How To Sell Your Company
As a business owner, selling your company has likely crossed your mind at some point during your entrepreneurial journey. Whether it was your goal from day one, or just something you’ve thought about more recently, it’s surely been a consideration.
For most entrepreneurs, the idea of selling their business can be overwhelming, and a bit scary. Selling a business can include an M&A process that stretches from several months to a year or more and can require significant time and hard work to ensure the business is ready for a sale. Understanding the necessary steps early in the M&A process can help you be prepared -- here are several steps I suggest you consider as you enter any transaction process:
1) Know Your Why
When you start the process of selling your business, an interested buyer will want to understand your motivation behind the sale. In preparation of that conversation, it’s best to know how you’re going to answer that question. Are you selling your business because you want to retire? Do you want to shift your focus to another business or project that’s more interesting to you? Do you see benefits in a deeply strategic partnership that can drive incremental growth? Do you want to sell, but are more focused on maintaining the company legacy that you've created? There are no wrong answers to this question but certain answers will likely increase your buyer pool and drive up your sale price. Regardless of your answer, having a well thought out response could mean the difference between a successful sale or failed M&A process.
2) Understand and Create Your Buyer List
An important, yet far more challenging step in the process, is identifying your potential buyer list. There are typically three groups of buyers looking to acquire businesses - strategics, sponsor-back strategics, and financial buyers. There is also a fourth option that somewhat rare, yet growing in popularity - Employee Stock Ownership Plans, also known as ESOPs.
Strategic buyers tend to buy and then incorporate companies that are often competitors, suppliers, or customers of their firm.
There will be a significant emphasis placed on strategic and operational fit
Real synergies may lead to higher purchase prices
The seller’s management team, post transaction, may not have the same opportunity compared to a financial buyer
Sponsor backed strategic integrations with platform companies, purchased with sponsor equity and bank debt, can typically drive the best sale price. This type of acquisition can also offer the seller’s management team an opportunity to participate in the economics of business when it is sold again down the road.
Hybrid buyer – best of both worlds
Strategic benefit coupled with financial and operational support
Opportunity for a "second bite at the apple"
Financial buyers (e.g., Private Equity, Growth Equity, Family Offices, etc.) are in the business of realizing a return on their investments within 5-7 years with a sale or an IPO. Because these buyers have fundamentally different goals, they will likely approach the sale in very different ways.
They are driven by financial returns with a focus on risk related to cash flows and growth
The seller's management team, post transaction, will play a critical role and will be a focus for investors
Expect to present a detailed organic and inorganic growth plan
A successful marketing process to a financial buyer requires in-depth pre-sale financial, operational and strategic analysis
Family offices are able to hold investments for a longer time horizon
Employee Stock Ownership Plans (ESOP) are trusts that are set up to purchase shares of a company for the benefit of its employees. ESOPs can be a good option for business owners who want to sell their businesses to their employees. There are a number of reasons why a business owner might choose to sell to an ESOP, including:
Employee retention: ESOPs can help to retain employees by giving them a stake in the company.
Tax benefits: ESOPs can offer tax benefits to both the business owner and the employees.
Retirement security: ESOPs can provide employees with a way to save for retirement.
With all of this in mind, knowing the type of buyer who is most likely to be interested in your company can help you set up your business in a way that will be the most appealing to them. It can also impact factors such as your timeline and structure for the sale. As an extreme example, you are likely to prepare very differently if you plan to sell to a family member or a long-time employee who is interested in buying the business, versus selling to a strategic buyer looking for product efficiencies and new customer opportunities.
3) Create Your Preferred Timeline
Now that you've contemplated your reasons for selling and understand who your potential buyers will be, the next step is to establish a realistic project timeline. You should leave plenty of time to gather all your important documents and set things up to make the transition as easy as possible for the buyer to evaluate your business.
This process might include strengthening your management team, identifying and expanding your customer base and improving your financial records. To allow enough time to make these changes, it’s ideal to start preparing for the sale of your business a year or two in advance. Once you’ve started this process and know the items you're looking to improve, it's far easier to work towards a target date for selling your business.
4) Get a Business Valuation
To get an idea of what you may be able to sell your business for, you should get a business valuation. When you get a valuation, a business appraiser will use a formula to determine the current or projected worth of your company. Some of the factors that an appraiser will consider include the market value of your company’s assets, the management of the business and the prospect of future earnings.
5) Surround Yourself with a Great Team
At this step, it’s time to decide on the best type of advisor to help you sell the business. This decision can depend on your targeted buyer. Even if you’re selling your business to a family member or a trusted employee, you need an experienced and industry specialized, M&A advisor or investment banker to assist you in each step of the transaction.
Using an investment banker or M&A advisor will save you time and hassle. You can talk to your M&A expert about your expectations and let them handle the details while you focus on keeping the business running. Advisors can also help you keep the sale quiet, which you might want if your employees aren’t aware of the sale. When you use an investment banker or M&A advisor, you will likely have to pay them a commission on the sale of the business. However, with the experience and buyer relationships that these M&A experts bring to the table, they can help you get the highest price for your business, which ultimately benefits you financially.
M&A Explained: Frequently Asked Questions
How do I know if I'm ready to sell my business?
Here are some common signs that it's time to consider a sale:
1) You’ve spent years building up the business, and a strategic partner (client, competitor, vendor) has suggested that your business is a perfect acquisition target.
2) The business is doing well, but it has grown into something beyond what you're able to manage day-to-day. You'd like to find the right partner to help take your business to the next level.
3) You have other projects that you’ve been working on that you’re more passionate about, and you want to focus your time and money elsewhere.
4) You’re preparing for retirement and want to financially reward yourself for years of hard work and sacrifice.
5) You've talked to other entrepreneurs and founders that have sold their businesses, listened to podcasts discussing M&A successes and failures, and educated yourself on what a mergers and acquisition process will likely entail.
How do I find qualified buyers for my business?
Your M&A expert will be invaluable in finding potential buyers. They will use their trusted private networks and relationships to make these connections for you. As those contacts indicate interest, your M&A expert will help you determine the right buyer for your business.
Should you sell your business or consider outside investors?
If selling your business doesn’t feel quite right, you may want to consider outside investors instead. The right option depends on your unique company strategies, your interest in retaining partial ownership or rolling equity into the buyer's company or platform, and the limiting factors that exist in your industry or sector.
If you’re ready to say goodbye to your business entirely and move on, selling it might be the right move. But instead, if your business requires incremental capital to drive needed growth, it may be time for private investors to enter the picture. Like any financial transaction, when considering outside investment be sure to retain experienced professionals to educate you and properly support the process.