Is our small business sellable?

[nara]

We're planning ahead on a exit strategy for our small business. I have never believed it to be the sort of business that could be sale-able. And a lawyer we had met with (to discuss other questions) didn't think it would be either.. but I'd like to explore this possibility so that maybe we could benefit in some way or at least make some changes that might at least give us the option to do this in the future. I don't know where to find specifics about this for our field, but general advice is appreciated.

We provide behavioral therapy to children with autism (mainly military families) and have been in business for about 5 years now. We never had a real business plan, as the business has just evolved and grew naturally by itself with little up front expense. We transitioned into an office space last year and have 4 full-time clients and three full-time employees. Our annual profit (before taxes) is around $150-$180k and has consistently gone up every year.

Several years ago, before focusing on my own company, I helped several other similar companies with their start-up. After 5 years, those companies were both bought out for very large sums of money (both also had 50-70 clients more than us!) It is becoming increasingly common in our industry for corporations to seek out larger private agencies to buy. It is also something that is becoming vilified in our field to sell out to these large "soul less" corporations that don't truly care about their clients...and I have to agree!

We offer several aspects that makes us very different and more appealing to clients over our much larger competitors. But growing larger would also alter the setting that we have created for our company, and is the reason why our clients come to us in the first place. The only downside to being small is that when one client leaves, we do feel it. And although losing a client that we haven't been able to replace hasn't be an issue yet, we do worry about the worst case scenario, as our clients are military families who move every 3 years. We have never marketed before because we rarely have openings, but we are beginning to branch out more in the community so we can have more assurance about a continual stream of clients (we have relied only on word of mouth and client referrals for the last few years!)

Just fading out over the years was the initial exit plan. But we have acquired so much stuff and have a great setup going that it would be such an amazing opportunity for someone else to just jump in and take over. I was thinking of just offering it to one of our employees who would have the proper credentials if she is still with us at that point, but benefiting financially would be ideal considering all the years of energy that has gone into every aspect of the business. I'd probably prefer to make it sale-able to someone currently in my field who has a dream of owning a clinic but doesn't want to go through the initial start-up process.

 In your opinion, do we have a business that is saleable at all? Are there small measures we could take (without compromising the things that make us different) that would at least give us the option of selling at some point rather than just fizzling out or giving it away? Any options that we haven't considered?

[dmd149]

Don't have experience selling a business (though I'm trying to grow my own consulting business with a partner).

I think the main thing with service business is the assets outside of your own labor. If you removed yourself from it, what's left?

A friend's dad had a dental practice that he recently sold to a younger dentist he hired for his practice. I think the buyout was structured as a loan funded by the proceeds from the business over X years. He stayed in the practice slowly reducing his hours until he could exit fully.

The benefits of doing it this way is that he could ensure that his patients stayed with the practice, help transtion it over to the buyer, etc. Selling to an employee might be a good option especially if you're providing the financing through profits in the business.

[bwall]

In theory, you can sell anything, it's all just a question of price. So yes, your business is sell-able, especially (!) since it turns a profit (!!!).

Some follow up questions:

You have four clients and profits are between $150-$180k. You charge each client $50k/year? Is that the cost for one autistic child? Who is paying that; the family or the gov't (military)?

Since the families rotate every three years and you have only four clients, on average you will lose 1.33 clients every year with little you can do about it. How is your out-reach to find new families/clients? Beyond word of mouth, of course. Has it ever been a problem?

I think that you've already hit on the main targets. Now you just need to go about doing it. If you have an employee who would like to take it over, that might be the best/easiest option. This person would already know the business, the clients, the seller (you!), the business model, etc. You would need to approach this person in advance and put it on their radar screen, with a window of 12-18 months (or so), especially if they don't have a business background. They'll need time to get used to the idea of owning their own business and making all the decisions, paying the bills, paying the other employees, finding new clients, etc, in addition to doing all the work they're doing now.

I'd make them a sweetheart deal, knowing that if they say 'no' and you close down, they could in theory pick right up where you left off. I'd saying something like 'X% of the previous 12 months income' (either pre-tax or post-tax, as you like), payable in monthly installments over the next Y months. I'm assuming that this person doesn't have a stack of benjamins laying around unused. Again, this isn't the best way to maximize the sale price, but you will be helping out someone else financially (presumably) and giving them a huge leg up in life (again, depending) as well as staying true to yourself and the kids.

