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The decision to sell your business is a complex one. There are many factors that must be considered before you can determine the best way to go about it. This article will discuss six things that are important when considering the sale of your company, including the considerations below.
What Are Your Financial Goals (Your “Freedom Point” or “Your Number”)?
As an owner, you should plan for the future by calculating if you’ll have enough money available to retire in style. You may need an advisor with expertise in retirement planning or financial advisors who can help you make decisions about how much you’ll need in terms of net proceeds in order to afford the lifestyle you want post-exit. A lot depends on this number and can range from supporting a simple lifestyle after you sell to a lavish life with ongoing high expenses.
Asking Price
In order to determine a selling price, you’ll need to secure a Business Valuation to get an idea of your company’s fair market value before you can figure out how much money will be needed to live comfortably in retirement. In order to determine if you have the business valuation sufficient to meet your personal financial / retirement goals, you’ll need to calculate the overall business valuation of the company and deduct the applicable expenses including taxes, legal, business broker fees, and related expenses to come up with your net proceeds – what we call your “Freedom Point.”
Deal Terms
To get the best deal terms, you’ll want to confirm whether or not you’re willing to accept different types of offers from potential buyers including those that may include liquidation preferences, earnouts, options on future deals between the buyer.
The “Gap”
Once you understand what your ultimate number is, and generally what your business is worth (less paying off liabilities), you’ll now know the gap (if any) between your present situation and your future goals. Your Exit Plan should focus on closing this gap by working on the eight drivers of value that enhance the worth of your business. By strategically focusing on these eight drivers, you’ll be in a better position to reach your goals more quickly.
The Eight Drivers of Value
Every qualified potential buyer is interested in buying your “future”. They want to earn a return on their investment so they are looking for the lowest risk, highest return for their money. The more that you can improve these eight factors in your business, the more value prospective buyers will place on your company.
1) Growth Potential
A steady pattern of year-over-year growth over time is a sure sign that your business is healthy and thriving. It also means you’ll be able to provide more information about the past, present, and future performance of your company in an Exit Plan presentation for prospective buyers. If a qualified buyer is looking at several comparable companies on paper but one has a history of growing, this business will be more attractive.
2) Financial Performance
You should take an objective view of your company’s financial health and decide if you are in a position of strength (revenue growing, yearly profit, generating free cash flow, reasonable debt levels). If you are not in the best financial position, you can still sell your business but you may not generate the maximum value nor secure the best terms. Financial considerations include the following;
3) Cashflow
Because the potential buyer will have to write “two checks” one to buy your business and the second to fund the ongoing operations of the business, the more cash your business generates, the more money the prospective buyer has to pay you.
4) Recurring Revenue
Potential buyers are looking for predictable revenue streams that they know will be there year after year. If your business relies on seasonal or periodic customers, then you’ll need a plan to transition them into recurring clients over time.
5) Loyal Customer Base
Potential buyers want to see a customer base that includes long-term relationships, not just one-time transactional clients. If you have customers who’ve been with your company for years and they’re still coming back, this lowers the risk for the prospective buyer as they can farm the customer base for additional products and services.
6) No Reliance on a Single Customer/Supplier or Employee
If your business relies on a single customer (or a small number of customers) or supplier, then you’ll want to develop other relationships in advance of the sale or be able to adequately explain why this is not a risk to the potential buyer. You never know when that one key client will suddenly decide not to buy from you anymore for any number of reasons. The same goes for key employees. Make sure that their work can be done by others or that they are happy, committed, and loyal to the company.
7) Market Differentiation
Your company may be doing a good job of competing with the competition, but it’s essential to take steps now to make sure that your business is truly differentiated. This will help you attract more customers and stand out from the pack in terms of quality or service offerings which will help the potential buyer scale the business and more thoroughly penetrate your market.
8) Reliance on the Business Owner
There are many businesses that couldn’t survive without the owner. This is especially true of small, family-owned businesses where all aspects of the company rely heavily on one person – from sales to customer service and beyond. The less that the business relies on the business owner and more on the collective success of the organization, the higher price and better deal terms you’ll get.
Other forms of Exit Strategy
There are many forms of exit strategy beyond selling your business outright. It’s important to think through the options and decide which is best for you and your long-term goals. The options include:
Sell your business outright.
Sell part of your business and continuing to run your company for the foreseeable future taking a “second bite of the apple” down the road.
Liquidate your business for the value of your hard assets only.
Hire (or promote) a leader to run your business day-to-day while maintaining your equity in your business.
Don’t sell the business and transition your ownership to your children.
Sell or transfer the business to your management team.
Before you contact a business broker to sell your business, it’s important to start thinking about what life will be like after the sale. You’ll need time to transition into retirement and develop hobbies that won’t make you feel bored or restless.
Here are some questions for reflection:
What does a comfortable retirement look like after you sell your business and step away?
What’s the best way for me to spend my free time?
Will I have enough money to travel?
What additional impact would I like to make on the world?
