Selling a business can be a difficult journey. Not only can it take between 6-12 months, but along the way, there may be many ups and downs. To say it is an emotional roller-coaster is an understatement. Additionally, significant deal fatigue can set in and cause you to want to take a break. But, since most children today do not want to take over the family business, in order to retire, you’ll eventually need to pick it back up where you left off. For these reasons, you need to partner with a business advisor.
Selling a Business Without an Advisor
You can choose to ‘go it alone’, but chances are you’ve never done this before. This is not the time for on-the-job training or figuring it out as you go. The stakes are too high. Additionally, if you do choose to go it alone, not only will you have to manage the sales process, but you have a business to run in the meantime. There will be many confidential conversations that you may not want employees to overhear. The last thing you want is for them to get nervous about their future, adding to the pressure of having to keep them calm or deal with employee turnover. Using a business advisor can greatly assist in the process.
Keep in mind that throughout the sale process it is absolutely critical that the business continues to perform well and meet the projections established. Should you miss revenue targets as you move through the due diligence process, the buyer may get concerned and demand price adjustments. The buyer wants a stable, growing business with manageable risk exposure. With a financial advisor, you can focus on running the business while they focus on the sale of the business.
You may have been very successful at building and running your business but this does not mean you have the experience or skill set to sell the business. This is different. To have a successful liquidity event you must be non-emotional, steady, and objective.
Receiving a Business Valuation
How do you value a business? Objectivity begins first with the valuation of the business. Yes – you have worked extremely hard, taken great risks, and sacrificed tremendously, the question is: does that translate into enterprise value? You must support the valuation of your business through adjusted EBITDA, revenue, and multiple ranges. The financials that you put in front of a prospective buyer must be accurate and verifiable. What you think your business is worth and how the market values it, could be different. If your hard work does not translate into financial performance, it is difficult to justify what you think your efforts and sacrifice are worth. This is where the value of a business adviser can greatly assist.
When considering who your potential buyers are, you’ll want to cast as wide a net as possible. Competitors may have approached you in the past with interest, but do you know all of your competitors? Are there competitors you are not aware of that should be included? Are there other buying groups that are acquiring businesses similar to yours? We think you should consider and perhaps put a plan together around three distinct groups: owner/operators; strategic buyers; and financial buyers. Each group has their pros and cons based upon your specific circumstances and should be considered. Financial buyers are private equity firms and family offices that may have an interest in your business, but you may not have the faintest idea how to reach this segment. This could be a very significant missed opportunity. Do not take that chance.
Documentation Required to Sell a Business
Once the listing process begins, you must be prepared with the documentation required. You must have a teaser, a confidential information memorandum, and a due diligence data room prepared. The data room – a source that securely stores important documents and files for M&A transactions – needs to be populated with all the due diligence documents required including financial, legal, operational, human capital, intellectual property, operations, sales, and marketing categories. It all needs to be properly prepared and in the data room ready for the potential buyer to review.
Having these readily available at the appropriate time will demonstrate to potential buyers how well run and organized the business is. Selling a business is about confidence and momentum. If a buyer has to wait for information to be prepared it may raise questions or concerns. Therefore it is essential that these items are prepared and organized ahead of time.
Negotiating a Sale
Balancing multiple conversations with multiple buyers at potentially different stages while negotiating with each is a challenge and a skill. It’s possible that you could have 10-20 different conversations occurring at once, each at different stages. In addition, you will want to create competitive tension, and give the correct information at the appropriate time without disclosing too much too early in the process. Again, it’s imperative that this is kept confidential. You’ll want to let your employees know at the right time.
Terms of Sale and Managing Financials
Creating deal terms with the correct balance between cash, bank financing, a seller’s note, and ‘earn out’ requires extensive knowledge of valuation, lending terms, underwriting, and M&A structuring. These factors need to be weighed against the seller’s priorities of how soon they want to fully be out of the business vs. being willing to remain involved. Taking a note back as part of the transaction proceeds can be tricky if the buyer is borrowing and your note is subordinated to bank debt.
Dealing with the financial impact of COVID and telling the appropriate story is critical. For many businesses, 2020 was a tough year because of COVID and as they make their way through 2021 financial performance is improving month by month. Being able to properly tell the story comparing 2019, 2020, 2021 and beyond is critical. Explaining how the business was impacted, but more importantly how it is recovering, gives the buyer confidence in the future.
Working with Your Potential Buyer
Every buyer is going to think they are smarter than you and can run the business better. Emotionally this is hard to hear, but it’s exactly what you want the buyer to believe. They want a stable business that they can ‘take to the next level’, and grow its revenue, cash flow, and enterprise value. There is probably sound logic in this because let’s face it – we can get stuck in our ways, keep doing the same things over and over and quite frankly just get tired. Fresh blood, fresh energy, and fresh ideas could be exactly what the business needs. So take your pride and ego out of this part and allow the candidates to think they are smarter than you. Having this conversation with an independent party is easier for them to have than having it with you – the owner.
Now let’s talk about the cost. The fees an investment banker or business financial advisor will charge are a percentage of the sale price with perhaps a small retainer to cover up-front costs. The range is usually from 2-10% depending upon the size of the transaction. Conceptually, think of it as hiring a real estate agent to sell your house.
The right exit strategy is crucial. While there is nobody better suited to tell the story of the business to prospective buyers than the owner, an experienced intermediary will allow you to remain focused on running the daily operations of your business while it is on the market, work with you to transform your business into a ready-to-sell enterprise, help you find the ideal buyer, and get maximum value for your business.