The way to maximize the sale price is to find an outside buyer. This will take time and energy and may in the end be fruitless as in the end all that you have is a client list, rental space, employees and some equipment, no proprietary information, no product to sell going forward, etc. You may be able to get all the money up-front (hopefully), but these kinds of buyers don't grow on trees.

[acroy]

Badass problem to have; congratulations. Interested how this works out. Good luck!

[swick]

When considering selling your business, you are selling a few different things.

Your name, brand recognition, community goodwill
Equipment/supplies and sellable assets
The ability to maintain current income levels and the potential for growth.

It's the last one that concerns me about your business. Do you and/or your husband have any specific licenses or certifications that are necessary for your business to keep operating? Would you have to find a buyer with those skills for them to be successful at stepping in?

If you don't want to sell-out to a bigger corp, you will be limited but it is not impossible. You just have to spend the time networking and cultivating relationships with people who may be interested. Your situation is ideal for someone who wants their own practice but doesn't want the headaches (or may not have the business skills) to start something themselves.

Another idea if you are making 150-180 k profit per year, would it be worth it to take less profit and spend the rest to become more hands off? Set the business up to succeed without you while still getting a nice little sum yearly from the business? This will also put it in a better position to sell in the future. Usually, the first thing I look at when I am evaluating a business is "Am I just buying a job?"  Some people, like a therapist wanting their own practice, may be totally okay with that. Other people who are looking for an investment business opportunity won't be.

[nara]

In theory, you can sell anything, it's all just a question of price. So yes, your business is sell-able, especially (!) since it turns a profit (!!!).

Some follow up questions:

You have four clients and profits are between $150-$180k. You charge each client $50k/year? Is that the cost for one autistic child? Who is paying that; the family or the gov't (military)?

Yes. Each child comes with a potential of  approx. $100k a year paid through their insurance. We don't usually make quite this much though--but it it very lucrative. However, there are all sorts of pay cuts coming our way in the near future. Which could greatly impact the future of our business.

Since the families rotate every three years and you have only four clients, on average you will lose 1.33 clients every year with little you can do about it. How is your out-reach to find new families/clients? Beyond word of mouth, of course. Has it ever been a problem?

It has not been a problem yet. But it certainly can be. And it's something we are working on (more outreach, etc.)

I think that you've already hit on the main targets. Now you just need to go about doing it. If you have an employee who would like to take it over, that might be the best/easiest option. This person would already know the business, the clients, the seller (you!), the business model, etc. You would need to approach this person in advance and put it on their radar screen, with a window of 12-18 months (or so), especially if they don't have a business background. They'll need time to get used to the idea of owning their own business and making all the decisions, paying the bills, paying the other employees, finding new clients, etc, in addition to doing all the work they're doing now.

I'd make them a sweetheart deal, knowing that if they say 'no' and you close down, they could in theory pick right up where you left off. I'd saying something like 'X% of the previous 12 months income' (either pre-tax or post-tax, as you like), payable in monthly installments over the next Y months. I'm assuming that this person doesn't have a stack of benjamins laying around unused. Again, this isn't the best way to maximize the sale price, but you will be helping out someone else financially (presumably) and giving them a huge leg up in life (again, depending) as well as staying true to yourself and the kids.

The way to maximize the sale price is to find an outside buyer. This will take time and energy and may in the end be fruitless as in the end all that you have is a client list, rental space, employees and some equipment, no proprietary information, no product to sell going forward, etc. You may be able to get all the money up-front (hopefully), but these kinds of buyers don't grow on trees.

Thanks for the advice! Any ideas of what we should charge an employee to take over? This is a few years off and we don't know what our profits will be then.. but if there a certain percentage that's appropriate?

[nara]

When considering selling your business, you are selling a few different things.

Your name, brand recognition, community goodwill
Equipment/supplies and sellable assets
The ability to maintain current income levels and the potential for growth.

It's the last one that concerns me about your business. Do you and/or your husband have any specific licenses or certifications that are necessary for your business to keep operating? Would you have to find a buyer with those skills for them to be successful at stepping in?

Yes. I have a certification that allows me to be reimbursed by insurance. If a buyer was to come in and didn't have this certification, they would have to hire someone who does. That could cut into their profits quite a bit!

