In our last blog post, we reviewed the steps you should take to prepare your business for a sale. Once you have an understanding of the prep work that goes into a sale, you are ready to think of these steps in getting your company sold:
Step 1 – Understand Your Realistic Range of Value
Understanding the realistic range of value for your business is critical to the process. You don’t to sell for too little but if you are asking too much, you are likely to scare buyers away before they even engage. So how do you figure out a realistic range of value? There are many ways to value a business, using different tools and methods that vary between businesses and industries. Common approaches include a thorough review of financial statements, recasting to EBITDA, understanding structures based upon lender criteria, leverage and ultimately comparing your company to others in your field.
Along with understating the value of your company, you’ll also want to go into the process knowing your drop-dead number and deal structure you’ll accept. This does not always mean the lowest number your business is worth, it is just the lowest number you’ll transact at. Think of it this way, everything else above that should be a bonus.
Step 2 – Pre-Marketing Value Enhancement
Based on a review of your company’s strategic and financial conditions, advisory firms can assist your business in developing changes that will make it overall more desirable before going to market. While massive changes don’t often take place due to time constraints and risk, minimal adjustments are usually enough to produce valuable improvements to your business.
Step 3 – Gather Data and Populate Your Virtual Deal Room
In preparing your company’s financial and business history, an honest and trustful relationship between you and your M&A advisor is crucial. Make sure you start with a detailed due diligence list and build your data from the ground up. While you will not need all of this information to get the process rolling, you will save yourself time in the long run because you will be more organized and your data will be available upon request.
Step 4 – Prepare Marketing Materials
After years of establishing your brand, you have most likely acquired an immense amount of collateral, including executive summaries and confidential information. Having these materials in order will not only increase your confidence but also increase the likelihood of a successful sale. In essence, you want to make sure that your story is in order so that you can relay your message to potential buyers. How you started, where you’re at today, where you could take the business if you had another 10-20 years in you…
Step 5 – Buyer Research and Outreach Strategy
Whether you’re a multi-billion-dollar company or a part of the lower middle market, you will most likely have multiple potential buyers. While it may be impossible to know every little detail about each potential buyer, you should invest time and money in the tools and resources that can assist you in researching and accessing data about these individuals. Utilize a push/pull strategy, in which you push out marketing materials to strategic buyers proactively, and pull information from “business for sale” websites (such as Axial and Merger Network). It is likely that your M&A advisor is a member of industry associations, such as AM&AA, which can be valuable networks to utilize in your outreach strategy.
Step 6 – Qualification of Potential Buyers
As stated previously, you may have multiple potential buyers; however, that does not mean that all of these buyers are qualified. Your advisor and banker can help you identify companies who are ‘tire-kickers’ so that you do not waste time communicating and increasing the confidentiality risk with unqualified buyers. Have these buyers completed any transactions before, how much equity do they typically put down in each deal and where is that money coming from, what type of capital structure are they going to use and what lenders do they typically work with, etc.?
Step 7 – Negotiation Process
While some businesses enter a negotiation process with only one highly targeted buyer, it is in the best interest of most business owners to enter the process with multiple qualified buyers. The competition created with this strategy has the potential to drive up the purchase price and make buyers act more quickly. On the same note, sellers need to keep in mind that too much competition could make buyers question the sale in regards to overpaying. An advisory firm, such as ourselves, can help you identify how many buyers to include in the negotiation process. For lower middle market companies, it is often more relevant to have an arranged-marriage type transaction vs. a broad auction.
Step 8 – Appropriate Structure
There is more to a business sale than the purchase price. Other financial and professional considerations that must be taken into account include stock sale versus asset sale, earn-out, terms and interest rate on financing, stock ownership and equity options packages, relocation, and more. To ignore these factors during the transaction process can be detrimental to the overall result of your sale.
Step 9 – IOIs, LOIs, APA and Closing
There are three steps that allow buyers to express interest in your company – Indication of Interest (IOI), Letter of Intent (LOI), and Asset Purchase Agreement (APA). An Indication of Interest outlines the terms and conditions expected of the transaction. If this is approved by the seller, the buyer continues to submit a Letter of Intent which can take the form of a firm bid or offer. Once the LOI is reviewed, final agreements can be defined in an APA, including purchase price, escrow, warranties, and more. Note: over 90% of middle market transactions are asset deals, hence the reference to the APA above.
Step 10 – Post-Closing Issues & Business Transition
While the sale may be over, there remains vital last steps in the process. The seller and buyer must work together to transition the company from one hand to the next. This post-closing commitment often includes transferring customer relationships and management dynamics, as well as any other necessary information needed for the business to operate successfully.
If you’re interested in learning more about the process of selling a business, reach out to a member of our team.