Are you looking to sell your business? There are a few things you need to do in order to make sure the process goes as smoothly as possible. In this blog post, we will cover the basics of selling a business and provide some tips to help you get started.
Here are a few things to keep in mind when you're preparing to sell your business:
Phase 1 - Preparation
Prepare Yourself
Selling a business is a Big Deal. You are only going to sell your business once, so it's not something that you should take lightly. However, there are many things to think about and prepare for. Here are a few things that a business owner should keep in mind when preparing to sell their business:
First and foremost, business owners need to understand why they're selling their business. What are their goals and objectives? What do they hope to achieve by selling their business?
Once they have a good understanding of their goals, they can start thinking about potential buyers and what type of buyer would be the best fit for the business, its employee and exit goals.
Another important consideration is timing. When is the right time to sell? Businesses go through ups and downs, so it's essential to time the sale of the company carefully. Owners need to think about things like market conditions, business performance, and the economy's overall health before making a decision.
Business owners need to be realistic about the value of their business. They should consult with experts (such as appraisers, accountants, and lawyers) to get an accurate estimate of the company's value. Once they have realistic expectations, they can start negotiating with potential buyers.
Finally, Business owners should create a plan for what they will do with their newfound free time and sudden wealth. By taking these steps, business owners can ensure that they are prepared for what comes after selling their business.
Make yourself redundant
When business owners look to sell their company, it is advantageous to delegate responsibility to the management team. This sends a clear message to potential buyers that the business is being run professionally and a strong leadership team is in place. A good management team can help attract buyers who are looking for a turnkey operation, and it can also help increase the company's value. In addition, delegating responsibility can help ensure a smooth transition after the sale, as the management team will already be familiar with the business's day-to-day operations. Thus, delegation is an essential step for any business owner preparing to sell their company.
Do some housekeeping
When selling a business, it is crucial to tidy up any legal or financial matters that may be outstanding. This will help to ensure that the buyer is getting a clean business, free of any potential liabilities. It will also help put the buyer's mind at ease, knowing that they are not taking on any hidden risks. In addition, tidying up these matters will help to facilitate a smooth and speedy sale. Buyers are often more reluctant to purchase a business if they perceive any legal or financial risks. By taking care of these matters upfront, you can help to make the sale process much simpler and less stressful for everyone involved.
Unlike other transactions (e.g. selling a car), one of the most important aspects of selling a company is full disclosure. This means that potential buyers must be made aware of all aspects of the business, both positive and negative. There are several reasons for this:
It ensures that buyers are fully informed about what they are potentially purchasing. For example, the buyer may unknowingly assume debt or liability for unknown environmental hazards.
It helps protect the seller from any legal liability that may arise from misrepresenting the business. Buyers will protect themselves via the purchase agreement from unforeseen risks within the company, which the seller might be liable for post-acquisition if there wasn't a proper disclosure process.
Full disclosure is always in the seller's best interest when selling a company. Sellers are required to disclose any material information that could potentially affect the company's value. However, even beyond legal requirements, full disclosure can help to ensure a smooth and successful sale. Buyers are often wary of hidden liabilities or undisclosed problems, and a lack of transparency can quickly erode trust.
Furthermore, full disclosure allows buyers to conduct due diligence with confidence, ensuring that they clearly understand the business they are acquiring. In the end, both parties benefit from a transparent and honest transaction.
Identify the potential buyer
When selling a business, it is essential to identify who the buyers are and understand how they will assess value. The most likely buyers are either strategic financial buyers. Strategic buyers will be looking for a business that can complement their existing operations. They will assess value based on the potential synergies between the two firms. On the other hand, financial buyers are primarily interested in the business's financial performance. They will assess value based on profitability, cash flow and growth potential.
With this information in hand, the business owner can then take steps to prepare their company for sale, such as implementing strategies to boost profitability or increase revenues. By taking the time to understand the needs of potential buyers, business owners can maximise the value of their company and create a more competitive sales process.
Business valuation
Before selling a business, understanding a firm's value is a vital step for several reasons:
Valuations and valuation drivers are often misunderstood, and valuation expectations are frequently too high. Therefore understanding the value of a business will help set expectations and help determine when to sell.
A business valuation can help determine the fair market value of the business, which can be helpful in negations with potential buyers.
It can also help identify any potential red flags that could impact the sale price of my business.
A business valuation can provide insights into the most valuable aspects of a business, which can help develop a sales strategy. For example, recurring revenue. or EBITDA
Businesses are typically valued based on their earnings potential. Investors want to know how much profit a company is likely to generate in the future. This can be difficult to predict, but two of the most common methods are based on either revenue or earnings before interest, taxes, depreciation, and amortisation (EBITDA).
