HOW TO SUCCESSFULLY SELL YOUR COMPANY TEN KEY RECOMMENDATIONS FOR PRIVATELY-HELD BUSINESS OWNERS
- Be clear about your motivation for selling. Reason for the sale is among the first questions buyers will ask. Your personal and professional reasons should be more than simply wanting to cash out for a certain magical dollar value quoted by your accountant. Despite what some advisors might tell you, it is not a good idea to “test the waters” just to see what sort of price your business will command. This only serves to waste time and irritate people who might otherwise be willing to assist you. Before you decide to sell your company, focus on your true objectives. The more valid your reason to sell, the more likely it will be that serious buyers will want to pursue your company.
- Engage experts to ensure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction, and may impact ongoing operations. Also, confidentiality works both ways. The broker will constantly stress confidentiality to prospective buyers. However, as the seller, you must remain confidential about a pending sale in your day-to-day business activities. It is virtually impossible for an owner to successfully sell their business on their own, while maintaining confidentiality and continuing to run the operation smoothly.
- Prepare for the sale well in advance. Be sure your records are complete for at least three years prior, and do all pertinent legal or accounting “housecleaning.” Be prepared to provide detailed interim financial statements as well. Anticipate information the buyer (and their lender) may request. To obtain financing, the buyer will need appraisals on assets, such as equipment, vehicles, real estate, as well as information to satisfy environmental regulations.
Here is a partial list of the minimum items that will be required to initiate due diligence with serious buyers:- Three full years’ profit and loss statements, plus interim P&L and balance sheet.
- Federal business income tax returns for the same three years.
- The facility lease and any lease-related documents.
- Copy of real property appraisal (if applicable) .
- List of fixtures and equipment, with serial numbers.
- Copies of any equipment leases.
- Approximate value and type of inventory on hand, by product type.
- Copy of the franchise or agency agreement (if applicable).
- Copies of long-term customer contracts (if applicable).
- Place a reasonable price on your business. Remember, your business is competing for attention and investment capital from all kinds of prospective buyers-whether or not they are looking for your type of business. Since an inflated figure either turns buyers off or slows down potential buyers, rely on a consultant to help you arrive at the highest “win-win” asking price. The consultant will be able to support the price with marketplace data and industry-tested valuation methods. Remember that most successful transactions are successful because they create a mutually beneficial situation for everyone involved.
- Carry on “business as usual”. Don’t become so obsessed with the transaction that your attention waivers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take from three months to a year to close, the buyer needs to keep seeing a healthy business. Take the time to spruce up the facilities, and repair any broken exterior signage and lighting. You, as the seller, should put yourself in a prospective buyer’s position. The next time go to your place of business, pretend you are a buyer looking at it for the first time. How impressed are you?
- Achieve leverage through buyer competition. This can be tricky, and is one of the primary reasons to engage an outside professional. Someone who is seasoned in the business sale and transfer process is in the best position to identify the largest universe of qualified buyers for your company. Have them explain how their marketing and advertising activities are going to achieve this. To the extent possible, create a competitive situation with multiple pre-qualified buyers to position yourself better in the deal. Many owners think they already have “a buyer” for their business, when in fact, that one buyer is really no buyer at all. If the first (and only) buyer thinks they have the inside track, how motivated will they be to pay top dollar and negotiate terms favorable to you?
- Be flexible about the terms of sale. It is not in your best interest to be the kind of seller who demands all cash at the closing, or who won’t accept contingent payments or an asset sale. Although a buyer might not have agreed to your original asking price, their offer may have other points that offset it, such as higher payments or interest, a consulting agreement, more cash than anticipated or a buyer that you are comfortable working with. You have probably spent years building your business–you want it to continue to be successful. Selling to the right buyer may be better than obtaining a higher price. This is especially true when seller financing is involved.
- Negotiate–don’t “dominate”. You’re used to being your own boss, but be prepared to learn that the buyer may be used to having their way too. Remember, the purchase offer includes several unique aspects–price, financing terms, and non-price terms. The final offer is a package of these, usually with trade-offs. If you counter-offer, do so on those points that are really important to you. Be willing to “horse-trade” if you must to complete the deal on terms, and timing, you can live with.
- Keep time from dragging down the deal. Once you have a ratified offer, keep the momentum going. Rely on the advice of your broker/intermediary, CPA or attorney, and utilize their unique knowledge of business transfer marketing, financing and associated tax implications to keep the deal moving forward. Stay on a time schedule and make sure that offers move in a timely fashion through the escrow process, so buyer’s due diligence and conditions of sale are quickly satisfied. At this stage of the process, it’s a team effort, and both seller and buyer should be moving in unison toward a shared goal.
- Be willing to stay involved, for training and consultation purposes. If bank financing is involved, the lender will be more apt to fund the acquisition if you are actively involved in assuring the new owner’s success (which helps reduce lenders’ perceived risk). Professional buyers, like private equity groups (PEGs) and other strategic industry buyers may want you to stay within arm’s reach for a while, even if you have management in place, to help train their management successor.