The process of selling a business is time consuming and complex even under the best of circumstances. That’s why you need to prepare for selling ahead of time. Even if you’re not considering selling your business now, the better prepared you are when the time comes, the better price and terms you will be able to receive.
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Selling a business requires a great deal of preparation that must be completed before taking the company to market. Some of this preparation can take years since every aspect of your business needs to be reviewed. With careful consideration of the following steps, you will understand all of the components involved with proper preparation and be able to start putting strategies in place to ensure the most successful result.
Determine Your Objectives
The decision to sell your company is probably the largest financial decision you will ever make because it’s very likely that your company is your largest single asset. Formulating answers to key questions about what is important to you prior to starting the selling process will help you maximize the value you receive and ensure you receive the terms you seek.
You must clearly understand your reasons for selling.
Next, you will need to consider when you should sell and what terms with which you will be satisfied. Consulting with an Investment Banker can help you determine if your goals are realistic based on the current market. You may find that you need to make changes within your company to maximize the value of your business and achieve your goals.
Finally, you should know before you put the business on the market which type of buyer you hope to attract, because the two buyers have different objectives. They will have different sales processes and different aspects of your business will appeal to one type of buyer more than the other.
Once you know your objectives, you must find exactly the right buyer to meet your objectives. This means you must prepare the business for sale by making it attractive to that type of buyer well ahead of your target exit date. Preparing ahead of time increases the chances of a positive outcome for you.
What Makes Your Business Saleable
The most important part of making your business saleable is ensuring a solid history of profitability and growth. You must show a good base infrastructure to support future growth through a strong pipeline of new products or long-term contracts with customers. You must have a good handle on market trends backed up by respected research showing that buyers will continue to want your products and services.
This is especially true if you are hoping to leave the business completely after the sale. You must be able to point to bench strength in the management team. Ideally, you should have a team that could replace you without missing a beat. Time is needed to build that talent and depth, so you must begin preparing your management team well in advance of your target exit date.
A history of innovation makes the company more attractive. A products and services based on a hard to duplicate or cutting edge technology is more valuable than one nearing the end of its lifecycle, so it pays to keep up to date. Be sure that you have adequately protected your intellectual property and that you have clear rights to all embedded technology.
You can also demonstrate innovation through a unique business model or by bringing together a team with a unique skill set. Even small innovations in business process can pay off handsomely when it’s time to sell your business. Something as small as training your team in superior customer service skills may be all it takes to set your business apart from competitors.
Buyers will be interested in acquiring your customer and supplier base. Superior strategic sourcing and a well-oiled supply chain can make your company very attractive, so focus and try to streamline this area. A diversified customer base and long-term contracts show that you are not dependent on a small market that could dry up in a downturn. You should also be able to demonstrate strong relationships at all levels of your customers’ organizations to reassure potential buyers that those relationships are not at risk if you leave. Your distribution network and channels should be clearly defined and running well.
You must also have a strong corporate infrastructure. You should have a functioning ERP system, a modern telephony system, and other resources necessary for your industry. A buyer wants to know that the company will continue to operate without requiring additional major investments in infrastructure to keep things running.
Of all of these considerations, the most important is profitability. If you can’t show that the business can make a profit under the leadership of a passionate and committed founder, then any potential buyer may have reservations about the company’s viability.
You should begin to measure every decision based on its effect on profitability. New equipment may streamline processes and make the business more profitable in the future, but you need to understand if the cost of capital decreases current performance. The answer may change your mind about the investment. You should begin considering investments and any discretionary expenditures well in advance of your target exit date. It’s a difficult balancing game and one that may require outside analysis and advice.
As you near your exit date, you are going to want to step up your presale planning. By ensuring that your pre-sale planning is adequate, you can eliminate any potential roadblocks or last-minute objections from the buyer.
Well before you are ready to sell, you should surround yourself with a team of advisors that you trust. Try to find people with expertise in mergers and acquisitions. At a minimum, you need an accountant and a legal advisor as well as your go-to M&A person. Ideally, put this team in place several years before your target exit date so that you have time to build up a trusting relationship that allows you each to speak freely. Your advisors need time to get to know your business.
