Selling a Business: 4 Important Steps
27 December 2021: Selling a Business: 4 Important Steps
As I’ve repeatedly mentioned over the past several years of posting to this blog, selling a business is a process – arduous and time-consuming, as I pointed out last week.
But it can be far less so if the seller takes seriously the importance of several of the steps in the process – and hires the right talent to help; people that have done this before – that have the training and experience that will provide the best chance of a positive outcome.
Like anything else in life, knowing what the steps are is the first order of business. And skipping any of them – especially the first one – could doom your efforts to failure or even leave money on the table. To be successful in selling your business, it’s crucial that you do the right things in the right order right from the start.
Here are four steps that, if taken in their proper order, will increase not only the odds of a sale but also the odds of a satisfactory outcome.
Get the Business Valued
I’ve often written about how business owners generally have an exaggerated opinion of their business’ value. This leads to expecting more from the sale than the business is worth – a guaranty of disappointment at best and no sale at worst.
Aside from increasing the likelihood of a successful sale, knowing what a business is worth will give the owner an idea as to whether the proceeds at sale will be adequate to support them post-sale; whether post-sale means a new business opportunity, paying for the grand kids’ education, a simple retirement or buying a ticket for Elon Musk’s next launch.
But sellers aren’t the only ones with skewed opinions of the value of their business. Buyers are concerned about paying too much and therefore tend to assign a value to the business they’re considering that is lower than its actual worth.
This shouldn’t surprise anyone, as neither the buyer nor the seller is likely to have any experience valuing businesses. But both parties need to know what the business’ value is.
Hiring a competent, experienced business broker – ideally one with a Certified Business Intermediary (CBI) designation – or a business appraiser should be the business owner’s first and most important step once he or she begins to seriously consider selling.
Assuming that the target price established by the seller after having a professional valuation completed is properly calculated, a valuation report gives the seller some level of assurance that the price at which the business is brought to market is justified.
But it also gives the seller an important and powerful marketing tool.
A valuation report issued by an independent, third-party professional makes arguing about price tough. A buyer, when handed a copy of such a valuation, will know that the seller didn’t just pull a number out of a hat. And when the valuation was done by a qualified business broker and that broker is representing the seller in the sale, the broker is in the strongest position to rebut any price issues raised by a potential buyer. We’ve found this benefit alone was worth the cost of the valuation.
Use a Letter of Intent
A Letter of Intent (LOI) is generally used to stipulate the salient points that the parties agree to prior to the buyer performing in-depth due diligence on the business. The seller needs to know that, though the LOI will often contain an anticipated price that the parties agree to at this pre-due diligence stage, the final, negotiated price may be different.
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A Letter of Intent is not binding – it’s not a contract. Rather, it’s a summary of the general terms and conditions the parties have hammered out as a preliminary step toward getting a purchase and sale contract negotiated. Such terms and conditions addressed in the LOI could include the length and scope of the buyer’s due diligence; the possible closing schedule and target date; how the payables and receivables are to be treated; what aspects of the inventory might be omitted, how the business will be paid for and a dozen other issues that are involved in the process.
An LOI is “general” in nature but should include “significant” issues, such as those mentioned above.
An LOI does not guaranty that the buyer will ultimately buy. But it does establish that the parties are serious and helps to define a common understanding of how the transaction should proceed as well as the meaning and intent of certain aspects of the transaction.
An LOI is an important step from the standpoint of gauging each party’s commitment to a deal.
Prepare for Due Diligence
The buyer is going to want to see everything – and I mean everything. The seller has got to be prepared for this.
The seller will be asked to provide financial, operational, legal, contractual and sundry other documentation to prove that the business is financially sound and that the information that has been presented to the potential buyer is accurate. The seller must prepare for this invasive examination in advance. Any delay that results from not being prepared risks raising suspicions among the buyer’s team of advisors.
A professional business broker will know what needs to be assembled and how that information should be presented. Most good business brokers will, when selling a business, prepare an offering memorandum (“OM”) for serious potential buyers. This document is extensive and comprehensive and intended to answer every anticipated question from a potential buyer. But the preparation of an OM requires significant seller participation and time.
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It’s not a good idea to leave this to the last minute because hurrying to put this information package together risks not including everything that should be in it or, worse, errors in the package that will undermine the credibility of the seller.
Scrutinize the Purchase Agreement
When selling a business, the purchase agreement is the formal legal contract that describes in detail the terms and conditions of the transaction. It is a comprehensive, “fleshed-out” version of the LOI and must be extremely clear in all respects.
As a rule, the buyer’s representative – usually an attorney – prepares the purchase agreement which is why we always suggest that our client – the seller – hire a transaction attorney to review it. As a rule, we always give a preliminary review of the purchase agreement and make any notes that we think should be highlighted for the seller’s attorney’s attention.
Some professionals leave the purchase agreement signing to take place at the closing table, but we like to have it signed ahead of time just because experience suggests that one or more loose ends might pop up at the last minute.
The Bottom Line
There are three very important takeaways business owners should remember from this post.
First, when selling a business you’ve got to know what the business is worth. A business valuation done by a professional will minimize the chance that any significant chasm will exist between the seller and any potential buyer when it comes to value.
Second, selling a business is a process that takes time – and faithfully paying attention to the steps the process requires. Taking shortcuts or skipping any of the necessary steps will almost certainly result in an unhappy experience for the seller – and likely an unsuccessful effort.
And finally, there’s this: hire the right talent. Find people that advise on and handle business transfers for a living.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. 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.
This week’s “Searching For” item: coastal U.S. based provider of any of the following financial services: non-CPA accounting, bookkeeping, and fractional CFO services, and related software businesses with revenue between $1 million and $5 million.
If any of you know of something that might fit, please let me know.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.