Tied closely to our most recent previous article outlining 6 deal-killing mistakes M&A sellers make is the criticality of adequately preparing your company for sale. While almost all business owners can appreciate the guts, hard work, and prolonged dedication required for them to build their business over a period of years or even decades, the reality is that most founders have little or no experience with the process of selling a company.
However, if open to advice and guidance from the right professionals – selling owners need not fear! Some advance planning can speed up negotiations, land you a better deal, and make the transition of your business to a buyer a smoother process. Following are important sale preparation considerations for business owners.
Are you ready – really, truly ready – to sell? Most business owners have put in years of sweat equity, missing vacations, social outings, and family events to keep advancing and growing their company. Exhausting and stressful? Yes.
But on the flip side it’s important to consider the impact that handing over the keys to your business will have on you. Many owners believe they’re ready to sell but once a real deal is on the table find themselves in a cold sweat wondering what they’ll do after spending a few weeks post-sale enjoying some hard-earned R&R. After all, your company probably defines your social circle and identity to some degree.
And your business legacy could be at stake. Is the buyer the right one? Who will take care of your trusted employees and the reputation you’ve cultivated so carefully over the years? Have you spoken to your tax accountant and financial planner to make sure you understand how much of the sale proceeds will end up in your pocket? And will those proceeds be enough to support your future?
Sellers who haven’t spent enough time analyzing this life-changing event often find themselves nit-picking, bringing up endless objections to a buyer’s proposals, delaying, and running hot and cold on the deal. You can streamline the transaction process considerably by first coming to terms with your motivations for a sale, your must-haves for the deal, and your future.
A buyer can’t define these drivers for you. Once you’re ready to speak to your buyer in earnest from a position of strength and self-awareness, you can then move confidently through the sale process.
Understanding Valuation and the Market
The purchase price a buyer offers for your company will likely be based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Among the many factors that will influence their offer are the articulable competitive edge of your company, meaningful market share, your proprietary technologies and processes, efficiently running operations, and a talented management team.
That said, there’s a typical range of multiples for companies sold in each industry and your offers are unlikely to fall outside that range. For instance, a business in a basic industry with low barriers to entry will sell for a lower multiple, while a technology-based business with proprietary offerings may sell for a double digit multiple.
If you were to sell your home, for example, you know the value is based on comparisons to similar homes in your neighborhood. The same concept applies when selling a business, so set your own expectations accordingly by familiarizing yourself with “comps” well before you take your company to market.
You’ll avoid jumping at a weak offer or, conversely, holding out for a fantasy. A good understanding of multiples in your industry and the levers that increase or decrease them will arm you with the ability to address gaps in your business and push your multiple a little higher.
Develop Your Management Team
Buyers will be looking for a balanced, developed management team with an exceptional understanding of your business and its industry. The founders, who are frequently the key executives for the company, will typically leave the business within some agreed-upon period after the sale, so a buyer generally wants experienced talent to remain on board.
Buyers will hesitate if the founders cashing out are overly involved in daily operations, instead preferring a well-rounded team with experience managing sales and marketing, operations, accounting, and strategic planning.
There was probably a time when you did most of those things yourself but, when you’re looking to sell, you should position the business in a way that allows the reins to be safely and efficiently handed over as part of the sale. Consider making hires to fill known gaps well in advance of a sale process to afford new personnel the necessary time to get up to speed in their roles.
Furthermore, the deal process itself will be extremely demanding. So ideally, you’ll have already shared your plan to sell the business with key members of your team. Prepare them to meet with potential buyers and your deal team, and task them with rounding up due diligence materials related to their department or function.
You may want to explore employment agreements or incentives designed to retain top talent. These steps will give both you and the buyer confidence that your management team is motivated and ready for the changes coming their way.
Buyers normally require GAAP (Generally Accepted Accounting Principles) financial reporting. Audited financials may not be essential, but adherence to accepted accounting principles always is. Buyers will spend countless hours scouring your company’s financials and they will question anything that appears irregular.
Expect a buyer to engage its own highly qualified and experienced financial expert to conduct a quality of earnings (Q of E) analysis that will dig deep into your accounting and financial records. Since offers to buy your business will most likely be priced on a multiple of EBITDA, pinning down that EBITDA figure will be a crucial component in the process.
If you’ve been getting by with just a bookkeeper up until now, plan to hire a CPA (preferably one with experience in M&A transactions) to regularly review your financials long before your sale process begins.
Hire a Team of M&A Deal Specialists
We’d be remiss if we failed to reiterate that a seasoned team of M&A specialists is key to a successful sale. You should identify and select an M&A attorney, accountant, and investment banker with proven M&A experience long before you go to market. Developing relationships and a level of trust with them will be invaluable, both before and during the process.
These specialists can provide guidance and information regarding the above factors based on their expertise regarding how deals get done, afford you access to other deal professionals for inevitable nuances that come up, educate you on the state of the market and valuations in your industry, guide you on GAAP accounting, and so much more.
You can be sure the buyer will bring this type of professional arsenal to the table for itself, and you’ll be at a major disadvantage if you don’t reciprocate for yourself. Your own experienced professionals can provide value to you throughout the process that greatly exceeds their cost.
About Linden Law Partners
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.