You should prepare a believable explanation for why you want to sell. Be able to clearly explain your business’s finances, including how you’ve been compensated. Have prepared business plans showing growth and profitability. Start to give your second line managers additional responsibility, especially if you intend to leave the business completely. Give them stretch goals and projects outside their spheres of expertise so that they develop an appreciation for all aspects of the business. A strong management team is attractive to any buyer. In fact, they might even acquire your company just for their expertise. This is also the time to lock in key employees with various tools such as non-compete agreements, stock options or retention bonuses.
Secure rights to all intellectual property. If you license any technology, try to lock in long-term agreements. Any buyer will uncover intellectual property discrepancies during due diligence, so you will expedite the deal if you clear these items up in advance.
Address any outstanding legal issues such as customer, supplier or regulatory lawsuits. Seeing an unquantified and potentially large expense looming because of an unresolved legal issue will turn most buyers away or negatively impact the purchase price.
Gather long-term contracts with customers, suppliers and key employees and have them ready for review. Any intellectual property license agreements or any contracts that could affect the profitability or longevity of the company should be at hand.
Consult with your advisory team to be sure all appropriate steps have been taken to clear any obstacles before the sale process begins.
Determine True Profitability
There are many perfectly legal charges that you can put against your business to reduce profitability for tax purposes. However, while it’s perfectly reasonable to do whatever you can to reduce your tax bill, when your company is up for sale the buyer is going want to look at maximum profitability. You will need to provide information on “Add-back” to your cash flow.
Along with generating clean financial statements, examine all expenditures to ensure you are running the business for maximum profitability. Remember, profitability is more than likely one of the key criteria for any buyer.
Manage Your Capital
As you are approaching your target exit date, you will want to manage your capital in the business since you are not likely to receive any significant near term return on additional capital expenditures. Before committing your capital, you may want to look at other alternatives.
Try to minimize working capital as well. Focus on improving your cash cycle – turning inventory faster, collecting receivables sooner, and improving trade payable terms. Reduce or eliminate unnecessary capital expenditures. This may not be the time to buy new equipment or new business systems or to undertake new research and development projects. You might also consider eliminating or divesting unprofitable divisions or products since they will reduce the attractiveness of your primary business.
In addition, try to avoid hiring expensive new talent as you approach the date when you will offer the company for sale. The added salary may reduce your overall profitability, and the buyers may have their own team lined up anyway. It is better for all concerned if you can make do with your existing team. Consider leasing an employee or hiring someone on a contract basis. Even roles such as CFO can be filled by contract employees, so don’t hire for the short term.
Develop Your Sales Strategy
Buyers will typically be looking at your company either as a pure investment vehicle or as a strategic complement to a product or company they already own. Whether you attract a strategic buyer or a financial buyer may affect the way the deal will be structured and the speed of the deal. Work with your advisory team to decide if your best bet is to sell to a strategic or a financial buyer.
A strategic buyer is more focused on how your company fits with their existing operations. Often times, strategic buyers are interested in the synergy that is created by the merger of the two companies. If you decide that your best bet is to sell to a strategic buyer, you should make sure you are able to show continued value through growth and profitability. As you talk to them, be sure you point out ways that they could leverage your existing infratstructure to achieve synergies with their existing business by reducing overhead or creating cross-selling opportunities with their existing products. Strategic buyers offer the best opportunity to retire from your business shortly after the sale.
Sales to Financial Buyer (Private Equity)
A financial buyer is interested in the ROI of an investment in your company. Their valuation process focuses on the ability to leverage the operations to increase the ROI. This is strongly dependent on your products, services, assets, and cash flow. . A financial buyer is usually requires the founder stat invested (rollover equity) and to continue managing the company the deal closes.
In either case, be sure you are comfortable with your role after the sale. Know how much equity you want to re-invest if you are planning to stay on as a part owner.
You should your exit planning at least a year before your target sale date. If you want to get the best possible price for your business, you must put in the time on planning and preparation. You want to control the timing of the sale, so plan ahead. Selling your company under duress due to unexpected illness, death, or financial stress will not maximize the value you receive.
Selling your business is an important decision, and not one you should undertake lightly. You should work with the best advisers you can find. Never attempt to sell your business without consulting with experienced professionals.