How to Sell a Business Ep 494

Abstract

Abstract

In a detailed discussion on selling businesses, Alex Hormozi, the owner of acquisition.com, shares his extensive experience, including selling eight businesses for significant profits. Hormozi emphasizes the importance of understanding non-disclosure agreements, negotiating with various types of buyers—like private equity, strategic buyers, and family offices—and the intricacies of deal structures. He candidly speaks about the challenges and tactics in negotiating terms, the due diligence process, and the emotional journey of selling a business. Hormozi also touches on the importance of preparing for a lengthy process, often taking 12-18 months to complete, and the reality of post-sale emotions. Throughout, he offers insights into the complexities of defining terms, networking capital, and escrow amounts, aiming to equip entrepreneurs with the knowledge to navigate the sale process successfully and avoid common pitfalls.

Summary Notes

Introduction to Alex Hormozi

  • Alex Hormozi is an experienced entrepreneur with a track record of selling businesses.
  • He has sold eight businesses over his career and owns acquisition.com.
  • Acquisition.com is a portfolio of companies with over $100 million in annual revenue.
  • Alex creates educational content to help others sell businesses based on his experiences.

"My name is Alex Hormozi. I own acquisition.com, which is a portfolio of companies that does over $100 million a year."

Alex Hormozi introduces himself and establishes his credibility by mentioning his successful business portfolio.

Experience in Selling Different Types of Businesses

  • Alex has sold businesses to various types of buyers, including financial buyers (private equity and family offices), strategic buyers, friends, competitors, customers, and partners.
  • He has experience with both large and small business sales, including brick-and-mortar locations.
  • Alex has navigated different selling scenarios and learned from them.

"I've sold eight businesses over my career... I've actually sold those Businesses to six different types of buyers."

The quote highlights Alex's extensive experience in selling businesses to a diverse range of buyers.

Acquisition.com's Focus and Business Model

  • Acquisition.com specializes in service-based companies, particularly in the internet service sector.
  • The company purchases minority stakes in businesses to help them grow.
  • Alex shares his knowledge to assist others with questions about valuing and buying companies.

"For acquisition.com, we work with specifically service based companies, especially Internet service based businesses, guru businesses, elearning businesses, course businesses, et cetera."

Alex explains the focus of acquisition.com and how it operates within the service-based sector, emphasizing their expertise in internet-based services.

The Selling Process Overview

  • The selling process is divided into three phases: prerequisites, marketing, and closing the deal.
  • Alex emphasizes the importance of understanding and completing each phase for a successful sale.
  • The process is detailed and requires careful planning to achieve high-value deals.

"So phase is the prerequisites... Phase two is now that we have prepared all the stuff, now we go market the thing... Phase three is now that we have people who want to buy the thing, now we got to close the deal."

This quote outlines the three main phases of the selling process, which Alex will delve into with more detail.

Prerequisites for Selling a Business

  • Most businesses have little to no value without meeting certain prerequisites.
  • A business's size, customer concentration, defined sales process, and timing of the sale are crucial factors.
  • Alex warns that most businesses are not sellable or are sold for very little due to failing to meet these prerequisites.

"Prerequisites. So these are deal killers... Most companies are just not that big."

The quote summarizes the importance of meeting certain prerequisites before a business can be considered valuable or sellable.

Common Mistakes in Selling a Business

  • Entrepreneurs often underestimate the number of potential acquirers they need to approach.
  • Timing is critical; selling too late can result in the business becoming unsellable.
  • Many sellers overestimate the worth of their business and are unaware of typical market multiples.

"You got to talk to 500, right? And that's how you can get somebody who's going to give you the right kind of multiple on your business if you want to sell to an institutional investor."

Alex emphasizes the need to approach a large number of potential acquirers to find the right buyer and get a favorable multiple.

Growth and Valuation Factors

  • Businesses must show growth or a compelling growth story to attract high-value offers.
  • The total addressable market (TAM) must be large enough to promise expansion potential.
  • Keyman risk is a significant factor; businesses heavily reliant on the owner are less attractive to buyers.

"No one's really trying to buy the thing. They want to try to buy what the thing is, what it become, all right?"

The quote highlights the buyer's perspective, focusing on the potential future value of the business rather than its current state.

