Selling or closing down your ceramic business

Chapter 32

We have earlier touched on the sensitive issue of how to deal with the fact that – one day – your business will either be closed or sold (Refer to chapter 30: “Will your ceramic business last forever?”). This issue is where I see most ceramic studios, in fact, most small businesses in general, looking for guidance.

How do you go about preparing for the end or transfer of your business? To some extent many of the most important factors are covered in chapter 30. I encourage you to read this “forever” chapter again and then, when the time comes, study the recommendations given in this chapter. As you will see right away, taking a finite look at your business, its position in the market and the perception of it by its customers, is crucial to how successful you will be to either find a buyer of, or successor to your business, or in just closing it down.

In the niche business of ceramic studios, you will often see them passed on to the present owner’s children or other members of the family. “Often” does not mean always – in fact in most cases the business is acquired by outside, non-related parties.

In the intra-family transfer cases, the present owner has a much better opportunity – and more time- to prepare for the transfer of ownership. This is especially important if there are employees in the business which are already loyal to that family member.

But what if your business is entirely built on the strength of your artistry – typical of a pottery – or strong leadership, with no family involved? I will address that further down.

In my professional career in the ceramic art and craft industry, I have bought and sold more than half a dozen different businesses, each one with its own profile and demanding an approach that needed a tailored approach.

Before we address that, let’s start with the basics.

When do I sell or close down my ceramic business?

In my experience, the short answer to this question is: “Whenever you start thinking of it”. You, as a successful entrepreneur, don’t – and should not – think about ending your involvement in your business – when the business is growing and in great financial shape. It has become part of your life and you have no obvious reason to sell, such as old age, illness or some other circumstance.

So you don’t think about it. However, when problems exist or there are signs on the horizon that that time for a change is approaching, you start thinking about it. And that is when you need support for outside advice.

 Some basic concepts

1. Be prepared, all the time

Rule number one is to prepare for a sale at the earliest time possible. Here lies a very difficult – almost impossible or contradictory – challenge. This is why I outlined some basic concepts in chapter 30. We essentially covered the need to operate your business in such a way that it could be transferred (sold or closed) at any time. This is not realistic really, just dreaming. But there is a kernel of truth to it. The smoother your business is operated, the more prepared you are to meet the challenge of selling or closing it down. The need might crop up at any time and, as the saying goes “forewarned is forearmed”.

As the owner of your ceramic business, you are the only one that can – and should – think realistically about which steps you need to take now to be prepared when the day comes. My recommendation is to discuss the value of your business with your accountant regularly. After each quarterly review, sit down quietly, and think through this issue. As the business owner you cannot ignore it and you cannot delegate this sensitive analysis to anyone else.

As your decision to sell is made, take contact with both your lawyer and accountant and brief them in depth on your situation and thinking.

From now on, confidentiality is very important. As few people as possible should know about your plans, especially not your customers. Each situation is different; just keep the basic need for secrecy in mind when you think through the situation in your business.

2. Try to look at your business as if you were a third party

This is very difficult to do. It becomes easier if you have someone you trust 100% – such as your spouse or a very, very good friend – to be open with without fear of this leaking out. Ask that person what he/she thinks of your business and its prospects of being successfully sold. At the very least, the answer will add to your data base and create a fresh frame of mind.

3. Where do I find a buyer?

In our realm of very small businesses this can be very difficult. The best potentials would be found amongst your employees, your competitors, your best customers, other related businesses in the ceramic field. Do not rush – think through this very important decision and accept a time frame that might be very long. Tell your support team – your accountant, attorney, trusted and loyal suppliers.

Many businesses are sold through brokers – all large businesses are. But your business? It depends on your size, complexity, future growth prospects, the price you will ask for it and other factors. Brokers have to be compensated for their work, normally as a percentage of the selling price. Many will not be interested in your business if it is too small. If you contact a business broker, you may learn quite a lot in the process. Even if the broker turns you down, at least you have learnt something. But, in most cases you are on your own.

4. How do I put a price on my ceramic business?

You may have a figure in mind, but do not mention it to anybody. Instead, listen to the opinion of your trusted team of supporters, such as the friend mentioned above, your accountant and your attorney.

There are many ways to calculate a price that would hold up to a potential buyer’s scrutiny (also referred to as “due diligence”). Also included is the more elusive valuation of “good will”. This latter part of a price asked for a business, considers your business’ reputation in the market place, your prospects for growth and many other factors.

And then there are the technical factors behind a concept known in the accountant’s vocabulary as the “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization). This is normally used in big business but can always be good start even for a small business. The underlying idea is to calculate that amount and then assume a buyer’s “profit goal”, such as the calculated price based on which it would yield a certain return on investment. (For example, if the ebitda is $50,000 and a buyer would demand a 20% return on the purchase price – the profit goal -, you would multiply the ebitda with a factor of five. (5 times $50,000 is $250,000. 20% of $250,000 is $50,000. $250,000 would then be the calculated price for your business).

In your case of a privately held niche-business in the ceramic arts and crafts market, these sophisticated evaluations would in most cases be overridden by many other factors, such as your business’ vibrancy, future prospects, history, attractiveness to other potential buyers and, above all, the perceived risk intrinsic in a small business. .

