Getting your best deal when you sell your business is a big challenge. Unfortunately, it’s a process that many business owners take too lightly. They end up settling for less when they don’t employ strategic business thinking in all elements of the sales and transaction process. To help you get your best offer; I have developed a ten step process that you can follow to help you achieve your goals.
One thing I’ve found is that getting the 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 understood the equipment you’ll need to achieve the most dollars and the best terms. They each have their own specific skills and you will need all of them. The few dollars you spend on professional assistance (typically 10% or less of what you receive from the sale (as received)) will more than pay for a better result. The steps in this process seem deceptively simple. But they require discipline, hard work, and sometimes painfully honest self-assessment.
#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 have 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 any conflicts between the two sets of goals and put together a coordinated list, keeping business and personal goals separate but on one piece of paper. Share the list with your leadership team. In most cases, they will stay (and locking them into their jobs may be key to achieving your goals). Ask for their views, in writing, on both the goals and the potential impact of achieving the goals on their areas of responsibility.
#2 Use your goal lists to generate a criteria checklist. Items on this checklist include: minimum sales price (see #3 below) required to close any gaps in your financial (estate) plan and ensure success in your retirement or next venture; type of buyer best suited to run the business; sales hours; goals to be achieved 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 entire checklist into MUST-HAVE items, those things that a buyer and/or sales transaction must have in order for you to close a deal, and LIKES, those that, while nice to have, are not essential to the sale . It takes time to develop a good, solid checklist, but it will keep you on target.
#3 Price is important. While you MUST get your bottom selling price, you’ll almost certainly want more. Also, you probably want to set a selling price that allows for 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 for establishing a realistic pricing strategy. Ideally, the valuation should allow you to compare various approaches to assessing the value of the business. These calculations may 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 for and under what terms is critical to your success.
#4 Take a look at all the preparations completed to date BEFORE you even search for a buyer or dangle a tempting “carrot” in front of an eager prospect. Be brutally honest with yourself. Have you considered all contingencies? Have you reviewed and considered all of your financial plans? Would building the business in a short period of time result in a higher selling price or better terms? ARE YOU READY TO LET GO AND GO?
#5 Evaluate specific potential buyers against your checklist. Prospective small and medium business buyers 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 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 suppliers and/or competitors may be interested. Research companies and individuals whose business interests fit your criteria, but don’t make any announcements until you’re really ready to go public and tell the world. (Once you announce that the business is for sale, there will typically be more “tire kickers” than you want to deal with.) Furthermore, it is almost certain that some competitors will use such information as a way of trying to “attack” your key accounts. . Match each prospect to your ESSENTIALS. If you find that something “must have” is missing, move on to the next potential buyer.
#6 Develop a short list of prospects made up of those who ask, those you think might make a good match, and those you think might make a good deal. Rate them on their potential attractiveness and their potential ability to complete the deal, grow the business, and complete all payments. Once you have a job listing to meet your criteria, you, or preferably a member of your team, can start networking. A significant showing of interest results in the prospect signing a Confidentiality Agreement. It is at this point that you will typically begin disclosing financial and other information to the prospective buyer.
#7 Once the Nondisclosure Agreement is in place and as you prepare to release information, have your team conduct a thorough due diligence review to qualify the prospective buyers (businesses or individuals) identified above BEFORE you release your own information. Serious buyers should insist on reviewing records, tax returns, financial statements, public disclosures, and other documents. They should talk to their accountants, lawyers, and advisors. They should want to talk (and this needs to be handled very sensitively) with their suppliers, customers and employees. They must also be prepared to show that they can complete the transaction. Due diligence is essential for both parties 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 terms rather than price. Several years ago, I negotiated a deal in which the seller and buyer were far apart in their estimates of the value of the business. We structured the sales agreement so that the net present value, the cash value today, was equal to what the buyer wanted to pay, but the total transaction dollars over time were more than the seller asked for originally. Both sides felt they had won. Another piece of advice I give my clients is to open negotiations gently. Keep in mind, particularly in the initial discussions leading up to the transaction, that you may be perceived as an entrepreneur more interested in “adopting” the business than selling it; or as a large, inflexible corporation trying to sell only one product line or division by a certain date or at a certain price; or as representatives of shareholders who do not know the business or its potential or future and just want to get out. Overcoming these perceptions is key to improving deal value. They all require different approaches and great sensitivity.
#9 Identify and align your options regarding payment at closing and after the sale. Knowing what you want is essential to achieving it. A short list of options includes: a strictly cash sale due at closing; a tax-free stock exchange; cash plus a promissory note plus an employment contract; cash, a promissory note and a non-compete agreement; venture capital The list goes on. At closing, make sure you have cleared yourself of any contingent liabilities arising from transactions in the old business. Such transactions may include: unpaid taxes; current leases; Lender’s UCC (Unified Commercial Code files) that have not been satisfied. Failure to clear these items could result in costly refunds at a later date. Allow an average of 2-6 months for serious buyers to identify and line up financing sources.
#10 Closing can be tricky and sadly has been the undoing of many a deal. Again, be careful. A deal is not closed until all parties have signed the transaction. One deal I witnessed fell apart at the closing table when one of the advisers, stating that he was “emotionally moved” by the integrity exhibited by both parties, read a poem he had written for the occasion. After closing, your new life begins. You are either out or an employee who will (likely) be out once the new ownership takes over running the business. (Despite employment contracts, most former owners are being asked to leave well in advance of their expiration date.) More importantly, the “money” now stops elsewhere. Remember that and step aside. Whichever you choose, good fortune and good luck to you as you explore your options.
If you are exploring selling your business, getting the right professional help can mean the difference between a successful sale and the frustration of wasted time, effort and hope. Solidify your position in the sale by completing your research and consulting with members of your advisory team in advance. With proper planning, you can get the best deal when you sell your business.
Copyright 2006 John J Reddish