Keyman Risk and Business Value

  • Keyman risk refers to the danger a company faces if it relies too heavily on one or a few individuals.
  • Transforming a business from a guru-esque model to a licensing model can mitigate Keyman risk.
  • The process of reducing Keyman risk takes time and effort.

"We work them over the next three to five years to help them not have Keyman risk, which is how we were able to exit gym launch."

The quote emphasizes the strategic approach taken to minimize Keyman risk over a period of three to five years, which was crucial for the successful exit of the gym launch business.

Single Channel Dependence and Investor Risk Aversion

  • Relying on a single channel for customer acquisition is risky.
  • If the channel fails, it can severely impact the business's revenue and value.
  • Investors typically avoid businesses with such vulnerabilities.

"Single channel dependence, meaning you only have one way of getting customers... And good investors don't take risks like that."

This quote highlights the importance of diversification in customer acquisition channels and the aversion of savvy investors to businesses that don't diversify, as it increases the risk of failure.

Enterprise Value and Future Sales

  • Enterprise value is calculated by assessing the discounted future sales of a business.
  • A business with high projected sales and a high likelihood of those sales occurring is more valuable.
  • The goal is to demonstrate growth and a high probability of future sales to potential buyers.

"Enterprise value is a discount applied to future sales, which means you have to take the total amount of sales that a business takes between now and the end of time, and then you apply a discount to it, which basically means risk."

This quote explains that enterprise value is derived from the expected future sales of a company, discounted by the associated risks, which reflects the likelihood of those sales materializing.

Choosing the Right Banker or Broker

  • Bankers are typically necessary for selling to institutional buyers, while brokers are used for deals under $5 million.
  • The choice between a banker and a broker depends on the size of the business and the expected deal size.
  • Networking is essential for finding the right financial professionals to assist with the sale.

"Bankers are what you're going to need to sell to an institutional. For the most part, brokers are usually when you're selling for less than 5 million."

This quote distinguishes between the roles of bankers and brokers in the sale process based on the size of the deal, indicating the need for a banker when targeting institutional buyers and a broker for smaller sales.

Networking and Selling Your Business

  • Networking is crucial for gaining introductions to investment banks or brokers.
  • A one-page summary document, or "teaser," is used to pique the interest of potential bankers or brokers.
  • The entrepreneur must be actively involved in selling the business, even when working with professionals.

"So you network for introductions to these banks... Once you have some introductions, you then give them a one page summary document you send them, because they'll be like, okay, well, send me a teaser."

This quote discusses the importance of networking to get introductions to the right financial institutions and the use of a teaser document to initiate formal interest in the business sale.

Fee Structures and Negotiations

  • Fee structures for bankers and brokers can include upfront fees, ratchets, and targets.
  • Negotiating fees based on the cash received rather than enterprise value is advantageous for the seller.
  • Being willing to walk away from negotiations can lead to better terms.

"What bankers will actually do is once they will help you package the business and they will go out to market and they will pound the pavement and they will talk to hundreds of buyers and they will walk you through this process."

The quote describes the role of bankers in packaging and marketing the business to potential buyers, emphasizing the importance of understanding their fee structures and the negotiation process to ensure the best outcome for the seller.

Emotional Aspects of Selling a Business

  • Selling a business is an emotional process that requires clear decision-making.
  • Setting a pre-determined acceptable sale price can help maintain objectivity.
  • The seller's involvement in providing the selling points is crucial, as they know the business best.

"This is one of the most emotional processes you can possibly go through. It's selling a part of yourself, selling part of your identity, and so you can get tied up in it."

This quote acknowledges the emotional challenges of selling a business and suggests setting clear expectations beforehand to avoid getting caught up in the process and making emotional decisions.

Final Advice on Selling a Business

  • Having options and a strong business position strengthens negotiation power.
  • Professional buyers are skilled negotiators; sellers must be prepared to assert their terms.
  • The willingness to walk away from a deal can be a powerful negotiation strategy.

"You have to be willing to walk away from the table in order to get the best deal, all right? Which is why you win negotiations before you start them by having options."

The quote advises sellers on the importance of being prepared to walk away from negotiations to achieve the best deal, emphasizing that winning negotiations starts with having a strong bargaining position.