Whatever would dictate the value of your business, it would not hurt if you are familiar with these pricing approaches. Discuss the ebitda approach with your accountant. He will understand how it works.

Bear in mind that any prospective buyer would have a colder and more distant approach to assess your business’ value than you have. Your closeness to your life’s work makes this valuation very much affected by your feelings – something a buyer would not be influenced by. An offer from a prospective buyer would, in the large majority of cases, be lower than what you have in mind.

Don’t be offended over a low bid. That is part of the negotiation process. Keep your feelings inside you and accept that your wish is to sell and for the buyer to be successful and satisfied with the deal. What does it matter to you if the deal is good for the buyer? We will answer that further down. Absolute openness and honesty by both parties must be involved before, as well as during and after the sale.

 Confidentiality agreement:

Regardless of your relationship with a potential buyer, treat him/her at arms distance. Have him/her sign a confidentiality agreement. It is standard procedure and – I have never heard of a case where anybody would refuse to sign. And even if that would be the case, it tells you something and you should walk away from this supposed buyer.

Here is a standard wording of such a document:

 Confidentiality Agreement:

“The following agreement has been made between (insert the names of the parties, seller (you) and buyer.

In the course of the two parties negotiating and doing business, certain proprietary information such as, but not limited to, designs, formulas, technical and commercial information such as customer names, business systems and other related matter, may be made known by each party to the other. All such information is to be kept strictly confidential by either party after signing, during the purchase process and indefinitely afterwards and may not be divulged to any third party without written consent of the other party.

The parties also agree to keep the existence of their negotiations strictly confidential.

This agreement shall be valid indefinitely, shall survive any termination of the negotiations and shall include exchange of information prior to, during and after the negotiations taking place between the two parties.

Place and date:——————————————————-

Signed:  (Buying party)………………………………………….

Signed: (Selling party)…………………………………………..

______________________________________________________________________

 

Why the buyer’s satisfaction with the deal is important

Almost in all cases, the selling process of a business survives the money transaction. It establishes a temporary relationship between the seller and the buyer, which in many cases is laid down in the purchase/sales contract. The new owner needs your support and must feel that you will be totally behind this follow-up aspect. Trust is essential. If it does not exist, forget about even starting to negotiate.

There are many factors that are important to the buyer, such as

–         the training you commit to provide after closing

–         verification of all inventory, furnishings, equipment and other fixed assets

–         all soft assets such as copyrights, trademarks and contractual arrangements

–         the financial aspects of paying for it. One lump-sum payment is strongly preferred but sometimes not possible, especially if real estate, owned or leased, is involved.

–         complete lists of customers and suppliers

–         correct and total submission of sales histories and all other accounting information

–         past three years (if possible) of annual financial statements

In short, the buyer must feel comfortable with having you on his/her side after the sale.

In regards to the written purchase agreement, your lawyer will likely be more demanding of the buyer that you are – that’s an attorney’s job. But you are the boss even in this relationship and have to make sure that the deal is not broken due to overly strong language in the contract.

What if my business is basically based on my talents and knowledge?

This would be he case if you are potter, working with very little help in your studio. Can you sell anything related to this business? Oh yes, you can. You have more assets that you may think, such as

–         equipment

–         inventory (raw materials and finished goods)

–         customer and supplier lists

–         business history such of recommended and documented successful shows you attend

–         contracts with galleries or websites where you can exhibit and sell

–         selling prices that you have found competitive and calculations of cost of goods sold

–         any successful and known proprietary techniques that carry your name

–         a favorable and transferable lease

–         in some cases the name of your business and its good will

As a potter by profession you can probably find other aspects that a buyer would be willing to pay for. You have both tangible and intangible assets to factor into a selling price.

Conclusion to the selling process

Selling your business is extremely important and you need to put all your thoughts in writing before going to your accountant and your lawyer and pay for their advice in the process.

These are times when nerves and anxiety play a role. The best way to stay cool is to have as much of your thoughts on paper right from the beginning. Remember all the basics of selling and marketing you have learnt. Well, selling your business is probably the most important sale of your life, so take your time to prepare for it and seek outside advice from all parties concerned.

Leave nothing to chance and  be patient.

Closing down

If you are unsuccessful in selling your business, you will – if conditions so require – close it down.

You should still consult with your lawyer and accountant. The lawyer or your accountant might need to give you advice in regards to your lease such as giving your landlord the needed time for cancelling the lease and other legal aspects.

Then you are faced with selling your assets – inventory, furniture and equipment and other fixed assets. Search for takers of other assets, such as your name, special formulas, supplier and customer lists and other current assets.

Contact an equipment trader or one or several reputable auction houses for the sale o your tangible assets. Search/google on line for “ceramic equipment trader”.

This might be a sad process for you – or a relief. For others it might be the end of one business and the fresh start of another. Life takes unexpected turns. Whatever your future has in store for you, the lessons learnt from having run your own business are worth every penny you have spent. Although a book like this one can be of a big help, the full lessons from running your own business can only be learnt from doing it.

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© 2011 by Rolf E. Ericson, Oneonta, New York, publisher. All rights reserved. Photocopying, reproduction , copying, or redistribution of any kind in printed or electronic form is strictly prohibited without written permission from the publisher.