Copyright 2006 John J Reddish
Getting your best deal when you sell your business is a major challenge. Unfortunately, it is a process all too many business owners take too lightly. They end up settling for less when they fail to employ strategic business thinking to all elements of the selling process and transaction. To help you get your best deal; I have developed a ten-step process you can follow to help you achieve your goals.
One thing I’ve found is that getting your best deal often depends on recruiting and using the right team of advisors. These advisors include your attorney, accountant, financial planner and consultant and/or investment banker. These professionals comprise the team you will need to achieve the most dollars and the best terms. Each has his/her own specific skills and you will need them all. The few dollars you spend for professional assistance (usually 10%, or less, of what you receive from the sale (as you receive it) will more than pay for itself in getting you a better outcome. The steps in this process appear deceptively simple but require discipline, hard work and sometimes painfully honest self-assessment. They are:
#1 Develop two written lists of goals — your lifestyle goals and your business goals. In short, what do you want to happen in your life once you’ve sold the business? Develop each set of goals separately. This helps you keep perspective. Compare both lists. Don’t be surprised to see conflicts. Resolve all conflicts between the two goal sets and prepare a coordinated list, keeping business and personal goals separate but on one sheet of paper. Share the list with your leadership team. They will, in most cases, be staying on (and locking them into their jobs may be key to achieving your objectives). Ask them for their opinions — in writing — of both the goals and the potential impact of attaining the goals on their areas of responsibility.
#2 Use your lists of goals to generate a criteria checklist. Items for this checklist include: minimum selling price (see #3 below) required to close any gaps in your financial (estate) plan and ensure success in your retirement or in your next endeavor; type of buyer most suitable to run the business; timetable for sale; objectives to achieve prior to any sale (including employment contracts, shadow equity or equity for key team members); transition period and contract for you; desired terms and conditions; and, other financial issues. Divide your completed checklist into MUST items, those things a buyer and/or sales transaction must have for you to close a deal, and LIKE items, those which while nice to have are not essential to the sale. A good, solid checklist takes time to develop, but it will keep you on target.
#3 Pricing is important. While you MUST get your minimum-selling price, you will almost certainly want more. In addition, you probably want to establish an asking price that allows some room for negotiation. You should have your consultant or one of the other team members prepare (or commission) an independent valuation of the company. The valuation will give you a good starting point in establishing a realistic pricing strategy. Ideally, the valuation should allow you to compare several valuation approaches to the company’s worth. These computations can be based on: multiples of earnings approaches; asset value plus goodwill; or some of the many sophisticated cash flow models. Knowing how much to ask and under what terms are central to your success.
#4 Take a look at all the preparations completed to date BEFORE even looking for a buyer or dangling a tantalizing “carrot” in front of an eager prospect. Be brutally honest with yourself. Have you considered all the contingencies? Have you reviewed and considered all your financial plans? Would strengthening the business over a short period result in a greater selling price or better terms? ARE YOU READY TO LET GO AND WALK AWAY?
#5 Evaluate specific potential buyers against your checklist. Prospective buyers for small- to medium-sized companies can be found in local and regional publications, as well as The Wall Street Journal, under Business Wanted or Business Opportunity. Investment bankers, venture capitalists, local banks, accountants and attorneys, in addition to many business brokers, are all potential referral sources for transactions. Your management team may be ready and willing to make you an offer. A family member might want to continue the business. Customers and/or vendors and/or competitors might have interest. Research companies and individuals whose business interests fit your criteria, but don’t make any announcements until you are truly ready to go public and tell the world. (Once you announce the company is for sale, there will normally be more “tire kickers” than you want to deal with.) In addition, some competitors will almost certainly use such information as a way to attempt to raid your key accounts. Match every prospect against your MUSTs. If you discover a “must” missing, move on the next prospective buyer.
#6 Develop a short list of prospects composed of those who inquire, those whom you feel might make a good match and those whom you feel might make a good transaction. Rate them on their potential attractiveness on their potential ability to complete the deal, grow the company and complete all payments to you. Once you have a working list to go with your criteria you, or preferably a member of your team, can begin making contacts. A significant show of interest results in the prospect signing a Confidentiality Agreement. It is at this point that you will normally begin to disclose financial and other data to the prospective buyer.
#7 Once the Confidentiality Agreement is in place and as you prepare to disclose information, have your team conduct a thorough due diligence review to qualify any prospective buyers — companies or individuals — identified above BEFORE releasing your own information. Serious buyers should insist on reviewing records, tax returns, financial statements, public disclosures and other documents. They should speak with your accountants, attorneys and advisors. They should want to speak (and this needs to be handled very sensitively), with your vendors, customers and employees. They should also be prepared to prove they can complete the transaction. Due diligence is essential to both sides in crafting a win-win deal.
#8 Begin the challenging task of negotiating the sale. My advice to clients (buyers and sellers, alike) is to strive to control the terms rather than the price. Several years ago, I negotiated a deal in which the seller and buyer were far apart in their estimates on what the company was worth. We structured the agreement of sale so that the net present value, the cash value today, equaled what the buyer wanted to pay, but the total dollars for the transaction over time were more than the seller originally asked. Both sides felt like they won. Other advice I give my clients is to go gently into negotiations. Realize, particularly in the initial discussions leading to the transaction that you may be perceived as an entrepreneur more interested in having the business adopted than in sold; or as a large, inflexible, corporate type intent only on selling a product line or division before a certain date or at a certain price; or as shareholder representatives who don’t know the business or its potential or future and just want out. Getting past these perceptions is key to enhancing deal value. All require different approaches and great sensitivity.
#9 Identify and align your options in relation to being paid at closing and after the sale. Knowing what you want is critical to getting it. A brief list of options includes: a strictly cash sale due at closing; a tax free exchange of stock; cash plus a promissory note plus an employment contract; cash, a promissory note and a non-compete agreement; venture capital. The list goes on. Be sure at closing that you have removed yourself from any contingent liabilities arising from transactions in the old company. Such transactions may include: unpaid taxes; unexpired leases; lender UCC’s (Unified Commercial Code filings) that have not been satisfied. Failure to clear these items could result in costly comebacks at a later date. Allow an average of from 2-6 months for serious buyers to identify and line up funding sources.
#10 Closing can be tricky and unfortunately has been the unraveling of many deals. Again, go gently. A deal isn’t done until all parties have signed off on the transaction. One deal I witnessed fell apart at the closing table when one of the advisors, claiming he was emotionally moved by the integrity exhibited by both sides, read a poem he had written for the occasion. After the closing, your new life begins. You are either out the door or an employee who will (probably) be out the door once the new ownership gets a handle on running the business. (Employment contracts notwithstanding, most former owners are asked to leave long before their due date.) More importantly, the “buck” now stops somewhere else. Remember that and stand aside. Whatever your choice, good fortune and good luck to you as you explore your options.
If you explore selling your business, getting the right professional help can mean the difference between a successful sale and the frustration of time, effort and hope wasted. Solidify your standing in the sale by completing your research and consultations with your advisory team members in advance. With proper planning, you can get the very best deal when you sell your business.