Follow these steps to make sure you get the most out of your business sale.
The decision to sell your business is a significant one. You've built it up from nothing and now you want to reap the rewards. But how do you go about getting your business ready for a sale? As someone who has experience on both successful and unsuccessful deals, I've determined 10 important steps to get your business ready for a sale.
1. Understand how to price your business for sale.
Whether it's an asset valuation, a price/earnings ratio, a discounted cash flow or an industry rule of thumb, you need to get your head around how businesses are valued. There are various ways to price a business, which could take into account the following:
- Value of assets: Add up the value of all the tangible assets (property, machinery, stock, etc.) owned by the business.
- Future earnings or profit: If you have retained customers or subscribers who keep coming back for more, then your business could be valued based on the future revenue from those customers.
- Intangible assets: Some buyers might be primarily interested in your brand and the goodwill it generates, your intellectual property, or a trademark you own.
It's important to build a solid understanding of how businesses in your sector are typically valued for sale. The best way to do this is to speak to an advisor who has worked on a number of deals in your industry as they will be able to guide you as to what a buyer might be really interested in.
Once you understand the intricacies of this process, you will be able to build a realistic figure of what your business is worth. This is important because the process of selling your business is expensive (in terms of both money and time) and you only want to start that process if you have a good chance of completing it. Too many founders have "an idea" of what they want for their business that simply isn't based on reality. It's a huge investment to get to the offer stage, so you don't want to get there only to find it's all been in vain, because the offer is lower than you were prepared to accept.
2. Make sure you know the selling process.
When you sell your business, you will typically go through these steps:
- Appoint an advisor to represent you.
- Analyze your business to find the points of value.
- Create a financial presentation that shows the growth history and potential of the business.
- Get ready for due diligence. All buyers will want to look under the hood of your business in detail. Make sure you are happy with what they will find.
- Approach potential buyers. Your advisor will do this anonymously on your behalf.
- Meet with interested buyers so you can hold chemistry meetings and conduct financial presentations.
- Negotiate on the price. You will hopefully receive multiple offers and therefore be in a position to negotiate a great deal.
- Reach agreement in principle. This is when you have agreed on an amount that is subject to due diligence.
- Appoint lawyers to represent you through the deal.
- Conduct due diligence. The buyer examines your company to make sure they know what they are buying.
- Complete the deal. This is the day the paperwork is signed and the money and assets change hands. Your lawyers will handle most of it.
- Handle any post-deal activity. You will work with the buyer to announce the deal and integrate the business.
This whole selling process usually takes months, but it can go on for years. And you might have to go through it multiple times if your initial deal falls through.
Remember that the sale process will vary according to your industry. Look at your industry press to understand who is buying in your market, what they are buying and how often. It's worth getting a decent overview of what's going on, what's hot and who you might need to speak to. Spend at least several hours doing this before you start the sale process and it will help guide your decisions throughout.
Advisors are essential to successfully completing an exit. However, there's also a lot to be said for learning from the experiences of others. Most founders who have exited will be more than willing to meet you for a coffee to talk you through their experiences. They'll be able to share what worked for them, what they wish they had done better and which advisors really helped them. But they might also have an idea of who is on the market for a business like yours at the moment. These short conversations can be incredibly valuable.
3. Find great advisors to help you sell your business.
From finance and HR to law and tax, surround yourself with experts in mergers and acquisitions. You can benefit from their enormous combined experience to make sure you don’t make too many rookie mistakes. Many of these advisors will let you pick their brains over lunch before you have to sign a contract with them.
Perhaps the most important advisor is the one who will help you complete the process of selling your business. You want to look for a sell-side M&A specialist. This is someone who works for the seller to help them find a buyer. It's really important to choose someone who has expertise in your sector, as they will understand the quirks of selling businesses in your market and have an existing list of contacts or connections to approach on your behalf. They will represent you in the market and will do so anonymously initially. This ensures that word doesn't get out that you are looking for an exit. Most advisors will charge an upfront fixed fee and a percentage of the sale price upon the successful completion of the deal.