Podcast Promotion and Listener Engagement

  • Alex Hormozi emphasizes the importance of audience support for the podcast through ratings, reviews, and sharing.
  • Reviews are quick to leave and can have a significant impact on the podcast's reach and influence.

"So the single thing that I ask you to do is you can just leave a review. It'll take you 10 seconds or one type of the thumb. It would mean the absolute world to me."

This quote highlights the ease with which listeners can support the podcast and the personal value it holds for Alex Hormozi.

Business Sale Process Overview

  • Alex Hormozi outlines the process of selling a business, starting with preparing audited financials and creating a comprehensive information memorandum (SIM).
  • The SIM includes detailed financials, company story, competitive analysis, marketplace evaluation, and growth trajectory.
  • A teaser is sent out to potential buyers without revealing the company's identity to protect employees and other stakeholders.

"Once you've got audited financials, once you've got a sim... they will send the teaser out to all these 500 people."

The quote explains the initial steps in the business sale process, highlighting the need for comprehensive financial documentation and a strategic approach to engaging potential buyers.

Non-Disclosure Agreements and Indications of Interest

  • Interested buyers sign Non-Disclosure Agreements (NDAs) to learn more about the company.
  • A certain percentage of contacted buyers will express their interest through Indications of Interest (IOIs) and Letters of Intent (LOIs).
  • The process involves narrowing down potential buyers through subsequent stages of engagement, including management presentations and negotiations.

"Of those people, a certain percentage will sign NDAs... From there, you'll usually get like 14 or so IOIs, 15% right."

This quote describes the funneling process of potential buyers from initial contact to expressing formal interest in acquiring the business.

Due Diligence and Marketing Materials

  • Preparing for the sale requires organizing due diligence materials and creating a Confidential Information Memorandum (SIM).
  • The marketing phase involves contacting prospective buyers, sharing a teaser, and providing access to a data room with all necessary information.
  • Alex Hormozi stresses the importance of having all materials ready before marketing the business.

"Now we start marketing because we got all the materials done. Now we market them."

The quote emphasizes the transition from preparation to actively marketing the business to potential buyers.

Negotiation and Deal Structure

  • Negotiating the sale involves understanding the importance of deal terms, not just the price.
  • Alex Hormozi shares his personal experience with selling his business, emphasizing the significance of clear terms and the absence of certain conditions like seller financing or earnouts.
  • He advises sellers to communicate their priorities clearly to bankers who will negotiate on their behalf.

"So you want to make sure that you know why you are selling and what the most important things are for you. And you need to ruthlessly, ruthlessly communicate that to the bankers."

This quote underscores the critical nature of understanding and communicating one's objectives in a business sale to ensure favorable terms.

Strategic vs. Financial Buyers

  • Different types of buyers, such as family offices and strategic buyers, look for different things in a business acquisition.
  • Strategic buyers may offer better multiples as they can integrate the acquired business into their existing operations.
  • Alex Hormozi discusses the importance of considering who the buyers are, their fit within the seller's company, and the seller's personal rapport with them.

"The ideal way to exit is to a strategic, because you'll get the best multiples."

The quote highlights the potential advantage of selling to a strategic buyer due to the possibility of obtaining a higher valuation.

Due Diligence and Closing the Deal

  • The due diligence process involves auditing the company's earnings and legal standing, and interviewing customers.
  • Alex Hormozi shares insights into the time and cost associated with due diligence, as well as the importance of not rushing the process for the sake of better terms.
  • Once due diligence is completed, the final sale and transfer of ownership occur, which may be less dramatic than expected.

"The due diligence will begin. They're going to try and negotiate time, saying like, oh, we can get a faster close if, blah, blah, blah, blah."

The quote provides a realistic view of the due diligence phase, where buyers may use time as leverage, and sellers must remain firm to maintain favorable terms.

Due Diligence Process

  • The due diligence process is extensive and involves multiple parties.
  • Buyers will invest significantly in researching the seller's company, including customer and employee interviews.
  • The process aims to understand the company's reputation and operational details.
  • Background checks are performed on the management team to identify potential issues such as criminal history or financial fraud.
  • Employment contracts are reviewed to ensure stability post-acquisition.

