“I’m planning on selling my business, where should I start?” We get this a lot. Almost every company has gotten the call “I want to buy your business”. You need to step back, think, and plan. You need to understand the process and what lies ahead – before you act. Your business is likely your biggest asset and you are counting on a successful sale at the right price to move on to whatever comes next. So, you need an exit strategy!
What happens without an exit strategy?
No sale. Or, at a much lower price. Without a plan in place – an exit strategy that addresses the timing of a sale and value creation – business owners lose out. Too many wake up after many years in business to the depressing reality that the business is not worth anywhere near what they need or want. It may not be sellable at all. There are often significant problems in the company requiring a lot of work before a buyer would even consider an offer. Because fixing things can take a substantial investment in time and money, you need to start now.
What do you need to know before starting down this path?
There are six key areas around exit strategy and selling your business that you need to understand. Here, I begin with the selling process. I will get into the others in subsequent blogs.
- The Process of Selling a Business – When a Sale is Your Exit Strategy. It can take 9 – 12 months or more. Therefore, you need to understand what this entails for you, the preparations you need to make, and what your advisory team should be doing for you.
- Options: It may not look like the transition or succession planning you envisioned. Your transition may be that traditional sale to a third party, but there are many other options that may be a better fit with your succession planning and personal goals.
- Value – the buyer perspective. Get an estimate of value. Identify areas for value creation and for solutions to problems that may make your company simply not sellable. Look at value creation from the eye of the buyer.
- Value Creation and Sellability – From the opportunities and problems that you have identified, prioritize them and define an action plan. Which initiatives and investments will give you the biggest potential value increase and which will remove glaring deal breakers? Examine everything from financial management to technology to human capital.
- Timing of the Sale – coordinated with your personal financial plan. Start NOW to decide when you want to sell, for what price, and why. Make sure that your price expectation is both realistic and in line with what you need for retirement or the next steps in your life.
- Your Collaborative Advisory Team. This is likely the biggest transaction of your life. Don’t go it alone, don’t depend on one person. You need the right team – collaborating on your behalf – as you build value, get into negotiations, and close the transaction. They need to communicate and collaborate – truly working together to ensure your success.
- Communication with Those Around You and “The Day After.” Make sure your family, spouse, partners, are part of these complex decisions – even key staff – at the right moment. Make sure that they understand what this will take to complete. If family members are involved in the business, this is even more important. And plan for your life after the transaction.
The Process of Selling a Business – Introduction
When I ask owners about their long-term plans, I usually hear “selling my business”. The business sale process can take a long time, typically 9 – 12 months, maybe more. You need to keep working the business full speed ahead, while at the same time participating in the sale process. As the steps progress, the time you will need to invest will vary. Yet, a good broker or investment banker will keep you informed and only take your time as necessary.
You need your broker to learn everything about your company to be able to best represent you and maximize the sale price. The broker will put together a marketing package, vet potential buyers, and negotiate through to the closing table. This will require you to pull together data that you may not have been tracking. You will need to agree on a price range that you are willing to accept.
When “selling my business” is your goal, your advisor is going to need A LOT of information. This can be very painful if you don’t keep a lot of records. It can be mildly painful if you have good records. Either way, this is the basis of the entire process. Full and accurate data, hiding nothing, is necessary for your broker to understand the business and tell your story in the best possible light. Transparency will also help address issues/problems in the best, candid way with buyers. Buyers will find the flaws, better to put them out there from the start.
Agree on a value range.
You need to work with your team to agree on an acceptable value range and other potential terms. After getting an initial estimate of value, work with your financial advisor to see how this sale price fits your personal financial plan. Remember that whatever the final sale price is, you will get maybe 60% of that after taxes, professional fees, etc. Your team should work with you to minimize the tax implications but start out with a more conservative mindset for planning.
Marketing Your Company
You have a product to sell – it’s just an extremely expensive one. The typical marketing documents are the “Teaser” and the CIM (Confidential Marketing Memorandum).
The Teaser: With all your company information in hand, the story can be told. The teaser is a one-page, high-level summary. It does not identify your company, it just shares enough information for potential buyers to say, “I may be interested, and I’d like to learn more.” This usually goes out to a broad audience – the buyer pool.
