As you prepare to sell your business, you need to think in terms of setting up the buyer for success. Inevitably there will be changes post closing- and many sellers worry that the buyer will want to make too many changes - but how can you avoid “bad” changes in your company, ones that could impair your new investment in a seller’s note?

Three Ways to Avoid “Bad” Changes in Your Business

How do we make sure that the buyer is going to make “good” changes and not make “bad” ones? There are three primary ways to guarantee this:

1. Find the Right Buyer: As has been discussed in other articles, carefully screening for the right buyer, at the right time, for the right company goes a long way towards a successful outcome, and hiring the right business intermediary to assist in this process is invaluable.
2. Make Sure The Buyer Has the Right Training: Most of the time, when the buyer makes changes that hurt the business, it is a direct result of their lack of understanding. Make sure that you stick around long enough – or have someone do so in your stead – to make sure that the buyer gets the right training so that all his or her changes are of the good kind.
3. Make sure your agreement has strong and valid covenants: Covenants are the written guarantees beyond personal guarantees that establish some boundaries of permissible change and required affirmative actions that make success most likely.

Most of the time, when the buyer makes changes that hurt the business, it is not because they chose to do so purposefully. They have no interest in hurting their own business. Usually bad changes come due to a lack of understanding. This lack of understanding might have been corrected if the buyer had been properly trained before taking over the business.

Don’t leave it up to the buyer to initiate the process. Instead, you as the seller should take control of this process. Don’t be passive, either, and ask the buyer how much training they want. They may know what they want, but they don’t know how much they need.

When you are providing the financing for the business, you have an advantage over a bank providing financing. You have the ability to teach the buyer everything that they need to do in order to be successful. A bank cannot do this. In fact, most buyers want you to teach them. But most buyers are NOT going to ask you every question that they should and are NOT going to know how many hours of training that they should ask for.

This is an area that you and your business broker should determine from the very beginning and should be modified once a buyer is located. There is a simple process that you follow to create the training program. You have more things in your head that are true keys to your success and are virtually critical to future success. At my firm, we help you develop this “training program” or, as we call it, “unique process.”

Your Own Unique Process

It is called a “unique process” because this is how your company – and your company alone – does everything from payroll to purchasing, marketing to maintenance. It is a training program that allows anyone with common sense and maybe the slightest bit of technical knowledge (depending on your particular business) that they need to do it the “unique way” that your business does it.

For example, there are hundreds of thousands of janitorial businesses in America, and there may be thousands that clean apartments the exact same way that we did with my first business. (Well, not the “exact same way;” our business was successful because of our unique business approach). It was easy for me to train the new buyer because I was prepared to let him know, step-by-step, how the process worked, from procurement to completion, from how to clean a toilet to how to vacuum the carpet.

You may think to yourself, “Man, if they need to be told how to vacuum then maybe they shouldn’t buy a janitorial business in the first place.” Well, most people know how to clean a toilet or vacuum. But do most people know that the “lines” that are created when you vacuum can cost you hundreds of dollars in profit a day if not done properly? It is true, particularly in the challenging market this buyer was going to be taking over.

Without getting into TOO much detail about the janitorial business (that would take a whole other book), we had a separate charge for “touch-ups.” This was a charge for a particular property when we were required to come back to the property and clean up a mess that was made by a repair person who came in after us. Now, this might have been an inconvenience, but at least we got to charge for our services.

However, if my cleaners missed something, we had to “go back” to the property and correct the issue for “free.” So I quickly learned that it was best if my cleaners vacuumed the last thing before they left.  For example, if you have a property manager inspect the unit, make sure that you go back and vacuum every place the manager walked. This way, there are NO footprints left behind and no “touch-up” calls needed.

I even had my cleaners “back” their way out of the apartment. This may sound funny, except when I’d get a call to come “back” to correct something my cleaners “missed,” that is. With this policy in place, it was easier for me to show the property manager once I arrived that someone had been in the unit since we had left. It was a regular occurrence for us to get a call to go back and clean up the “sheet rock dust” that was on the floor.

