As with most how-tos and five-easy-steps, there is the practical and there is the emotional. For business owners, the practical steps are not the issue; it is usually the emotional challenges that present the largest impediment to a successful sale of their business. So let us start with the emotional.
What is your company worth? The time and effort it took to establish your business is not its actual market value. You want to determine this value before putting your business on the market. In one case, we represented a seller who told us his purchase price. He met with several buyers, received several offers, some at his purchase price — and then decided he needed a higher number to retire.
So he pulled out of the process. This left several buyers frustrated and determined not to engage with him again. Take the time to figure out what you need to leave and what is the fair market value of your business.
How do you determine the “fair market value” of your business? This is more art than science. One buyer may pay more for your company (house, artwork, business), because it is exactly what they are looking for — the right client list, vertical specialization, geographic location.
Some general criteria used for language service providers is 2.5–4x EBITDA (income before interest, taxes, depreciation, and amortization). Cash flow is a more current reflection of a company’s financial health. When are monthly payments received and how quickly are expenses / debts paid? If EBITDA is not used or relevant to the situation, you can use revenue. So roughly 60–80% of revenue can be used to determine a purchase price.
Determining the value of your business is more art than science
For companies under USD 2m in annual revenue, the above multiples are fairly accurate. Buyers assume a greater risk for smaller businesses in that losing one or two large accounts can significantly reduce the value of the purchase. Businesses over USD 5m in annual revenue may get 7–8x EBITDA if there is substantial upside to their business.
In the case of Amplexor buying ForeignExchange Translations, and Teleperformance buying LanguageLine, the purchase price was 2–3x revenue.
Determining the right price for your company is not an exact science. Speak to a language broker, use the above ratios, and reach out to colleagues in the industry who have bought or sold a language business.
Making a Grand Exit
Once you determine pricing, decide what you want your exit to look like. Do you want to sell tomorrow and join an ashram in India the next week? What do you want the future of your employees to be? Are you looking to sell your business and stay on long term with the new, larger company, keep your team intact and, possibly, step in as CEO in three to five years? Do you want to get out of the industry and are you willing to stay on for two to three years to facilitate the transition?
Decide what you are willing to do to make the transition happen. Be aware that your exit strategy will likely impact the structure and cash flow of the final offer. For example, if you are willing to stay on for three years and structure an earn-out deal, you may see a higher upside with the total return.
EBITDA has been used by companies starting in the 1980s to determine the ability to pay back debt. For private equity and investment bankers, this is a key measurement to determine pricing. In the language services industry, however, there are other factors that substantially impact calculations of value.
Once you have determined your exit strategy and pricing, there are some additional concrete steps to take. Working with your accountant, you want to put together the following information for prospective buyers:
- Revenue and EBITDA numbers for the past five years
- Revenue from your top five accounts over the past five years
- Vertical specialization
- Mix of direct clients and work subcontracted by other LSPs
- Production process, office locations, number of personnel in these offices
Ideally, you create a one- or two-page brochure with some of the above information and the marketing spin on why your company is special: brand recognition, long-term customers, 98% customer satisfaction, you get the picture. Basically, what makes you unique and valuable as a business.
Don’t Be the Knife
Once you are “on the market” and talking to prospective buyers, there are several next steps, such as exchanging NDAs, providing your financial details, meeting with the owners and financial folks from the buyer.
Often, it is not the owner who holds the purse strings, but key investors who have to approve the deal. During this getting-to-know you process, it is important that you have a good level of comfort with the potential buyer. Are your values aligned? Do you have similar visions for your businesses and processes? In one case, the owner said he did not want to sell to a certain buyer because he did not trust him. Trust is an important component of the deal and must not be overlooked.
In another instance, the owner did not want to buy from a seller whose business had been losing money for five years and yet insisted on getting compensated all in a single upfront payment. This made the buyer uncomfortable. Investment bankers refer to this situation as “catching a falling knife.” You want to structure a deal where both sides are comfortable.
Trust is an important component of the deal and must not be overlooked
If the buyer determines there is a fit, he offers a Letter of Intent or LOI. The seller can then review the offer and make adjustments, changes, and suggestions. A Letter of Intent is just that, an intent to buy.
The next step is due diligence. This includes a review of the following:
- Articles of incorporation, stockholder list
- Contingent liabilities (Any litigation past or present ?)
- Regulatory compliances with state and federal government
- Client lists and distributions (Does one client represent 50% of your business ?)
- Income taxes, profit and loss statements, cash flow
Say both sides now agree they want to do the deal. Just as a young couple agrees they want to have a child, this does not guarantee a pregnancy. Myriad obstacles could result in the deal falling through, such as the following:
- The seller may lose a top account during the process
- The buyer may lose funding from the bank or private equity
- The buyer could discover that long-term contracts with government are based on owner minority status — which would go away with the ownership change
- Majority stockholders are not happy with the purchase price
Finally, the deal happens. The partner gets pregnant and you finally achieve what you were looking for. As any parent knows, there is a lot of work ahead.
Next steps during the transition include informing employees, communicating with clients, transitioning insurance, structuring and tracking payments, and determining future liabilities.
The best ending for this process is a win-win. New company grows the business, former owner gets a higher payout.