For those who indicate that they may be interested, your broker will have a first conversation for an initial screening. This will be the first step to weed out potential buyers who may not be a fit. For example, they may not have the financial capacity to do the deal.
The CIM: The CIM can be 20, 30, or more pages of information. It shares an in-depth picture of the company. The most sensitive information is usually held back until later in the process. For example, customer names. The CIM is only provided to those prospective buyers who have gone through a first round of vetting and have signed an NDA. Additionally, CIMs are sent out only with your approval. Potential buyers may have gotten through the first round of vetting, but you may learn something later that takes them out of the running. You may not be interested in selling to them for one of many reasons.
The Buyer Pool
Discussions can start early about the potential types of buyers. These include an individual, a competitor, a private equity group, or others. You want a broad potential pool of buyers, but you also want to consider your specific company, industry and other factors that might identify one type of buyer as a better fit for you than the others. This might be the highest price possible. It might not be the highest price. You may have other criteria when it comes to the sale of your company and legacy. For example, it may come down to, in part, who you find compatible. You will be working with a buyer through a lengthy process of negotiations and, most likely, months or more of a transition period.
Screening Potential Buyers
As I note above, the broker is routinely screening potential buyers. At the outset, you want to know that they have the financial capacity to do the deal, before wasting too much time. There is a lot of communication back and forth, providing opportunities to continue the vetting process. Learn about the buyer and their plans should they buy your company. Issues may arise that move you to stop negotiations.
Don’t go it alone. Engage with an exit strategist for preliminary discussions to better understand the process and what lies ahead – before you act. There is no end to what you could do for value creation. It will take time or money, likely both.
Get your advisory team in place as early as possible. Even if they are not all engaged immediately, identifying them early on will help move more quickly when needed. This will also help them function better as a collaborative team on your behalf. In addition to your exit strategist and broker, the key members of this team include: a business and transaction attorney, your CPA, your financial advisor, business consultants in a variety of subject areas, and more.
Negotiations, the LOI and Getting to the Closing
Regardless of what can be dozens of pages of information, buyers will have clarifying questions. And then they will have clarifying questions about the questions you already clarified. Your broker’s job is to be thorough, providing everything that is appropriate. Also, to efficiently bring the discussions to a head by asking for the LOI (Letter of Intent).
At this point potential buyers should have what they need to write an LOI. This is a non-binding, but good-faith, outline of what their offer and terms will be.
The LOI is not just a price. It should include the price, how much at closing, any portion for which they request you take a loan note, any transition period, earnout expectations, etc. With your team, especially with your attorney, you should identify a list of specific items that you will ask the potential buyer to address. You should also expect that they will include contingencies and caveats you will need to accept, reject, or counter. The potential list of these contingencies is unending. It is best to address everything up front to identify potential deal breakers or points of negotiation early on.
Don’t rush your response. This needs to be reviewed thoroughly with your advisory team.
You may get more than one LOI. This is a good situation in that you have competition. You now can compare them and go back to each one to request changes or improvements. The next step is to enter exclusive negotiations for a period of time, perhaps 60 days. The buyers will request this. You will choose one to move forward with, letting the others know you may come back to them if the first one does not work out.
Your team will now work quickly to iron out many details and the buyer will then submit a purchase agreement with related documents. Again, a lot of back and forth to negotiate issues big and small. Your attorney and advisory team need to fully weigh in again. With both sides in agreement, you will head to the closing table and watch that wire arrive in your bank account! You will have gone from thinking about “selling my business” to “sold!”.
What You Are Doing Throughout this Time
You need to be available as needed for the sale process, but your advisory team will minimize that time so you can keep working on value creation and solutions to problems.
Options: It may not look like the exit strategy or succession planning you envisioned. Your transition may be that traditional sale to a third party, but there are many other options that may be a better fit with your succession planning and transition goals.
David Shavzin, M&A Advisor / Exit Strategist
Business Sales, Value Creation, Exit Strategy
Founder and President, The Value Track, Atlanta, Georgia
Co-Founder and Past President, Exit Planning Exchange Atlanta
770-329-5224 // [email protected] // LinkedIn