One useful metric is recurring revenue. This is revenue that a company can count on regularly receiving, such as monthly subscriptions or annual contracts. Recurring revenue is so valuable because it provides a reliable stream of income that can be used to finance operations and growth. In addition, businesses with high levels of recurring revenue are often less reliant on external factors, such as the economy's health, that can impact profitability. As a result, companies with good growth and strong recurring revenue streams (e.g. Tech companies) are valued this way.
On the other hand, EBITDA is a measure of a company's profitability and a more traditional valuation approach. EBITDA is often used as a measure of a company's financial performance because it provides a clear picture of the company's earnings before the effects of taxes, interest, depreciation, and amortisation are taken into account. This makes it an ideal metric for comparing and benchmarking different companies across industries. Furthermore, EBITDA is easily calculated from a company's financial statements, making it a convenient metric for investors to use. Finally, EBITDA is a good predictor of cash flow.
Ultimately, a business valuation is an essential step in selling a business. It sets management expectations, allows business owners to avoid selling below their market price and finally allows leadership teams to determine the drivers of value in their business.
Timing your sale
Businesses are like other business assets - their value changes over time. Therefore, timing is one of the most important factors to consider. If you sell too early, you may not get the full value of your business. On the other hand, waiting too long to sell can be detrimental as business growth declines with age. The key is to sell when your business is at its peak value. This requires a careful analysis of your specific situation, including market trends, financial stability, and personal goals. With careful planning, you can ensure that you time your sale perfectly, maximising your business's value and your chances for success.
How long does it take to sell a business?
When selling a business, there is no one-size-fits-all answer. The timeline can vary depending on several factors, including the type of business, the economy, and the agility and motivation of the different parties.
However, it takes most companies about six months to find a buyer and complete the sale. Therefore, it's essential to have patience and realistic expectations.
Phase 2 - The Sale Process
The Business Sale Process
Once management and the business are prepared for sale, the actual sales process is relatively straightforward. First, create the required marketing materials to sell your business (a teaser and information memorandum).
Then approach potential buyers, sharing the teaser as necessary. As discussions continue, an NDA is signed with interested parties, and sellers can share the information memorandum. Discussions continue until an offer is made, which is then negotiated, and if agreed, it is signed and the company sold.
Buyer List
A buyer list is a list of potential buyers that a company may potentially be interested in when pursuing a merger or acquisition. Ultimately, creating a buyer list is to help make the process of finding a suitable buyer for a company's products or services as smooth and efficient as possible.
The list creation process is iterative. Start by identifying companies with a good strategic rationale to acquire the target business. This may include companies in the same market or enterprises expanding into new markets and geographies. Filter and eliminate companies on the list that are either too small, have no cash/credit facility and those with limited M&A experience.
Marketing Materials
The Teaser
A teaser is a short, concise document that provides potential buyers with an overview of a business being offered for sale. The purpose of a teaser is to generate interest in the company and attract buyers who are qualified to purchase it. A well-crafted teaser will provide enough information to pique the reader's curiosity without disclosing too much about the business. The ideal length of a teaser is 1-2 pages, and it should be free of any confidential information. When done correctly, a teaser is an effective tool in selling a business.
Usually, as a broker led M&A process, the teaser is shared before a non-disclosure agreement is signed. Therefore they are often anonymised, e.g the name of the company for sale is replaced by a code name.
Information Memorandum
A business information memorandum (IM) is a document that provides potential buyers with an overview of a business being offered for sale. The IM should provide key information about the company, including its history, financial performance, products and services, competitive landscape, and current ownership structure. In addition, the IM should explain why the business is being sold and what the buyer can expect to gain from the purchase.
The IM is a confidential document and is only shared with potential buyers who have been qualified and have signed a non-disclosure agreement. Nevertheless, the IM plays a vital role in helping to facilitate a successful sale by giving buyers enough information to determine whether they are prepared to invest.
Once an IM has been shared the next step is to conduct management meetings with a small subset of interested buyers so they can ask questions (conduct high level diligence) to help them develop their investment plan and a potential offer.
Letter of intent (LOI), Heads of Terms, Offer
A "heads of terms", "letter of intent", or "offer letter" is a short document that sets out the key points agreed upon between the buyer and seller. The document is used to record the main commercial and legal points between the parties and can be used as a template for the more detailed contract of sale.
Typically, heads of terms will include:
Information on the purchase price.
The structure of the deal.
The basis for the valuation.
Specific accounting terms and definitions.
How the deal will close (completion accounts locked box)
Plus, any conditions that must be met before the sale can be finalised.
Remember this is a negotiation, and as a seller, it is your opportunity to negotiate the principal business sale terms you are looking for.
One of the most important aspects of the heads of terms is the exclusivity clause. This clause ensures that both parties are committed to the deal and will not engage in discussions with any other party during the negotiation process. Without an exclusivity clause, one party could continue to negotiate with other potential partners, leading to delays or even the deal's collapse. Therefore, an exclusivity clause is standard in heads of terms agreements.
