This is the fifth article in a series about transitions and transactions for midsized companies. Three different perspectives have contributed to this article on the sale process: business consultant Karen Albritton, mergers and acquisitions advisor Mark Phillips, and corporate/transactional attorney Deana Labriola.
The sale process doesn’t happen overnight, and there are many things before the sale that can greatly impact the sale.
However, positioning your business in the best possible ways for sale has a wide range of meaning. As a business owner, you should aim to understand the sale process itself, timing and the market, but even with those understandings, your business will be judged by buyers on merits that are shaped long in advance of the process and may be surprising to you.
Initially, the sale process can be intimidating. Owners are usually experts in their respective domains and well-versed in all kinds of business dealings, but very few have sold a business before. Understanding that a sale of the company is unlike any of their previous business “deals,” acknowledging that this is outside of their expertise, and seeking guidance and counsel on the sale transaction are not easy things for many business owners.
What are the financial, operational, and other considerations for an owner prior to sale?
No two owners or companies are exactly alike, and neither are any two scenarios for the sale of a company. If there is one universal truth, however, it is that professionalizing your business in advance of the process pays off.
From a financial standpoint, is your business profitable at levels that would be attractive to an acquirer? Can you show consistency and steady growth over time? Are your costs in line with your industry? Do you have adequate financial reporting and controls in place? Do you have good customer margins?
Operationally, do you have the systems in place to sustain the business? Are there areas of operational excellence that differentiate your business? Are your practices and procedures documented? Are your technology systems robust and secure? What’s the state of your customer relationships and contracts? How secure are your vendor and supply chain relationships?
Business owners should also take a close look at the current management team. A buyer of a closely-held business evaluates the management team heavily. Buyers ask questions like is there an effective management team supporting the owner, or can the business run without the owner? Answers to these questions will impact business terms. It likely also will be equally important to assess which people in the business are necessary to help with the sale process, and then providing them some incentive to stay. A successful sale process often comes down to a small handful of people within a company dedicating themselves to the transaction, and to remaining with the business after the transaction. Identifying those people early on, and rewarding them, can make all the difference.
Finally, an owner should ask him/herself whether the business has created a strong brand or reputation. Does the business have a clear, differentiated value proposition in the market? Is that brand or reputation tied to the business or to the business owner? These factors matter to a potential acquirer. While brand or reputation of a business influences potential acquirers just like it does consumers, sellers need to understand whether that brand can be directly linked to the metrics of the business, like growth, margins or customer retention. If it cannot, then the seller often overvalues the impact of the business’s brand or reputation relative to the value a potential acquirer would place on such a brand or reputation.
A business owner’s initial efforts to get a company’s “house in order” are vast and include interviewing and engaging advisors, getting CPA-audited financials, formalizing any agreements with key employees, assembling all of the information buyers will need to evaluate the business, tax planning and cleaning up any business matters that may have been neglected throughout the years but will now impact purchase price. Ideally, this all occurs before the formal sale process itself begins, and all while an owner continues his or her normal role in the business. Given this, getting started early and slowly working through the to-do list, rather than scrambling to get it done later in the process, can largely change the flow of a sale, once it formally begins.
What is the length of the process and value I can expect for my business?
A business owner would be wise to understand the process of sale against the timeframe in which the business owner would like to sell. Even if your business is ready, it’s still a lengthy process. During the process, you’ll need to balance maintaining strong business performance with participating in the process from positioning the company for sale through due diligence and closing. If an owner wants to sell in the near term and the business is ready for sale, or if the owner simply wants out of the business in the short term, the entire process generally takes 6 - 12 months. That is 3 - 6 months to position the company for a sale process, and then another 3 - 6 months for the actual sale itself to occur.
An owner should be realistic about his or her business, and the factors that will impact the valuation of it in the eyes of an acquirer. That means understanding the metrics by which a third party values a business, and how your business scores against them. For example, if an owner wants to sell in the short term, but there are operational or financial items within the business that can’t be changed or aren’t realistic to change within a short timeframe, those factors will influence price. However, if an owner can wait to improve operational and/or financial factors in a way that is appealing to an acquirer, the total length of time needed to prepare your business for sale will increase, but so too will valuation.
