We get it. After building a business, and having made countless sacrifices to help that business be successful, it can sometimes be nice to enjoy the fruits of your labor. You have had to wear all the hats, and build all of the necessary departments needed to create your offering. Now it is time to let the company move on to its next phase of life. Enter the sale.
Selling a business can be life changing, but requires some preparation and work to ensure that you are in the right position to have the full value of the company realized. Here are four things that we have found can help business owners get great returns when they are ready to sell.
1. You will need to prepare for lots of questions
Potential buyers will want to hear you answer a wide variety of questions. Some of the questions might seem easily discoverable through pro forma statements, but they want to understand the thought process behind the decisions that generated the numbers they are viewing. They will usually want to also know about the history of the business, how the valuations were determined, and if the business can survive without you.
Here are some questions that you should be prepared to answer:
- Why is the business being sold? Also, why now.
- How did the business get started? How did it grow into what it is? Were there key factors that helped it be successful?
- How was the business marketing and sales growth handled? What strategies were most effective and are they still being successfully utilized today?
- Who are the most important clients (or partners) and what would the businesses’ financial outlook be without them?
- Which business relationships might your exit inadvertently impact? What clients might leave or what partners may take other companies calls as a result?
- What are the major risks to the business? What issues need to be addressed or potential obstacles are on the horizon?
- Can the business survive without you? What would that look like?
- Describe the company culture.
- What steps are required to get to the next stage of growth for the company?
The more you can prepare succinct impactful answers to these questions, the easier it will be to find a buyer that is a great match for the business and has a similar set of values to your own.
2. The process
It is critical to understand the timetable for a sale and what can be expected prior to the process being completed. Generally speaking, a seller can expect to go through these steps throughout the business acquisition process:
- Valuation and consensus around the price
- Buyer engagement
- Creating an Offering Memorandum
- Management meetings
- Negotiating and structuring a deal
- Letter of Intent, Term Sheet, and final negotiations
- Due diligence
- Closing documents
The buyer will be basing their proposed acquisition figures on a wide range of factors, however one of the most important to them is often the business profits.
A major aspect of any business purchase process will be them doing a deep dive into the debts, assets, and earnings before interest, taxes, depreciation and amortization (EBITDA) for the business. Along those lines, keep in mind that business profits are much more important than business revenues. A business could have $1.5m in revenues, but only $100,000 in profits, versus $450,000 in revenues but $300,000 in profits. This is why experienced buyers will want to understand how much the actual profits are for the business, as well as how much they can count on those profits being there if the business changes hands.
3. Buyers do not pay more for potential or the past
Many business owners believe they have a potential gold mine and expect to receive a premium selling price based on what they see as the potential future opportunity. Unfortunately this is not how it works. If a brand new business line has not yet proven that it can be a viable source of reliable revenues, many potential buyers will not want to pay extra for its untested potential.
Additionally, unless it is a sentimental purchase for them, most buyers do not care about the past performance of the company “in its heyday” if it has long since retreated from those revenue numbers (especially if the landscape has changed significantly since).
If the buyers are turning around or fixing major issues with a company, they will expect to purchase the company at a discount to normal valuations. Rather than purchasing a well-oiled machine, they will have to think about who they know that they can bring in to fix the gaps. This added expense and extra risk cuts into the price they are willing to pay.
That said, a very strong brand that still holds weight in the marketplace – as determined by 3rd party research, can still significantly help the seller’s case.
4. Buyers expect access and confirmation
For prospective buyers, the proof is in the transactions. The best way to verify the financial claims highlighted in the paperwork is to have access to the transactions that prove the numbers all add up. This means that if you are going to claim revenue from a specific source, you need to have verifiable proof. This might include invoices and bank statements that show matching deposits, access to online accounts, and deposit records. Keep in mind that it is not personal, they are making a significant investment and need to verify that the numbers are all as described out of a fiduciary responsibility to their shareholders.
From your Offering Memorandum to your due diligence, a successful deal that allows you to live comfortably afterwards is often determined by every step in the sale process. This means that every detail matters. If you or someone you know is looking to purchase or sell a business, we at Hartmann law look forward to helping create the best structure for success. Feel free to reach us on our website, or on the phone at (816) 599-6638.