WHAT'S NECESSARY TO SUCCESSFULLY SELL YOUR BUSINESS?
The decision to sell your business is a landmark event, whether you are an entrepreneur, the owner of a family business or a business owned with partners. The skills used to build and operate a successful business, however, are different than those necessary to achieve a successful sale.
UNDERSTAND VALUE AND PRICE
When considering how to sell a business, what steps should you take to ensure that it is a success? One key consideration is to position the business to achieve its maximum value. However, this should not be the only consideration. Sometimes, obtaining the maximum value does not result in a successful sale. If your goal is achieving the highest price, (see our valuation guide) simply having impressive historical revenues and operating results is not the only, and sometimes not even the most important, in accomplishing your goal.
So, what are the key steps to achieving a successful sale?
FOCUS ON YOUR BUSINESS
It is critical that you and your management team remain focused on operating your business and building on its existing success (unless you are selling a distressed business, and the considerations involved in those types of sales are different and not the focus of this article). Owners and management teams should operate their business without regard for the possibility of sale. Potential buyers look at trend lines in your business operations. Any drop off will discourage offers or adversely affect valuation and the terms of the transaction. A sale can never be assumed.
ASSEMBLE A TEAM OF EXPERTS
It is important to have a team in place with the expertise to ensure a successful sale of your business. This team needs to include both members from the business as well as outside professionals. The business team should include the chief executive and others familiar with the business financials, and members of the business possessing knowledge and expertise about the business’ operations, assets, and liabilities. Although key personnel should be included, the internal team should be limited in number and how much of their time is required of them. You do not want the operating management team to lose focus and be distracted from their day-to-day focus on operating the business.
MERGERS AND ACQUISITION EXPERIENCE
Outside professionals who are critical to the sale process include experienced mergers and acquisitions advisors, legal, finance, accounting and tax professionals who know the potential buyers, the current market and your industry and are experienced in structuring and negotiating mergers and acquisitions transactions. Experienced professionals come at a cost, but the value of their contributions generally exceeds their fees, both by ensuring that you get the best price (and get to keep it), and by ensuring that the process goes forward to closing on terms that satisfy the needs of both you the seller and the buyer.
Entering the sales and negotiations process with an experienced buyer without your own experienced team of professionals is like going into a gun fight armed only with a knife. The legal and accounting professionals best suited to assist in a sale may be different from the legal and accounting advisers you employed when starting and operating your business. It is important to understand that the sale process requires a specialized mergers and acquisitions skill set that may be different than that of your existing advisers.
REMAIN PROACTIVE AND ORGANIZED
Ideally, your transaction team should develop and implement a plan before the sale process begins. This plan should include reviewing your business (see our checklist) to the extent relevant to your business and industry. In addition, your review should include organizing all the material that will become part of a buyer's eventual due diligence process ahead of time so as not to further distract your management team during the often-emotive experience and intense time constrained process of selling the business from their day-to-day roles and responsibilities.
The next step following your review is to consider what changes or additional documentation may be required, whether to maximize value, eliminate due diligence concerns, address risk or otherwise better position the business, not only for sale but to improve its business operations.
UNCOUPLING FROM YOUR BUSINESS
Privately owned businesses sometimes intermingle personal and business assets and liabilities. These should be uncoupled prior to sale, as well as any assets or business segments that will not be included in the sale.
ACCURATE, RELEVANT AND TIMELY REPORTING
Financial books and records are of particular importance. The gold standard is audited financial statements which provide assurances to third parties that the financial position and results of the business have been accurately reported. However, many lower-middle-market sized businesses do not have, or need for their current operations, audited financial statements.
The books and records should, at minimum, be prepared and maintained in a manner to permit an audit in compliance with accepted accounting principles and support and pass a quality of earnings evaluation conducted by your potential buyer. Many buyers base their valuation of a business on its adjusted earnings (removing extraordinary, non-recurring items) before interest, taxes, depreciation, and amortization (EBITDA).
Having the technical ability to produce monthly interim statements by work day seven of the preceding month becomes important as your selling is underway and the other parties buying process experiences delays (such as a pandemic) to allow you as seller to continue to provide transparency into the businesses ongoing successful execution and performance month over month to the forecast or projections presented in the marketing documents (referred to as the Confidential Information Memorandum) created by your sell-side Mergers and Acquisitions advisors.
REAL ESTATE IS ANOTHER BUSINESS
Real estate is often a principal element of a more complex privately owned business group. Not all operating business buyers want to buy the real estate and may prefer to lease the premises going forward. Sometimes owners will seek to separate the real estate from the business sold. Likewise, a real-estate buyer may be interested in the real estate separately from the operating business.
It is important to have a team in place with the expertise to ensure a successful sale. The skills used to build and operate a successful business, however, are different than those necessary to achieve a successful sale.
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