Ideally, a business being sold should have an established track record of steady growth in the years preceding the sale, and such established track record will serve to enhance the purchase price, timing and terms of the sale itself. If a business does not have such a positive track record, then an owner needs to be able to articulate to potential buyers why this is the case and perhaps adjust his or her expectations for the value to be received from the sale as a result.
What team do you need for sale, and do you have it?
In preparation for a sale, it is also critical to evaluate whether the company and/or business owner has the team necessary to help through the sale. Often the answer is “no”, and working to identify that team prior to the beginning of the sale process itself will net better financial terms and a smoother sale process.
Internal advisors: As mentioned above, looking at your internal management team through the lens of a sale is critical. An owner should know which members of management are crucial to any sale transaction, not only during the process but also those who may need to stay in the company post-closing. Finding ways to incentivize or reward those members of your team will impact negotiations and the longevity of the company you’ve built post-closing.
Depending on the structure of a company, an engaged Board of Directors can also help owners adequately assess the value of a deal, and serve as an internal checkpoint to owners for all matters along the way. A board can set direction, and help owners think through the inevitable bumps along the deal way.
Finally, if there is more than one owner in a company, discussions among those owners and the expected outcomes of a sale process are very important to have at the beginning stages and gain alignment on a shared vision for the transaction. Many owners want to sell, but what’s an acceptable outcome may be different for each owner.
External advisors: An owner will need a team of advisors who are very experienced in M&A transactions, which are very nuanced and complicated, to help guide him or her through the process. While loyalty to service providers and business consultants can provide efficiencies for business owners through the lifecycle of a business, it’s important to assess whether these folks have the requisite experience to guide you through the sale process.
A lawyer and CPA who understand and have experience in acquisition transactions is imperative. Often these are new relationships with advisors who are brought in specifically for the transaction, and can work in collaboration with a general business attorney and tax accountant, in order to retain the benefit of the existing advisors’ historical knowledge.
An M&A Advisor/Investment Banker is important if an owner intends to run a competitive process with several potential acquirers, which is typically the best way to know that you, as an owner, have gotten the best deal. M&A advisors can also be helpful in bilateral discussions with just one buyer. Experienced investment bankers know what market values are, how to creatively structure deals, and how to keep a deal on track and on schedule. They also can play the “bad cop” in negotiations, which can help to preserve the relationship between buyer and seller during the deal, while maximizing the sale price or other deal terms.
Finally, a wealth or other financial advisor is an often overlooked piece of the sale equation. However, there can be significant tax savings by having discussions with a wealth advisor early on, particularly if an owner will receive significant cash from a transaction.
While this sounds like a significant amount of advisors to bring into a deal, many do not get paid until the transaction occurs or until the deal is significantly ramped up, and the total cost is not materially different whether you hire them three months in advance or three years in advance. As such, bringing them in early on for advice can help drive value for an owner without increasing the cost or requiring a significant advanced cash outlay for you or the business.
There can be different types of potential buyers for your business, with different motivations and different implications for you. You may be getting emails or calls from potential acquirers today. It’s tempting to be reactive and let that outreach drive your process. Instead think about mapping the possibilities out in advance to proactively inform the steps you take leading up to the sale, including the types of external advisors you engage. In all likelihood, you’re only going to sell this business once, so it pays to get it right.
A well-run sale process can be fun, exciting, and emotionally rewarding. In a competitive process with multiple prospective buyers, the owner gets to hear experienced executives or investment professionals describe all of the great things about the business as reasons they want to buy it; he or she gets to explore various deals with different buyers, envisioning alternative futures for the business; and see the flattering commentary and strategic theses manifested through offers with purchase prices that increase during the auction process. Ultimately, owners get to choose the deal and buyer that they feel is best, personally, for the business, its employees and reputation. Many owners describe their business as a child, and in that analogy, a successful sale process is like seeing that child graduating from college, getting a good job, and starting out on a new life of their own. However, just like child-rearing, the work you put in early on matters to the outcome on sale day.