Note: It should be possible to complete due diligence and agree on the purchase agreement within 90 days of signing the offer. Therefore 90 days should be the maximum exclusivity period sellers should agree to otherwise, the risk is that the deal will take a long time to complete.
The heads of terms is not a legally binding document (except for the exclusivity clause), but it can help to prevent disputes and misunderstandings later in the process. By drafting this document at an early stage in the negotiations, both parties can be sure that they are on the same page regarding the key terms of the deal.
Top Tip: A legal firm will be required when negotiating the final purchase agreement. Legal firms typically quote for the work based on the offer (Heads of Agreement/LOI). As offers to acquire your business are received, it is an appropriate time to start contacting legal firms for a quote. As part of the process to win your custom, they should be willing to provide free legal feedback on any offer's received.
Deal Structure
In any business transaction, but particularly in mergers and acquisitions (M&A), the term "deal structure" refers to how a particular transaction is put together. That includes the financial terms of the deal and which party will take on what risks and rewards. In an M&A transaction, the structure can significantly impact whether or not the deal is successful.
Several factors go into designing a good deal structure, including the requirements of the parties involved, the tax consequences of the various options, and the overall goals of the deal. Therefore, the proper structure for you will depend on your specific circumstances.
The most common deal structures are all-cash deals, stock deals, earn-outs and asset sales.
In an all-cash deal, the buyer pays you the full purchase price upfront in cash. This is typically the most straightforward type of deal.
On the other hand, a stock deal (partial sale) involves the buyer acquiring the shares of your company's stock.
An earn-out deal encompasses staged payments: an up-front payment followed by subsequent payments that are contingent on the sellers meeting certain milestones after the sale.
And finally, in an asset sale, the buyer acquires only certain assets of your business, such as your product line or customer contracts.
Each type of deal has its advantages, disadvantages and tax consequences, so it's important to carefully consider which type of deal is right for you.
Tax advice
Before signing an offer agreement, it is important to get tax advice to minimise the amount of tax you will have to pay. This is because different deal structures may involve different rates of tax. A tax advisor will help you understand the tax implications of a deal and can suggest structures to minimise your tax liability. Remember, structures that are advantageous to buyers may be punitive to sellers. Therefore you will have to negotiate the deal shape with the buyer. It's worth getting the tax advice, and bigger legal firms will have a tax team who can provide guidance.
Phase 3 - The Offer, Due diligence and Completion
Once an offer is negotiated and signed, the final two steps are due diligence and agreeing on the final sales and purchase agreement.
Due diligence
Due diligence is the process of investigating and verifying all aspects of the business before the completion of the sale. This includes financial audits, legal reviews, and investigations into the business's history, intellectual property, operations, and prospects. The due diligence process helps to ensure that the buyer is fully informed about the company and that all potential risks have been identified. It also helps to protect the seller from any future legal liability. The due diligence process can be detailed and time-consuming, but it is essential for ensuring a smooth and successful sale.
Sales and Purchase Agreement
A sales and purchase agreement (SPA) is a binding contract that legally sets the terms of a proposed transaction between a buyer and a seller. The SPA typically covers the price and timing of the sale, the allocation of risks and liabilities, and any pre-closing conditions that must be satisfied. The SPA is typically negotiated between the parties' lawyers and business brokers and then signed by the Owners or other senior executives acting for shareholders. Once executed, the SPA becomes binding on both parties.
Getting advice (business broker)
If you're considering selling your company, you may be wondering if you need to hire a business broker. While business brokers can be a valuable resource, they're not always necessary. If your company is small and relatively simple, you may be able to handle the sale yourself.
However, hiring a broker may be the best option if your company is larger or if you want to keep the process anonymous, you don't have the time or expertise to manage the sale process.
Business brokers are experienced in negotiating sales and can help you get the best possible price and terms for your company. They can also provide valuable advice on preparing your business for sale and navigating the legal aspects of the transaction.
Ultimately, whether or not to hire a business broker is a decision that should be based on your company's specific needs.
In Summary
When the time comes to sell your business, you want to get the best possible price. But how do you ensure that you get top dollar for your company? Although there is no surefire formula for success, there are several steps you can take to increase the likelihood of a successful sale:
Be prepared and optimise the sale to maximise your value.
You need to do your homework and research the current market value of similar businesses. When approaching buyers, create a professional and polished appearance. This means preparing a well-organised presentation covering the key elements of the company.
Be prepared to negotiate to get the best possible price and structure for your business.
You can give yourself the best chance of getting top dollar when you sell your company by following these tips.
About Lighthouse Advisory Partners
Our team of M&A experts has a wealth of experience working with strategic and financial buyers. We'll work with you to understand your goals and objectives and then help you find the right buyer and get you the best deal for your business. Contact us today to learn more.