Preparing Your Business for Sale
Selling a business is a long and complicated process that requires a lot of planning well before the actual sale mandate begins. Often sellers find it difficult to decide where to begin, which is why we have summarized the process and highlighted important aspects of it below.
The most important thing is to decide whether you are ready to sell the business in the first place. Often sellers get cold feet during the final stages of a deal, simply because of the uncertainty that comes after the sale of the business. We understand that it is not easy to let go of a project that you have nurtured for the better part of your life. In order to prevent this psychological barrier at a later stage, it is important to have a clear plan about the future. Having the right plan, using a trusted broker, and preparing the business for sale will increase the likelihood of finding the right buyer whose vision and goals for the business align with yours, thus reducing uncertainty.
Once you have decided to sell the business, it is important to start preparing the business for sale. Some key considerations are as follows:
- Maintaining Sales Growth and Performance: It is important to ensure that the business is doing well and that sales are on an upward trend with healthy margins. A growing business is valued at a higher multiple and attracts strong interest from buyers. If you are planning on selling your business, it is preferable to not pursue any major pivots in the strategy that would impact sales performance. If the business has been in decline, it is important to make strategic investments well in advance of a sale and demonstrate a recovery as a result of those investments to attract buyers.
- Getting Organized: Whether you are preparing for a sale or not, it is important to be organized. The sale process will require you to provide documentation to support the information provided.. The business must have its financial books and records in order and have proper accountant prepared statements. In addition, it is beneficial to have all tax filings, bank statements, invoices, leases, minute books, various contracts, and other corporate documents organized and ready as they will be required during due diligence.
- Creating a Succession Plan: Businesses that are too dependent on owners and do not have a succession plan are harder to sell. Buyers want to make sure that the business can function independently without the sellers being present on a daily basis. Identifying and grooming key employees to take on managerial roles goes a long way in a successful business sale. In addition, it is helpful to have process manuals, workplace safety policies, HR charts, and other documents that add structure to the organization and its processes.
The sale process can be long and exhausting. It is important to know what to expect and be mentally prepared. It is important to also know that many businesses that are on the market for sale do not end up being sold. Taking the right steps to prepare the business for sale can help in increasing the likelihood of a successful transaction. The entire sell-side M&A process can take anywhere between six to twelve months on average and sometimes even longer. Throughout this period, sellers can expect to receive a list of questions and requests for additional documents to support due diligence. The process can be overwhelming at times and therefore it is recommended that sellers hire professional M&A Advisors that can assist through the entire process. In addition, having a lawyer and accountant that bring transactional experience can help get the process moving along.
Valuing your Business
In order to set the right price, an accurate, up-to-date, and realistic valuation of the fair market value of the company is required. Below we highlight key steps in the valuation process, as well as common pitfalls to avoid.
What is the Value of Your Business?
A valuation can be considered an art as much as it is a science. There are several methods of valuation that all provide accurate representations of business value in comparison to similar companies, based on the intrinsic value of the company, or as a reflection of previous earnings. All methods provide different valuations, and a suitable combination of them depends on the industry and company.
Common methods include multiples of earnings, comparable sales data multiples, and discounted cash flow analysis. The multiples of earnings approach to valuations take a key earning metric from the income statement, such as net income, operating income, earnings before income, tax, depreciation, and amortization, and multiplies it by a value (called the multiple) to come to the total value of the company. This multiple can be determined through risk analysis, industry standards, or from experience.
The comparable company approach to valuation takes similar companies, based on revenues, industry niche, or supply chain, and determines a suitable price for the company based on the selling price of its comparable peers. This approach compares a company’s performance to its peers, however, it can lack the accuracy of the other valuation methods as no two companies are exactly alike.
Lastly, the discounted cash flow analysis approach determines a company’s value through the present value of future expected cash flows. This approach is purely intrinsic and thus can leave important information about the company’s competitors and industry out of the equation. Also, while focused on the future performance of the business, compared to the other two methods that look back at history, the DCF method is difficult to achieve accurate results for small companies as discount rate as well as future performance for such businesses is notoriously difficult to predict.
Although each measure has its own pros and cons, they are best used in tandem with each other. The combination of these approaches depends on the company itself. Considering a deeper look at the nuances of various valuation methodologies is essential in achieving an accurate valuation.
A Guiding Principle
Valuation is a guideline for the actual negotiations of a sale. The final transaction price is often different due to a variety of factors, including transaction structure, macroeconomic factors, and owners/buyer preferences. A common mistake when looking to value a company is an unrealistic expectation of value. Owners may have unrealistic or biased opinions on potential growth, or a misunderstanding of the valuation process is. Buyers may overvalue synergies or have higher expectations of performance, or – overestimate the risks associated with running a business and therefore devalue a business. For that reason, it’s important to remember that valuation is a guiding principle. The valuation is subject to change and is not a fixed value, and remembering this can prove essential in effectively valuing a business.
Finding the Right Buyer and Due Diligence
Once a business is prepared for sale and a valuation is completed, the next step may be the hardest – finding the right buyer. But before highlighting the necessary steps in finding this buyer, it is important to understand the various types of buyers in the marketplace.
What Kind of Buyers Buys Businesses?
Strategic Buyers – Generally the highest-paying buyer group, strategic buyers are companies that operate in the same industry or an adjacent one. Strategic buyers include competitors, suppliers, or customers. They have the objective of integrating a business into the one they currently own. They are looking for an opportunity to grow and expand their product lines and services within the same market while incorporating aspects of the acquired company.
Financial Buyers – Conversely, a financial buyer is usually a private equity (“PE”) firm or a fund with committed capital to be used for acquisitions. These buyers have defined criteria for the types of deals they will pursue. Their goal is to improve the business and exit at a point in the future to increase return on investment.
Individuals Buyers – These buyers are self-financed individuals looking to purchase and manage their own company. This group includes entrepreneurs and managers who see the business for sale as a gateway to a secure job, income, or lifestyle. Because individual buyers are least capable of securing significant financing, they are more common among small to mid-sized businesses.
An experienced M&A Advisory firm and business brokerage will generally have an extensive network of all groups of buyers across multiple industries, allowing it to solicit interest and find the right buyer for a business.
Why Hire a Business Broker for the Sale of Your Company?
Although the task is not impossible, hiring a business broker to aid in the process may help in several ways. As mentioned earlier, having a third-party value the business allows for an unbiased opinion of value and thus, allows sellers to attach a price that attracts more buyers. Well-trained business brokers also understand how and where to successfully market business opportunities to get results in the shortest amount of time. business brokers have the necessary tools to cast a wider net while maintaining confidentiality. Acting as a filter, business brokers make sure only buyers who seem genuinely interested and have the financial credibility get access to company details.
What’s Needed From a Seller During Due Diligence?
Once a buyer is selected, due diligence begins. Due diligence allows the buyer to confirm pertinent information about the business, such as contracts, financial performance, operations, suppliers and customers. Depending on what the due diligence uncovers, the purchase price set in the initial letter of intent from the buyer may need to be revisited. This can mean a complete retraction of the offer itself or downward pressure on the price. In order to avoid this, it is of paramount importance that any information initially shared with buyers can be backed up and confirmed in the due diligence process.
Deal Completion and Closing
After the due diligence period is complete and the buyers have verified all information, the process is followed by a negotiation and mutual execution of a definitive purchase agreement which is binding in nature. Once completed, the deal is official and both parties can start preparing for the transfer of ownership.