If you don't want to sell-out to a bigger corp, you will be limited but it is not impossible. You just have to spend the time networking and cultivating relationships with people who may be interested. Your situation is ideal for someone who wants their own practice but doesn't want the headaches (or may not have the business skills) to start something themselves.

I don't think we have anything to offer right now that would even interest a big corporation. We don't have 50-70 clients like the other places that have been bought out.

Another idea if you are making 150-180 k profit per year, would it be worth it to take less profit and spend the rest to become more hands off? Set the business up to succeed without you while still getting a nice little sum yearly from the business? This will also put it in a better position to sell in the future. Usually, the first thing I look at when I am evaluating a business is "Am I just buying a job?"  Some people, like a therapist wanting their own practice, may be totally okay with that. Other people who are looking for an investment business opportunity won't be.

I rather not. In my field, being hands off isn't practical. Everything falls on my shoulder. I am the one who would be responsible if the insurance companies audits us, if a parent accuses of abuse, etc. I can take more of a backseat, but it would always remain a stressor.

[bwall]

Nara:

$100k/student/year is a lot of money. No wonder business are racking up 50-70 kids and laughing all the way to the bank. That's serious money.

Going back to what your lawyer said that the business isn't sellable; lawyers are best at giving legal advice, not business advice. Just b/c he'd never buy your business doesn't mean that no one will buy it.

Even though you plan your exit a few years away, I'd start laying the groundwork now. Ask your potential employee, the one you are thinking about, what her goals are in life. Where does she she herself in one year? Three years? Five years? Does she want kids? Is she married? Does she want to be a stay at home mom? Make a career? Get a PhD? Run a business like the one that you have? The point is more to get her to think and to put it on her radar screen, not to get a commitment. And, over the next few months, try and show her some more of the behind the scenes stuff of the job. Look to see if she shows interest? Or does she just want to draw a paycheck, turn off the brain on Friday afternoon until Monday morning? If she signals interest, then proceed. If not, then you need to think about bringing in a new employee with a sale in mind.

If she's signals interest, then maybe at the end of this year you could tell her your plans. That in X amount of time, you are looking to move on to something else. Maybe she'd be interested in taking over the business? No need to talk numbers at this point yet, either. "Ah, we can work that out later. Just wanted to know if you'd even be interested?"

And then when you are about 18 months out, you can push it along again, and make the formal offer; She can take over in one year and pay 30% of profit for the first year. You'll stay on part-time as an advisor. Then, if she wants (or if you want), you can have a clause where the time as an advisor can be extended another 6 or 12 months (again, at 30% or if you want to move, then you could take 20% and be available as a consultant/mentor over the phone/Skype, etc), in the interest of a smooth transition.

The numbers are interchangeable, of course. But, I think that 30% would get you an extra $50/60k windfall with more upside potential. If you ask for more, then the other party may balk and then you'd have nothing, or have to start again at zero. It's got to be a good deal for them also or else they won't do it.

[Axecleaver]

You have a viable business, congrats! Next is planning the exit strategy. You really need to identify your potential buy targets and work closely with them to figure out how to transition. Do you have someone identified who might be interested?

[wanderin1]

You’ve gotten great advice here. As someone who has sold one biz via broker to a party I didn’t know, and another biz directly to a group of my employees—I think you’d like the employee sale route much better, in part because you can be surer that your approach to the work will be continued.

Below are examples of some things you can do to increase your business’s saleability. Remember that to successfully sell, you have make the biz attractive to the buyer, easily manageable by the buyer, and seamless in transition for your clients.

Document all processes
Figure out your current issue of the outsize impact of losing a single client (this might include long lead time notifications, rethinking your client pipeline, etc)
Figure out the insurance issue (if certification is specific to you, and outsourcing this—as the buyer would have to--radically changes the profit figures, then maybe you need another solution)
Make sure your business form (S-Corp, LLC) is one that’s advantageous for a sale.

Read a book or two such as Selling Your Business for Dummies (really!) to jumpstart you on more essentials. And whatever you do, DON’T use that same “bad advice attorney” for any part of this. There are lawyers around who specialize in business sales, including small business sales. That’s who you want to work with.

Final piece of advice: my experience selling a business to a group of employees was—despite the occasional moment of stress—mostly just fun and inspiring. Consider that it could be the same for you!