While it might be too early to answer this question, thinking about what you’ll do with your free time will help lead you towards answers. Some people start new businesses or volunteer their time; others use it as an opportunity for personal growth by learning a language or taking up another creative hobby like painting.
Your Future Vision – Why Do You Want to Exit Your Business?
What do you plan to go do after you leave your business? The typical small business owner decides to sell because they need to retire or take care of their health. Those are valid reasons to exit, but they do not necessarily lead to a satisfying result. The key is to become clear on what you are excited to pursue after you leave your business. You should consider what you are most looking forward to regarding life after your business.
Structuring Flexibility
Have you considered the practical financial questions surrounding your exit? How much is your business worth to you? What’s your bottom line? How much of that money are you willing to receive over time or put at risk in return for a potentially bigger reward in the future?
The key to maximizing your score on this driver is to remain flexible on how your deal to exit your business is structured. If you’re open to helping the new owner capitalize on their investment in your business, you’ll have more potential acquirers, negotiating leverage, and options for structuring a deal than if you insist on an all-cash offer with no involvement in your business after your exit.
Personal Detachment
How personally attached to your business are you? Have you built a fulfilling life outside of your company? How much of your self-worth is tied up in your role as the owner? How will you feel if you are able to sell your business? It’s natural to feel proud of the business you’ve built, but being too personally invested in your company can lead to a difficult time transitioning out of it. The secret to a solid exit strategy is to start building up rewarding life with friends and fulfilling projects outside of your business.
Your Team
Have you considered how your employees will be treated when you exit your company? For every employee, you tell about your plans to exit, the chances your exit will collapse grow exponentially. Customers may leave, suppliers may be spooked and employees may start looking for other jobs.
Despite the considerable risk of being transparent about your plans to exit, some owners feel the need to tell select employees before a deal is consummated. Is there anyone you want or need to involve in your decision to exit? How about a family member and trusted advisors outside of the business. It’s important to have a circle of people you can trust to help you through what could the most important decision and transaction of your life.
You should have a solid, trusted team ready to help you through the sales process including an attorney familiar with mergers and acquisitions, potentially a business broker or advisor (see below), your external accountant or CPA, and potentially a real estate agent if there are physical assets involved. The right team will help you immeasurably, especially if this is the first time you are fortunate enough to sell your business.
You’ll need to consider the time frame for you to execute your exit strategy. Some business owners may want a fast sale while you may want to sell your business at a slower pace … and only when you get the right price and terms.
The entire process will take time (typically 3 months on the low end to a year or more on the high end), from hiring a team to prepare the business for sale and find buyers, executing contracts when both parties agree on terms (days or weeks) and finally executing the purchase agreement and filing the appropriate paperwork with governmental agencies.
The process to sell your business typically includes the following steps;
Step 1: Evaluate the state of your business and your reasons for selling
Make sure that your corporate house is in order, you know why you are selling, you have calculated and can justify your business valuation and you are mentally prepared to sell your business and other factors that weigh on the journey you are going to undertake.
Step 2: Hire a team to prepare the business for sale
You can certainly sell your business on your own, but we recommend putting together a team of professionals to help guide you through the process, especially if the first chance you’ve had to sell your business (you make not get a second chance).
Step 3: Create a marketing plan to attract buyers
With your team of advisors, prepare the strategic narrative on why another company should buy your business. The focus needs to be on THEM, not you, and what they will get by bringing your business into their operation. You’ll want to create a high-level overview of the business with annual sales and yearly profit once someone signs your non-disclosure and you are confident that they are serious and a qualified buyer.
Step 4: Screen the list of potential buyers and negotiating terms
Establish criteria upfront for what you want in a buyer that may be willing to give you the maximum value. These could be things like geography, type of business or the desired stage of development your company is at that will provide them with an opportunity to grow its value and become more profitable.
Step 5: Evaluate the offers
This step can take some time as there are many factors to consider. The focus should be on what you are getting out of it including the overall price, down payment, payment terms, conditions to close and the overall impact the acquisition will have on the rest of the company.
Step 6: Negotiate and sign the purchase agreement.
The final step is to negotiate all terms and conditions with the buyer for a binding agreement that can transfer ownership quickly once they have agreed to buy your company at an acceptable price.
Step 7: Close the deal which includes completing all necessary legal paperwork.
Step 8: Transition the company.
Make sure you have a plan for how to transfer ownership of your company and who will be responsible for what as well as when this should happen. For example, some businesses require an interim management team or advisers until new owners are ready to take over. Create a list of all assets that need to be transferred over and how you will handle dealing with the customer base, employees, etc.
Selling your business is stressful! The best way to feel confident in getting to a successful exit is to be prepared ahead of time and have a clear strategy!
Can I Sell My Small Business Fast?
Some small businesses may want to sell their business quickly, for example, if they’re retiring or going through a divorce. These sellers need to be aware of the risks that come with quick sales and take steps to mitigate them as best they can.
Before you start preparing to sell your company, it’s important that you know who the prospective buyers are that you should focus on (there is no “perfect buyer”). The right buyer for your business is the one that you would go work for if you weren’t running your own business, especially since you may be required to work for them for a period of time.
