Three Things to Know About Selling Your Business Before You Do It
March 25, 2021 - "Should I sell my business?" It's a question every owner asks themselves sooner or later. The decision to sell your business, whether you plan to stay on board or exit post-close, is obviously not one to make quickly – or alone.
Before you start lining up buyers, keep the following considerations in mind to be sure you're prepared to sell your business.
Understand your business and what you want for it
Self-awareness is the first step in getting ready to sell your business. It underpins almost every aspect of the transaction, from motivation and timelines to valuation and negotiation, and helps you understand what's right for you and your business.
Business owners need to ask themselves the following questions before making the decision to sell:
- Why are you selling? Buyers will ask this question, and so should you. What makes now the right time to sell? What opportunities do you think will open up for the business after selling? Are you interested in staying involved post-close (rolling equity), or are you looking to exit the business entirely? Why are you selling your business? Your answers will help you decide your goals and the structure of the deal. Every answer may have an impact on your proceeds.
- What makes your business attractive to potential buyers? As a rule of thumb, anything about your business that makes your life easier may be something a buyer finds value in. This does not mean you will get paid for everything you love about your business, but you should consider what you feel makes you “best-in-class.”
- What is your timeline? Selling a business can be as long or short a process as you are willing to make it. Is promptness as important to you as getting the greatest value from the sale? While your motivation for selling can impact your timeline, you should talk to a strong advisory team (including legal, accounting, financial advisors, investment bankers, etc.) about creating a realistic timeline to set expectations on both sides of the bargaining table.
- What do you want for your business and your people after you exit? Every business transaction is different, and there are a variety of buyer types and business transaction structures. Each of those types and structures will have a direct impact on your valuation as well as your exit plans, the direction of the business after exiting, and the people who will stay on board.
Understand what it really means to sell your business
The basic principles and parties of selling your business might seem simple – buyer, seller, offer, etc. – but the process is incredibly complex. Below the surface of any M&A transaction, there's a layer of nuance that influences the entire process.
It's hard to foresee things like timelines and schedules, points of contact and representatives, and the elements of negotiation before you decide to sell your business. In our experience, there are two things most first-time sellers do not realize before they begin the process: The time and effort that selling a business takes and the importance of a strong, trusted team to support and guide you.
- Sellers bear the burden of proving that their business is worth investing in. Along with the self-assessment mentioned above, that means a burden of data to increase the buyer's confidence in the valuation to prevent re-trading. Collecting and positioning that data alone takes hours and mind space. Going into the process unprepared for the strain can lead to miscommunication, poor execution, bad signaling, and deal fatigue – which can and does kill transactions every day.
- Selling your business is more than just you and the buyer. A support team is essential for coordinating, communicating, and advocating for your business during the transaction – people who can take a hard, honest look at your business to understand anything that can come between you and the buyer. Your trust team can be internal (C-levels, board members, owners, etc.), external (attorneys, accountants, financial advisors, and investment bankers), or a combination of the two.
Put yourself in the buyer's seat
Every action you take during an M&A transaction has an effect on the overall transaction. After all, if the deal is successful, your assets will become the buyer's assets; your pain points will become their pain points.
It goes without saying that your desire as a seller is to maximize value. On the other side of maximizing your value is the buyer’s desire to minimize their liability. If the seller fails to mitigate concerns and risks identified by the buyer, the transaction and terms can be at risk. Some of those problems are easier to address than others, but they will all take effort and time – and they are all important to a buyer.
Here are just a few examples of things about your business that could put buyers on edge:
- Inadequate ERPs can fail to provide sufficient granularity (e.g., lack of visibility into margins) or show you're not set up for growth
- Management's inability to speak to trends and changes in the business
- Significant employee turnover
- Significant customer concentration
- Significant reliance on a single vendor
- Inconsistent accounting and/or inaccurate financial statements
A buyer's valuation of your business considers market trends and factors such as the above to derive an offer. The offer is a reflection of their confidence in the deal. Every business has ways to make itself better, but if your business suffers chronically from these problems and does not address them, buyers will not give you the valuation you want for your business.
The M&A process is a delicate balance of each party's goals against realistic expectations. If you are looking at selling your business, nothing is as valuable as a team you trust to strike that balance.
Joe Hellman, CPA
Joe Hellman is a partner leading the Transaction Advisory Services practice at Redpath and Company. He provides support to clients throughout the transaction life cycle, from evaluating opportunities pre-LOI to post-close net working capital true-ups and synergy assessments on both buy-side and sell-side transactions. Joe has experience across a variety of industries including manufacturing, healthcare, construction, consumer products, distribution, financial services, and energy. He has provided public accounting services since 2008 and joined Redpath and Company in 2020.
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