What You’ve Wanted to Know About Selling a Company: “The Process”
One of the most overused words by Business Brokers, Consultants and Exit Planning Advisors is the word “Process”, also known as the “Lifecycle” of selling your business. Let’s take a look at what this process/lifecycle encompasses and all the challenges along the way for a lower middle-market or “Main Street” company.
Selling a business involves a number of steps, it takes time (sometimes 9 – to as much as 18 months or more) and for the business owner, it is emotionally and psychologically draining. The most important aspects of this experience though, are confidentiality and patience. Simply, tell no one what you’re doing… and take a deep breath.
Selling a Company : ” The Dance of a Buyer and a Seller”
The graphic below and following descriptions illustrate the Lifecycle of successfully selling a company and the challenges and steps each owner will experience. At the end, this “process” becomes a “dance”, if you will, between a business’s seller and a potential buyer.
Long in duration, grueling emotionally and psychologically, this “dance” can become exhausting and extremely frustrating. Oftentimes you wonder…is it worth it? Just be cognizant of these steps and remember patience, …and tell no one what you’re doing.
The Steps in a Successful Transaction:
The first step is deciding what you want to do – the sale and successful exit of your business. Next, consider what you eventually want to end up with, that is, where would you like to be financially and emotionally the day, weeks and years after the divestiture. And finally, how will you go about selling your company – your marketing plan that identifies prospective buyers, the buyer screening and buyer interviews, your pricing and the limits to your terms and conditions that are acceptable. If you have an Intermediary/Broker, together you can discuss your objectives and create a plan of action, from there, the Intermediary will do the rest. Just remember, managing and experiencing the sale process can take a considerable amount of time. Especially, if you do this yourself.
2. Valuation: Evaluating and Valuing the Business
If you work with a Broker/Intermediary or do this yourself, dispassionately look at your company. What would you pay for it? Time to be honest, what would you – really – pay for it? You need to realistically value your business.
First, start with a financial analysis; The essential number discovered is Seller’s Discretionary Cash Flow (“SDCF”) or more commonly referred to as “adjusted” EBITDA. It is the “science” of a valuation.
Buyers want to know how and where your company makes money. They are buying a business’s cash flow! Cash flow that is stable, through time sustainable, and with proper management, scalable. That is why crystal clear, up to date financial statements are so important.
Applying a multiple: If there is an occasion in the valuation process where the title “art form” exists, it is the application of a multiple to the cash flow. The “multiple” will factor into account all of the “value drivers” a buyer considers, as well as discounting all the negative aspects of the company that are perceived. By nature it is subjective and the beauty, or value, is in the eyes of the buyer.
Remember, the company is worth what a buyer believes they can make with it, not what you think they should make.
Although cash flow is king and the principal metric, the management team, management systems and front line staff are critical elements that enhance the value of your company. Cherish your key and exceptional employees.
3. Client Review and Engagement
If you feel comfortable with the valuation and costs of going-to-market, the grueling journey of marketing and meeting buyers – it’s time to say – “let’s go”.
For many business owners, the sale of their company is not just the closing of a long journey, but the most important business decision and personal “liquidity event” – of a lifetime.
4. Marketing Materials Produced:
The initial step is the creation of public marketing materials, that includes “blind ads” for social media sites and a Confidential Business Review (“CBR”), or Offering Memorandum (“OM”), for a serious buyer. The CBR or OM should address all aspects of the business, including the financials, complete story of the company, infrastructure of employees, marketing initiatives and general company information, as well as all the items that will be included in the transaction. This document contains the important facts and history of the company, an industry opportunity assessment and should include the last 3-5 years of tax return information, or yearly P&L’s and balance sheets.
Identify and target who your probable, and/or best buyers may be. Generally, they come from three groups, Strategic/Synergistic Buyers, Investment Groups, or Individual Investors/Entrepreneurs. Knowing your buyer and their motivation for the acquisition becomes critical to understanding how a market perceives value. Simply, some buyers will pay more.
5. Confidentially Creating Buyer Interest
The marketing initiative will utilize a “blind ad” that is posted on various web sites and additionally, may be offered by your Intermediary directly to selected, pre-qualified buyers. The focus is to generate “market” interest. There should never be mention of the company name or its precise geographic location in a “blind ad”. When interested parties respond, and a Non-Disclosure Agreement (“NDA”), or Confidentiality Agreement (“CA”) is executed by the buyer, the Business Review (Offering Memoranda) can be extended. Only then. No exceptions.