Some of them will be private equity firms or investment groups looking to invest their money in buying businesses, and others may be just individual entrepreneurs with enough capital and experience to buy businesses or similar companies to theirs.
The third group is made up of both strategic and non-strategic buyers interested in making acquisitions for the many strategic reasons we detail below.
It’s important to create a competitive “auction” where you attract multiple buyers (and preferably strategic buyers) to bid on buying your business.
You should start this process by putting together an initial list of qualified buyers including companies that you work with every day (competitors, suppliers, and even customers), then conduct additional market research to round out the list.
Look for companies with several recent business acquisitions that operate in your space as they are most likely primed and ready with capital and a process to buy a business quickly.
The Top Reasons Why A Company Might Want To Buy Your Business
Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.
Before you sign that purchase agreement to sell your business, think about the strategic reason why a big company might want to buy yours. Here are a few top reasons to consider:
To control their supply chain
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million in an effort to control their supply chain – now Starbucks is no longer beholden to one of its suppliers.
To give their salespeople something else to sell
In 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising salespeople more inventory to sell and HuffPo had 26 million unique visitors a month.
To make their cash cow product look sexier
Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed (they missed that one!) they could sell more Windows, Office, and Xbox by integrating Skype into everything they already sell.
To enter a new geographic market
Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest-growing market for office furniture. Your business may be located in a region that a strategic buyer is interested in penetrating and can more easily and quickly set up shop by acquiring your business.
To acquire your employees
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.
Having your “house in order” will allow you to justify and defend your price, bring credibility and potentially secure a quick closing. It will indicate to qualified buyers that you are a credible leader and should help to increase their trust in you and streamline the process of selling your business.
Historical Financials
Before you speak with the potential buyer or their business brokers, you should evaluate the state of your internal affairs including accurate financial statements (preferably reviewed or audited) including 3 years’ historical financial records such as consolidated income statement, tax returns, balance sheet, list of business assets, accurate sales pipeline, that will be placed into a secure data room when the potential buyer is ready to conduct due diligence.
Preferably you have externally prepared financial statements by a CPA. We recommend at least 3 years of audited financial statements but many small business owners don’t want to invest in the cost of audits so reviewed financial statements will usually suffice.
Contracts and Agreements
Analyze whether you have current and relatively standard customer contracts, employee agreements, vendor contracts, etc. Review if you have the appropriate termination clauses and what they will cost to terminate if needed. Review your current lease agreements, equipment leases, intellectual property (IP) licenses, patents, or trademarks that may be of value to the business.
Bank Accounts
Check all business bank accounts for any balances as well as outstanding debts owed in relation to those accounts which need to
Public Records
If you have been incorporated, your public business records will need to be updated with the new owner’s information. If necessary, complete a DBA (Doing Business As) filing for trademark protection of the business name.
Financial Forecasts
You will need to provide accurate financial forecasts for the next 12-26 months that have been prepared by a qualified CPA.
No Unresolved Legal Issues
Is there any dispute pending against the business? If there are, try to get them settled before you start the process of attracting potential buyers.
Employees
Know how many employees you have, identify your “key employees”, assess whether the acquisition has any impact on non-compete agreements (yours or others), and what impact the acquisition will have on the staff (reductions, morale, promotions, etc.)
Data Room
Provide your potential buyer with access to an online data room (iDeals is one example of an online virtual data room) with all relevant business documents or be ready when they ask you for it and make sure everything is in order first since this can cause problems down the road if not done
Professional Business Valuation
There are many factors that go into the valuation of your business, including size, industry, and location. You should consult with an expert to determine what price range is appropriate for your business based on its strengths and weaknesses (i.e., lack of intellectual property).
If you’re thinking about hiring a business broker, it’s important to choose wisely. Find out how they work with both sellers and buyers of businesses so that the transition will be as seamless as possible for your employees, customers, and suppliers.
Most reputable Business Brokers are experts in selling businesses and can help you avoid all of the potential potholes in successfully selling your business. You don’t want someone who doesn’t know much about selling or buying a company helping to sell your business! Ask them how many businesses they have sold and don’t be afraid to ask for references selling similar businesses. Ask if they’ll help determine your company’s worth and how they calculate it. The good ones can help you get the maximum value when you sell your business and will shepherd the process through.
There are several types of Business Brokers.
At the lower end of business sales (under $1mm enterprise value), there are listing sites that are offered by business brokers where you simply list your business for sale.
In the middle market ($1 to $50mm in enterprise value), there are M&A advisors that will help you prepare your business for sale, prepare a teaser letter, solicit potential buyers and help you through the acquisition process.
At the higher end of the market (above $50mm in enterprise value) there are professional investment bankers that will help you evaluate various exit strategies including an acquisition by a strategic buyer.
Check to see what fees your business broker charges to use their services (including marketing costs). Each different type of business broker or M&A Advisor noted above charges different success fees. Some will charge an upfront fee or monthly retainer along with a declining percentage of the sales price.