by Rafael De Paoli

Selling a business is a complex venture that involves several considerations and requires careful planning. As a seller, your goal should be to prepare the company well, making it as desirable as possible for buyers to not only drive the highest possible price but also attract the best terms and conditions.

After years of hard work, business owners often make drastic mistakes when selling their companies, losing thousands or millions of dollars in the process. These mistakes are usually easily avoidable.  

Reviewing the considerations below will help you build a solid plan to avoid pitfalls and achieve a successful sale to private equity or strategic buyers.

1. Prepare your business to run without you

In order to create a company that is attractive to buyers, you need to make sure that your business can run without you. Buyers will be much more skeptical to acquire a company if the business owner’s involvement is critical to its daily operations.

It is imperative that you hire qualified team members as soon as possible. Take time to train them well and make sure they can fulfill their responsibilities without having to rely on you. Every department should have best practices, processes and procedures that are followed rigorously. In addition, every position should be well defined with a description, specific responsibilities, and reporting structure. 

This well thought out organization is very appealing to buyers because it shifts the dependence on specific individual knowledge to a more procedural approach helping your company run smoothly like a well-oiled machine. This also alleviates training needs post closing, making any changes to personnel easier to manage.

Prospective buyers will reward you with higher offers and better terms if they feel more comfortable that there is a succession plan in place and your business can thrive without you.

2. Eliminate unknowns

Buyers tend to be risk averse and any unresolved issues can not only forestall the process, but also cause buyers to walk away since the amount of time and effort associated with getting a deal done might not be worth the trouble.

Make sure that all pending issues are resolved prior to initiating the sale process. Common problems that can impact a sale include litigations, tax audits, regulatory violations, environmental cleanups, minority shareholders, verbal agreements, expiring contracts, etc. 

If possible, purchase minority shareholder interests in advance since they could stall the sale and demand a considerably higher price for their shares later on in the process. Ensure that all business contracts are signed and in order. You should also renew any major contracts that are approaching their expiration date.

Intellectual property is another area of main concern. Work from W2 employees is considered property of the business, however, that is not applicable to work performed by independent contractors. For example, if you hired an outside firm to build a website, make sure that your rights are protected by strong development agreements. Depending on the situation, it might be a good idea to engage an IP attorney to clear up any issues before they are raised by a potential buyer.

Unresolved issues create a challenge to estimate the risk. Take time to prepare. Your advisors will also provide an outside perspective that might not be as easy for you to recognize.

3. Clean up your financials

One of the most important things when considering selling a business is to have highly organized bookkeeping records. You need to accurately track expenses in the correct category since buyers will not buy your company if they can’t fully understand its financials. 

Trimming costs leading up to a sale will increase cash flow and make your company more valuable. Seller discretionary expenses such as boats, family vehicles, optional travel, club memberships are examples of items that should be eliminated.

Work with an accountant to prepare at least three years of clean financial statements in addition to year to date results and tax returns.

4. Determine a realistic value for your business

Setting a value that is too high can deter prospective buyers upfront or result in bidders walking away after months into the process. On the other hand, business owners often price their business low because they are burned out, in a rush to sell, or didn’t receive good advice. 

Consult with an experienced M&A professional and do your own research before following along a path that could lead to an undesirable outcome. A third party valuation can help set realistic expectations about how much your business is worth. Investment bankers are well qualified to provide a price range based on their industry knowledge, access to hundreds of pre-selected buyers and relevant information about precedent transactions in your industry. 

A business is generally worth a multiple of its revenue and profit. Final price determination is derived from a range based on three distinct methodologies: public trading comparables, precedent transactions, and discounted cash flow analysis. We will discuss these valuation methodologies in more detail in a separate article.

Other company specific information is also taken into consideration when developing a final price range. For example, companies with higher margins and growth prospects will drive higher multiples than its peers in the same industry. Your banker will assist you to prepare and present a credible growth strategy to potential buyers. Conversely, customer and supplier concentrations expose the seller to higher risks, driving lower valuations. 

In summary, having an experienced investment banker assist you to determine the value of your business will not only maximize your selling price but also bring credibility to the valuation and overall process that potential sellers can rely on.

5. Find the right professionals to represent you

Selling a business is a complex task that usually involves many considerations. M&A professionals such as investment bankers, brokers, accountants and lawyers play a key role in easing the burden and ensuring a successful closing.

Attorneys and accountants are a required part of the process as they will protect the seller’s interest in the sale. Attorney’s will be involved in the preparation and negotiation of legal documents while accountants will opine on preferred tax structures and help clean up the financials prior to beginning the sale process. 

Investment bankers and business brokers will help you with the preparation and execution of the sale process. Their interest is closely aligned with the seller since their economics are tied to achieving a successful sale for the maximum possible price. 

Business brokers have different licensing requirements compared to investment bankers, which limits the scope of their role. Typically, brokers are involved in less complex transactions of $2 million or less that are structured as asset sales. Brokers generally sell businesses by listing them on multiple sites. 

Investment bankers operate in a broader range of deal sizes (up to billions of dollars) and more complex structures including not only asset sales, but also stock sales. Their selling approach is also different from brokers. Instead of listing businesses for sale on sites, investment bankers will proactively identify a list of potential buyers upfront. The list will generally include strategic buyers (other companies) and financial buyers (private equity or venture capital funds). Investment bankers provide a more comprehensive service offering including: deal structuring, business valuation, preparation of marketing materials, identification and interaction with potential buyers, as well as guidance and general support until the deal is closed.

The sale process normally takes between 3-12 months depending on its complexity, which can be an emotional venture for many sellers. Hiring an experienced investment banker has many benefits including:

  • Free up management’s time to keep the business running
  • Keep the sale process quiet to avoid any potential negative impact on vendors and clients
  • Achieve higher sale price based on proactive reach to extensive network of relevant buyers in the sector
  • Preparation of credible valuation analysis that buyers can rely on to support the sale price

If you are interested in learning more about how to prepare your company for a sale, please contact us at (203) 246-4325.

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