling a business. You can spend years building a business, but you generally get only one shot at selling it. That’s why you should have a system for hiring professional advisers, one that helps you avoid conflicts of interest and the trap of hiring someone who happens to be a friend — or a friend of a friend.

When hiring professionals, it’s important to make sure they are working in your interest and not just theirs. Make sure your advisers have experience doing precisely the kinds of things you are asking them to do. You also have to make sure they follow best practices. To do that, you may have to spend time finding out what those best practices are.

In a follow-up post, I will talk more about setting up systems to hire and manage professional advisers. If Ms. Hunter had used a systematic process, she almost certainly would have hired a different adviser. Unfortunately, as I’ll explain in my next post, Ms. Hunter’s troubles were only just beginning. She did go on to hire a broker who specialized in business sales, and she did hire a lawyer to help. But it wasn’t entirely clear whose interests the broker was representing, and it wasn’t entirely clear that the lawyer had the requisite experience with mergers and acquisitions.

Nonetheless, Ms. Hunter did manage to close a transaction. More about that in my next post.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2012/12/13/how-the-sale-of-a-business-can-go-terribly-wrong/?partner=rss&emc=rss