April 09 , 2020
Selling your company is a complex process. As such, finding the right buyers to achieve maximum value can be challenging. However, the more you know about the process, the more seamless and effective it can become. Hiring the right people to help you is very important even for the most astute business owner. It takes emotion out of the equation or at least reduces it.
There are really four key components to consider involving value, consultants, presentation, and confidentiality:
This will help you set a fair asking price for the company that is “in the market” as opposed to “on the market” or “out of the market”. The latter two will cause your business sit with little to no interest. It will also help you understand what you can reasonably expect in terms of offers and understand cash proceeds you might receive. This is critical when negotiating offers presented from potential buyers.
An offering memorandum (OM) will be developed by you or a broker that uses this value and your companies’ performance to support value. There are other things involved in an OM as well such the reasons for selling business, pro forma expectations, opportunities, assets, proposed deal structure, etc. After reviewing, an interested party may then submit a Letter of Intent (LOI). Through this LOI a high level understanding of the deal structure, price, due diligence period, etc. are agreed upon. A buyer may then seek additional detailed information to conduct his/her due diligence to match the OM with reality. Once complete additional negotiations may take place and/or a purchase and sale agreement can be drafted and signed.
This represents an overview of the process for small to mid-sized, private companies. This process is much more complicated for publicly traded companies.
An accurate valuation of your business and an understanding of how it was determined are critical pieces of information to have prior to proceeding with a sale of your business. Ideally, the business valuation should go hand-in-hand with an Exit Plan but more commonly does not for various reasons. I have found business owners do not seek to understand the value of their business unless and until an event such as a divorce, a sale, a shareholder dispute, etc. prompts them to do so. This is a mistake. Exit Planning is beyond the scope of this article but something every business owner should consider.
When it is time to sell, it’s important to align yourself with a broker or transaction advisor that will consult with you during each step of the process. Again, this process goes from asking price, to presentation, to offer evaluation, to negotiation, to contract, to close. This person should be very familiar with the current state of your business, the operations, the financial performance, the value, and the industry. This will be critical when having initial discussions with suitors or when seeking referrals for legal and tax advice.
Potential suitors or qualified buyers will want understand that your company is worth your asking price and/or that your asking price is “in the market”. Generally, it’s not enough to have just a calculation based on “rule of thumb” multiples. A buyer will generally do their own valuation, so when negotiations take place, numbers are at the forefront. A justified multiple, or capitalization rate, based on more granular analysis is very important. Profitability and cash flow obviously are critical.
A justified and accurate valuation of your business and its assets, such as real estate, protects everyone. The valuation should provide a range from which to make decisions. Aspect of your business like the markets, intellectual property, financial statements, management team credentials (especially non-owner), customers, vendors, employees, and compensation all play into the value and ultimately the transaction. All these things must be demonstrated in as transparent a manner as possible. The accuracy of your materials and value saves precious time in the negotiation process.
Confidentiality is critical and ties in to number 3 above. Diligence in your materials helps ensure that negotiations will end successfully and a pending sale will close. However, in the event that they are not successful, confidentiality will help ensure employees and customers, and thus your business, are not disrupted via morale, performance, and other job security concerns real or otherwise. Competitive aspects come into play as well. A Non-Disclosure Agreement (NDA) should be signed by prospective suitors. An experienced business attorney should draft a strong NDA to protect your interests.