"The firm that purchased us spent like $250,000... on research to see what your customers think about you."

This quote emphasizes the depth and financial investment buyers make to understand the seller's business and its standing with customers.

"They're going to interview them really heavily to see what's your involvement... what do you do on a daily basis? What do they do on the daily."

This quote explains that buyers will conduct thorough interviews with employees to gauge the seller's involvement and daily operations, which impacts the company's future performance.

"Then you've got background checks of you and your management team to make sure no one's a convicted criminal or something sketchy, which more realistically is like financial."

The quote highlights the importance of clean background checks for the seller's management team, focusing on criminal history and financial integrity.

Selling Process Timeline

  • The process of selling a business is lengthy, often taking up to a year or more.
  • Initial stages involve finding the right bankers and preparing the business for sale.
  • Due diligence can extend the process significantly, contrary to bankers' optimistic timelines.
  • A strong management team is crucial to continue business growth during the selling process.

"I'm not saying that that's typical, but I'm saying you need to be prepared for a year, and it's going to be a year slog."

This quote sets realistic expectations for the duration of the selling process, warning that it can be a long and demanding period.

Negotiation Leverage

  • The seller's ability to continue growing the business during negotiations can speed up the process.
  • Buyers prefer a slow close to their advantage, while sellers should aim for a fast close.
  • Growth during the due diligence period can give the seller more negotiating power and the option to entertain other offers.

"The only way to speed up the close is to keep growing like crazy, because then they're going to realize that all of a sudden the valuation from the beginning to the end will have changed."

This quote suggests that business growth during negotiations can shift the balance of power in favor of the seller, potentially leading to a quicker and more favorable close.

Purchase Agreement Concerns

  • The purchase agreement includes clauses for indemnities, non-competes, and schedules.
  • Sellers must negotiate indemnities carefully, as they can be held liable for significant amounts.
  • Non-compete clauses require careful consideration, especially regarding future plans and activities.
  • Schedules provide proof of the business's operations and must be included to validate the agreement.
  • Definitions in the agreement are critical and can alter the meaning of entire clauses.

"Indemnities are the things that you are liable for... But the other indemnities are things that are completely out of your control. So you want to make sure you negotiate those things out."

This quote underscores the importance of carefully negotiating indemnities to avoid liability for uncontrollable factors post-sale.

"If you roll equity into the new company... you may have a non compete, as long as you are an equity holder in that other company."

The quote explains the complexity of non-compete agreements, especially when equity is involved, and the potential long-term restrictions on the seller's activities.

"Schedules is all the stuff that you provide. It's basically another word of, like, proof."

This quote clarifies that schedules are essential for substantiating the assumptions made during the selling process and must be included in the agreement.

Final Negotiation Points

  • Working capital negotiations determine the amount of money left in the business for operations post-sale.
  • The escrow amount is a portion of the sale price held as insurance against future liabilities.
  • Sellers should aim to minimize the escrow amount to maximize their immediate payout.
  • Speed should not be used as a negotiating tool against the seller, as the process will take as long as necessary.

"Net working capital is how much money is required to run this business so that when we have this transition, it can continue to work as normal."

This quote explains the concept of working capital and its importance in ensuring the business operates smoothly during the ownership transition.

"And then finally is the escrow amount... if you can keep it under 10%, you're rocking."

The quote advises on the escrow amount, suggesting that a lower percentage is beneficial for the seller and highlighting it as a key negotiation point.

Post-Sale Reflections

  • The actual sale completion can be anticlimactic, with significant paperwork involved.
  • Sellers must be prepared for the emotional and administrative aspects of finalizing the sale.
  • Understanding the intricacies of the sale process is crucial to avoid being taken advantage of.

"You've negotiated all the hard points you've gotten here, and it's now payday... And then all you do see is just like a big deposit in your bank account and you're like, oh, well, I guess I am the same."

This quote reflects on the emotional anticlimax of completing a sale and the sudden change in financial status.

"You got to read stuff, watch this video, rewatch it, and understand the pieces that someone's going to try and do to screw you over."

The quote emphasizes the importance of being informed and cautious throughout the selling process to protect one's interests.

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