When I sent my supervisor to the complex, he could point out to the property manager that you can clearly see the “vacuum lines” underneath where the sheet rock dust had fallen. While this may seem a little like CSI, it was crucial to the profitability of my janitorial business. Literally, we would profit hundreds of dollars a week more each and every week that we put this “little” policy in place.

These are the types of seemingly simple things that we learned over the time in developing our processes.  We refined the processes, sometimes through trial and error, resulting in part of the value of the business we were now selling.

Therefore, when I sold the business, to ensure that the buyer got at least the same value from the business that we had, I needed to make sure that the buyer knew full well “why” we vacuumed the way we did, how it could save him money and how not to “leak money” by ignoring this vital – and simple – process. If he didn’t understand this concept, he could easily change the policy when the teams complained about the extra five minutes that it sometimes cost them. The teams often missed the point that, sure, it may have cost them five minutes, but it saved the company hundreds of dollars.

Once the buyer understood this vacuum strategy and how it made him money, he could also see the value of me training him in my company’s specific protocols. Would you believe that, to this day, the janitorial business is still following this process? Sure you would, because it just plain makes sense.

Does Your Company Have Vacuum Strategies? Well, maybe not “vacuum strategies,” per se, but does it have “some” strategy that helps your profitability that a new owner would not immediately “pick up” on? In fact, you may not even realize or recall some of those strategies off the top of your head.

This is an area where a good business broker will help you really strip your company down to the brass tacks to make sure that no stone is unturned when it comes to training the new buyer with all the tools he’ll need to succeed.

To ensure that your buyer is properly trained in the operations of the business, you should make a list of everything that the business does. For instance, write down the answers to the following questions:

• Who is responsible for each task?
• And how, specifically – step-by-step if necessary – is each task completed?
• Employees, vendors and clients – how do you work with each?
• Who is the point person for each?
• What special agreements do you have with each?
• What are the best practices with each?

This may seem like busywork but, in fact, it is important to be detailed when handing over your company to someone new. It’s easy to miss something if you don’t strip the company down to the bottom and write these processes down from scratch. You don’t want the buyer losing an employee because you failed to let them know that an employee takes off every third Thursday.

It’s a little like baking a cake from scratch. Sure, your grandmother may know how to do it without consulting a recipe card, but could you tell someone how to do it without leaving out one single ingredient, step, temperature or detail? Not hardly; that’s why recipe cards – and unique processes – were invented!

This article is simply an outline of the process my firm uses everyday with our clients. We have a detailed system for how you develop a training process for your buyer. Many times a written, detailed plan is not necessary, but just as often it can help you, the seller, understand the “unique” processes your business follows every day that you forgot about. Many times you’ve been doing these processes so long you take them for granted, but leaving them out of the equation can leave your buyer empty-handed – and unprepared.

Take time before the actual sale of your business and “walk” through these steps so that you can have the confidence that when you finance your business the buyer is qualified AND trained for your particular business. It doesn’t matter if the buyer has more experience in the industry than you do (this is actually a common occurrence with buyers our firm locates) or if the buyer does not have more experience in the industry than you.

Regardless of how experienced he or she may be in your industry, you still have more experience at your particular business than the buyer. You understand the employees, vendors and clients; you know the details through and through.

To succeed, the buyer needs to understand every aspect of your business and how the business operates, especially the areas that your company operates differently from others in the industry – and how that difference is a competitive edge. Set them up for success!

You have pride in your business, in what you have created and built over the years.  For ego reasons alone, when you sell your business, you do so wanting to see your company survive and thrive. There are more reasons too for not wanting a buyer to run the business into the ground, especially if you as the seller are financing part of the purchase price.