4. Isolate your unique value.
What is it about your company that makes it special? Do you have some major, highly sought-after clients? Do you employ the leading experts in your field? Is your proprietary technology top of the industry? Is your product a market leader? Is your brand famous? Is your real estate brilliantly located?
Whatever it is that makes you special will likely be key to attracting buyer interest. It's therefore worth implementing a plan to play to your strengths. How can you reinforce these points of unique value? How can you communicate them better? The best businesses to sell are those that are successful and unique, so make sure yours ticks those boxes.
You also want to remember that different buyers will find different elements of your business valuable. If your employees want to buy your business in a management-buyout scenario, they will be interested in maintaining the current team, brand, and customers and building on your current foundations. However, if you sell to a competitor, they could be most interested in taking your brand out of the market. And a private equity firm might be looking to roll your business up with others in the industry to create a super-brand.
5. Create an optimistic but realistic forecast.
Your financial forecast should be based on facts but lean toward the best-case scenario. During the initial 'dating' stage of an acquisition, one of the first things a potential buyer will want to see is your forecast. After all, they are buying into the future of your business. That means you need to paint an appealing picture of what that future looks like. Include secured revenues, expected revenues that are based off of your sales pipeline, as well as changes to staff and supplier costs. If you're not confident in financial modeling, then you need to get an expert to help you with this.
6. Get on top of your admin.
After you have accepted an offer, the due diligence process begins. That means the would-be acquirer will want to look under the bonnet of your business. You will sign a nondisclosure agreement to protect you during this phase. Save yourself heaps of anxiety and stress during the process by making sure your employee contracts, client contracts, insurance, leases and supplier contracts are in place. Get organized so you can get everything signed and buttoned up.
7. Share your plans internally.
It's definitely not a good idea to announce that you're planning to sell to your entire team for a number of reasons. Firstly, the knowledge might spook people who don't understand what it means for them. Secondly, you lose control of the message as rumor takes hold. Additionally, an exit is only news once it is completed. You don't want the entire industry to get wind of the fact that your business is up for sale. If your exit plan fails, that could affect future attempts. Just like a house loses value if it sits on the market for too long, the number of potential buyers of your business is finite. You don't want people labeling your company as "one that just can't sell."
However, it is a good idea to let key people in your team know of the plan confidentially. They will be able to help you get the business ready for a sale. They'll be instrumental in wooing potential acquirers and the context will be useful for them when it comes to making decisions in the general course of business. For example, they might think twice about signing a three-year contract with a supplier if they know an exit is potentially on the cards within 12 months.
8. Get your story straight.
Anyone who is interested in buying your company will want to know why you are selling now. You need a good answer to that, and that answer should be positive and forward-thinking. For example, are you looking for an expanded market? More senior support? Tech synergies? Whatever it is, make sure that the answer is honest and makes sense to a potential acquirer.
9. Review your online PR.
When a potential acquirer first becomes interested in your company, they will start with some basic online research. It's worth investing in some good PR and SEO services to make sure your company is positioned in a really positive light when they do this. An award-winning, well-known company with a positive brand is always going to be more valuable than an unknown.
10. Prepare yourself emotionally.
If you decide to go ahead with the process of selling your company, you need to be forewarned as to the impact it will have on you personally. You've built your business to its current level of success, which means you are emotionally invested in it. It'll be hard not to take it personally when potential acquirers pick out its small faults and ask difficult questions, or try to negotiate the price down at the last minute. And there will be many wobbles on this journey, with loads of opportunities to change your mind. You want to make sure you only pull out of the process for genuine business reasons, rather than driven by your own anxiety.
If you are successful, you might find yourself without a job right after the deal is completed, since the new owner is under no obligation to keep you employed. You need to make sure you are emotionally resilient enough to weather this process while keeping your business running. The exit process could take months or even years, and it'll require quite a lot of your time. Add to that the pressure to keep the business performing throughout (if performance drops, the value of your company drops) and it should be clear that mental preparation is an important part of the process.
The decision to sell your company is a significant one. Stack the odds in your favor by preparing the right way.