Throughout this journey, confidentiality is critical to the success of selling your company. A Business Broker’s/Intermediary’s job is to handle the process’s noise and you as owner – to manage and operate the company aggressively, until the very end of the lifecycle, the closing table… that is, until documents are signed, money has been exchanged and hands are shaken.
6. Buyer Screening, Meetings and Negotiations:
This step is where a Business Broker is treasured for the screening, assembling, and massaging of various buyers.
The aim is to gather an audience of interested parties that induces an atmosphere of buyer tension.
The result – is the best possible offer for a seller.
Screening: When there are company inquiries, your Intermediary will screen interested buyers. They must possess both the skill sets to operate the business and the capability to finance the acquisition. If financing is involved (and there usually is) financial institutions too will investigate – beside a company’s cash flow durability – the buyer’s character and professional background, capability for capital, conditions in the economy, the current market space for this business and the quality of any buyer collateral.
Remember, the construction of a business sale oftentimes involves three principals – the seller, the buyer and the buyer’s banker.
The Dance Between the Seller and a Buyer Begins.
Meetings: After the reading and consideration of the Business Review is completed, and if the buyer still has interest and wants to move forward, a meeting or teleconference with the buyer and seller is arranged.
Negotiations: Once conversations between the buyer and seller open, and if necessary an inspection of a facility occurs, and the buyer is impressed enough to proceed, they offer for consideration a “Letter of Interest” or “Letter of Intent”. Here the buyer and seller consider and mutually agree to pricing, terms and conditions.
“Letters of Interest” are usually submitted for lower middle market and middle market acquisitions which eventually lead to a Letter of Intent. The non-binding Letter of Interest just outlines, in general, pricing, terms and conditions the buyer would like to extend if the information presented proves, upon further review, to be accurate.
“Letters of Intent” are submitted to express a serious intention. Then in addition to mutually agreed pricing, terms and conditions, all the contingencies the buyer would like to investigate during “Due Diligence” are itemized. This information request can be substantial both in number of items and complexity, so be prepared, relax and just know you will work through it – each item and each step at a time.
7. Due Diligence: Working towards a “Definitive Agreement to Purchase”
The purpose here – after a Letter of Intent (“LOI”) has been submitted, mutually agreed upon and signed – is to work toward the writing of the final “Definitive Agreement to Purchase” that is executed at closing. The attorneys for both sides assemble the items outlined in the LOI and incorporate them into a mutually agreed, binding Agreement to Purchase.
In Due Diligence, a buyer with his advisors investigate all the conditions and contingencies of the business outlined in the LOI. A checklist and better yet, a time-line for each item’s accomplishment is often supplied by the seller’s or buyer’s attorney and crossed off as each item has been examined. It is helpful to have a series of “sign-offs” for the buyer to document as each contingency is assessed and completed to their satisfaction.
Keep one thing in mind, lawyers, accountants and business advisors are paid by the hour. And some, unfortunately, feel they are hired to “win” a deal. Carefully monitor the time and expenses. You are not crafting the Magna Carta.
Beware: Due Diligence is the stage in the transaction process where most deals fall apart. Buyers and sellers become exhausted and frustrated and just say – “enough”. A buyer becomes uncomfortable with discoveries or perceptions change. A seller grows tired and irritated from repeated requests for information. Make sure everyone understands the objective and works toward the goal – a mutually agreed upon and signed agreement. Patience is required.
8. Successful Closing:
When all the above steps have been successfully taken, and all contingency items agreed to and documented, a Closing Meeting is scheduled. There, agreements are signed, money exchanged and hands are shaken. Done. Both parties depart smiling. An adventure for the new owner begins and the financial liquidity event of a professional lifetime – rewards the seller.
The Music Stops, The Dance Ends.
One Last Consideration for the Seller:
Prepare yourself for new adventures without the business and particularly all the people who became an integral part of your professional and personal life each and every day. Sometimes that is the hardest step to take in this divestiture journey – leaving the people who helped make it happen. Think through what direction you want your life to go – post transaction, and enjoy all the new experiences to come.