Before proceeding here, I want you to get past the common knee-jerk reaction to the mere mention of the term “seller financing.”  Seller financing is a common piece of the package of a successful business sale and can provide substantial financial rewards with minimal risks to a seller. Before I can successfully convince you of the benefits of seller financing, however, I know that I need to address this common fear - what happens if the new buyer runs the company into the ground?

First, let’s put this fear into perspective.  The buyer does not want your company to fail any more than you do.  After all, they have spent their own money and time and provided you with a personal guarantee on any seller financing.  A buyer has nothing to gain by your company failing. There are a lot of easier, and more pleasant, ways to lose all of your money than a failed business venture.  Las Vegas, comes to mind. Let’s be honest, if you carefully vet for the right buyer and your company is as good as you have represented to the buyer, you have already taken a lot of precautions against future failure of the company.

There are two important precautions that I recommend to add additional protection against your fear (real or imagined) that the buyer will run your business into the ground.  There are probably 50 more ways, but one of the most important is post-sale monitoring of monthly or quarterly reports.

As a condition of seller financing, you can stipulate that you will be monitoring the company’s progress through monthly or quarterly reporting.  What type of reports are we talking about here? Well, let’s start with P&L (profit and loss), balance sheet, sales report, A/R aging (accounts receivable), just to name a few. You will know which reports will provide you with the best gauge on how the company is progressing. 

When I sold my janitorial business, for instance, the sales report I wanted to receive was the number of units cleaned in a day, week and/or month. Having access to this monthly monitoring showed me a great deal about the company in “real time” and how it was surviving after the sale. I also wanted to see A/R aging to make sure the new owner wasn’t sitting on a ticking time bomb of late or potentially unpaid invoices waiting to drag him down. In the janitorial business, as in a lot of other service businesses, just because you were doing the work didn’t mean you were actually getting paid for the work. Therefore, I wanted to make sure that the purchaser understood clearly that when “Client X” went past 60 days, well, they better pick up the phone asking for payment (since that particular client had probably “lost” the invoice).

From a seller’s standpoint, it is very important for you to go through this process of continuing to review various reports long after the sale of your business. After all, you can see the signs of your business struggling far sooner than anyone else, whether your employees or the new owner. You have experience seeing signs of stress on your company and averting disaster or wouldn’t have a thriving business to sell.

The buyer knows this too. He or she knows that you will know, better than anyone, the little signs that reflect a BIG problem is lurking just around the corner. Money aside, this is one of the main reasons the buyer is begging you to “carry” the note on the business. It is not just because the buyer doesn’t have to put as much money down. Instead, the buyer wants the satisfaction that you are looking over their shoulder and will help them along the way, particularly in the first year or two of the transition phase.

I’m not talking about you overstepping your bounds, telling them what color to paint the bathroom or how to arrange the furniture, but it is your job to help them understand little things that could potentially turn into major problems if left alone.  Remember, success for them is also success for your investment in financing the seller.

I recognize this precaution may not seem particularly attractive to you at the moment. In fact, I have had a fair number of sellers tell me that they do not want to spend time reading “those” reports once the business is sold. Why? To me, the reason is simple: They are burned out!  They simply don’t want to monitor the business after they sell it. That’s understandable, but remember that you are not continuing to run the business, you are mostly monitoring your new investment, your seller’s note.

Remember, I’m not suggesting you still swing by the office every week and pick up the reports yourself. I’m not saying you should be in constant contact with the buyer after the deal is done. However, with just a simple perusal of some equally simple report(s), you can:

1. make sure things are going smoothly in your absence,
2. spot a potential problem quickly,
3. alert the new owner to the situation, and
4. hopefully, (help them) avert it.

Just a little time in reviewing reports can satisfy you that things are going well and your investment is safe. You don’t get that opportunity with most other investment opportunities. When you invest in Google, you don’t have a secretary that will call you and tell you about the new venture that the crazy president has that will literally “kill” your investment. (No, because that would be insider trading.) Yet when you sell your business, you have tons of information about the business post-closing that will protect your investment. (And it’s ALL perfectly legal!)