Selling A Business? 12 Steps to Success
Selling a business takes preparation, time and multiple talents. Most business owners do not have the latter. In fact, very few have the time, either!
Selling a business is a process, one with multiple steps that must be preformed in the proper sequence. If you’ve started to think about selling your business, here are 12 things you can do to give yourself the highest chance of success.
1.) Gather the right talent and assemble the team
You need advisors that know what you don’t; people know the ropes of one or more aspects of selling a business. Finance, legal and other advisors will help you work your way through the process. You want a “transaction” attorney, not one that chases ambulances; an accountant with transaction experience, not your cousin Millie, the bookkeeper.
One of the most important members of your team will be an experienced professional business broker or M&A specialist. The guy or gal that sold you your house or the property your business is housed in is almost certainly not equipped to value, market and advise on the sale of your business.
A professional business broker has made a career out of advising business owners on the preparation, negotiation and sale of businesses. Interview a few and get the one you feel most comfortable with.
For all participants in this process, choose people who have lengthy experience and get them on board early.
2. Define your exit strategy and consider all potential exit options
What are your goals and, if there are other stakeholders – co-owners, a spouse, etc. – what are theirs? How soon do you envision selling? Do you want to continue in the business for some period of time? Do you want to sell all or less than all of the business? What are your plans after the sale? The answers to these and other questions that arise as you go through the preparation process will help you and your advisors determine the most appropriate exit strategy.
3. Determine the market value of your business.
While the market will ultimately determine the value of the business, it is crucial that you get some sense of its likely value before you get very far down this road. Selling a business is hard. Selling one that is not properly priced is well nigh impossible.
Get a business valuation from someone that values businesses regularly. Business appraisers will provide an appraisal of your business but an experienced business broker will provide a Broker’s Opinion of Value, which is the next best thing and, generally, less expensive. If you’d like some advice on what to look for in a business broker, let me know here:
Before you go to market you want to have a good sense of your business’ value for two reasons: 1) you need to know that the proceeds will be enough to provide for you and your family post-transition, no matter what your plans are and, 2) if you want the business to sell, you must have it priced near its value. As I’ve stated many times before, the most common reason – possibly the only reason – that a business doesn’t sell is that it’s priced to high.
4. Consider who the potential buyers are.
Competitors, suppliers, customers, management, overseas businesses, employees, strategic buyers, financial investors and private equity investors (PEGs) all are potential buyers and each will have different reasons and objectives for buying. We’re seeing a great deal of interest from PEGs at the moment but there are also many strategic buyers in the market interested in expansion through acquisition. An experienced professional business broker – someone who makes his or her living advising and selling businesses – will be able to tell you what specific slice of the buying market should be targeted.
5. Prepare for the due diligence
Put on the buyer’s hat. What data would you want to see if you were buying your business? You can be certain that any buyer is going to want to see at least that data.
Get your books in order and make sure that everything is clear. Inventory, contract abstracts, employee records, payables, receivables, asset lists, long and short term debts, organizational documents, shareholder/member agreements, etc., etc., etc. If you’d want to see it, your buyer will want to see it. Get this all together and organized to make the buyer’s due diligence efforts as easy as possible. A transparent seller with organized and understandable information will not only make the buyer’s due diligence easier but will come off as trustworthy.
6. Develop the marketing program.
We first develop a 20-30 page in-depth analysis and detailed description of the business. From that, we distill that data down to a 2-4 page abstract that describes the salient points – industry, general location (province, state, region), number of employees, sales and discretionary earnings, general (but not specific) product or service, etc. – which we will send to potential buyers .
We then edit and flesh out the original 20-30 page analysis into an Offering Memorandum that is sent to potential buyers after they sign a non-disclosure agreement.
All of this is to respond to the legions of potential buyers that your broker will surely receive inquires from once the business is actively marketed – and if it’s priced right!
7. Consider Offers
If your business is profitable, marketed properly and priced correctly, you will very possibly receive more than one offer. Such offer is likely to be in the form of a letter of intent (LOI). You very well may receive more that one. One or more of the potential buyers may ask for an exclusivity clause which will require you to cease actively marketing the business while they do their due diligence. Should you give exclusivity to one? See the next two items.
8. Get familiar with the likely documentation.
A buyer will most likely make its first move utilizing an LOI that will contain an exclusivity clause. This is not at all unusual and should not concern you but you must realize that LOIs (and term sheets: another name) or non-binding; the seller will be able to walk if it finds some issues of concern. But if there is an exclusivity clause in the LOI, it is critical that you sunset it. That is, put a date certain on that exclusivity period, otherwise the buyer will be able to drag out the process thereby keeping you from marketing and accepting offers from other buyers.
There are plenty of other documents that will be part of any sale; a purchase agreement, bill of sale, note, deed (if real estate is involved) and much more. An experienced business broker will help you understand and navigate them.
9. Manage the due diligence process.
This is where the proverbial rubber meets the road – and where a professional business broker will earn his or her fee. Managing the due diligence process is a time consuming and detailed business. Multiple dates for decisions must be established and information flow is crucial. If you have followed the guidance of #5, above, this process will be measurably smoother, quicker and less stress-inducing.
I suggest that you make full use of a virtual data room (VDR) for this process as it will help keep things moving and will provide a great level of confidentiality. (Listen to this podcast about confidentiality.) If you’d like a list of virtual data room providers, let me know here.
10. Negotiate the deal
The purchase price is only one aspect of a purchase and sale agreement. The terms are where the real details lay. How is the price paid? What is included? How are payables and receivables to be handled? What about employees? How is the intellectual property to be valued? There’s a million things that go into the negotiation, must of which you may not even think of. This is another area where a professional business broker will earn his or her fee.
11. Be prepared to stick around for awhile during the transition
This could be a period as short as 30 days but is likely to be much longer. No matter how good the management team is that stays with the business, the buyer is likely going to want you around to ease the transition with customers, vendors and others. If the buyer is smart, it will want to keep the transition confidential (for all the reasons mentioned here).
12. Keep your eye on the ball.
You’ve got to keep running your business. If you take your foot off the gas for even a minute, your business will lose some value. To have that happen during the marketing, due diligence, negotiation and/closing business will be very costly.
Even though you may have a signed contract and even though the due diligence period is nearing its end with no problems, the business is not sold until the the money is wired to your account. Don’t start thinking about that world tour. Keep your foot on the gas.
Many times a buyer will want an earn-out. This means that your proceeds will not be fully transferred for some period of time and they will be dependent upon the performance of the business during that period. And if all else fails and the buyer pulls out, while you may be able to sue the buyer – a process that can easily eat up five or more years and hundreds of thousands of dollars in legal fees – you want to be able to sell the business to one of the other suitors that showed up at the beginning. If business is off because you’ve taken your foot off the gas, it will be worth less.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you want to sell your business, what is your biggest concern about the process? Let me know. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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