You’ve decided to sell your business. Congratulations – that is a big decision! But, what happens next? How do you go from the decision to sell to actually being sold?
Here are the 8 steps to sell your business
What’s your story? Just like everything in business (and life), you need a good story about why you want to sell your business. And, you need to run this by trusted advisors to get their feedback. Think through how you are going to communicate this and make it positive for the buyer. If you want to find someone who can take your business to the next level and execute your growth plans, that is a great story. Wanting to live on the beach in Hawaii may be what you want to do, but that is not the best story for the buyer.
Obtain trusted advisors. You will need to share your plans with your legal counsel, accounting firm and obtain sell side investment representation. This should begin 1-2 years in advance of when you want to sell. Why do you need to prepare your team so far in advance? There are a number of areas of your company that need to be audited to confirm that they are ready for sale. There may be things you need to do that take time, such as diversifying your client base or selling certain assets. Your trusted advisors will help you identify these.
Prepare your financials. While this seems like common sense, there is more to it than having clean financials. You may have to sell some assets that don’t look good on your financial statements to a buyer. You may need to diversify your customer base (no more than 20% of revenue from one customer). You may need to increase your EBITDA for maximum value. All of these can take time so that your trailing 12 months of financials will warrant you the highest offers for your business.
Back-up planning. Sometimes, deals don’t go through and this can happen even at the last minute. This is why you want more than one offer to negotiate. Buyers can change their mind after reviewing due diligence documents or if they engage with a different seller. Don’t count on the sale until it actually closes because moving forward before the sale closes can hurt your company.
Determine your company’s value. You will need to share your financials, growth strategy and other documentation with your M&A advisor. They will review it and provide you with a valuation range for your business. They will also point out areas that you can improve for maximum value. A typical company is valued on their EBITDA, but there are a number of factors that contribute to the value. For example, one-time costs can be excluded or high growth technology companies may be acquired for their intellectual property and market potential rather than profit. Your trusted advisors can share the due diligence documents you will need in advance and I recommend having those ready to go when you enter the M&A process.
You need to have all your documentation in order for due diligence. This means:
- All customer contracts (including all statements of work and purchase orders);
- Employment agreements (including NDAs and noncompetition agreements if applicable);
- Identification of key personnel needed for the transition;
- Intellectual property documents (patents, trademarks and copyrights); and
- Strategy documents (including growth strategy; business plan; and product roadmaps).
- Technology companies also must have their software versions and customer data backed up and easily transferable.
Employees. This is a very tricky decision – what employees need to know about your plans and when will you inform them? Typically, you will want your CFO and other executives who may be key personnel to be informed and prepared for participation in this project. However, you must be very careful because you don’t want the information leaked and you also don’t want employees to quit if something goes wrong. Also, make yourself less important in running your company. Start to transition many of the key aspects to your team. No buyer wants to acquire a company that is totally reliant on the owner. They want to buy a company of strong employees since you will be gone at some point after the transition process.
Plan on a transition. You will most likely be needed to help transition the new buyer. This can be difficult because you are not the owner anymore. But, you might have earn out and need to make the new company successful in order to receive the remainder of your compensation.
If you have an exit strategy that revolves around being acquired, start the process one to two years in advance. Obtain M&A representation early to determine your value and any steps needed to improve your position.