The Art of Selling Your Business

1. Position your business for acquisition by creating strategic value

Value is in the eye of the acquirer.

Strategic positioning is crucial when selling your business. Focus on how your company can benefit potential acquirers, such as:

• Providing a competitive advantage
• Offering access to new markets or customers
• Improving profit margins through synergies
• Enhancing technological capabilities

To maximize your company's appeal:

• Identify potential strategic buyers in your industry
• Align your business model with their strategic goals
• Highlight unique assets or capabilities that complement their operations
• Quantify the potential value you can bring to their organization

2. Timing the sale: Focus on internal factors, not external markets

Sell when the trajectory of your company is on the upswing and there's lots of excitement about the future.

Internal readiness is more important than external market conditions when deciding to sell. Key factors to consider:

• Company performance and growth trajectory
• Strength of management team and processes
• Scalability of business model
• Competitive position in the market

Prepare your business for sale by:

• Improving financial performance and predictability
• Reducing owner dependence
• Diversifying customer base
• Developing intellectual property or unique assets

3. Create a bidding war: Attract multiple offers to maximize leverage

To get the best possible price for your business, you need an experienced intermediary who will construct the illusion of competition.

Multiple bidders increase your negotiating power and potential sale price. Strategies to attract offers:

• Develop a comprehensive list of potential acquirers
• Craft a compelling "teaser" document to pique interest
• Prepare a detailed Confidential Information Memorandum (CIM)
• Utilize an experienced M&A intermediary to manage the process

Benefits of creating competition:

• Increases perceived value of your business
• Provides leverage in negotiations
• Allows you to compare different deal structures
• Reduces the risk of a single buyer walking away

4. Maintain control: Slowly reveal information to potential buyers

Information about your company is a form of currency, and as with money, you need to decide how to spend it.

Controlled disclosure is crucial in maintaining leverage throughout the sale process. Key steps:

1. Start with a non-confidential teaser document
2. Require signed NDAs before sharing more detailed information
3. Provide the Confidential Information Memorandum (CIM) to serious buyers
4. Gradually reveal additional details as the process progresses

Avoid common pitfalls:

• Don't disclose your desired sale price too early
• Protect proprietary information until late in the process
• Be cautious of buyers fishing for information without serious intent
• Use an intermediary to manage information flow and maintain confidentiality

5. Structure your role post-sale: Understand the pros and cons of earnouts

Treat [an] earnout as a bit of a bonus, and in hindsight, we would have maximized that.

Post-sale involvement can significantly impact deal structure and overall value. Common options:

1. Clean exit: Full payment at closing, no further involvement
2. Consulting agreement: Short-term assistance for a set fee
3. Earnout: Additional payments based on future performance
4. Equity rollover: Retain partial ownership in the business

Considerations for each option:

• Personal goals and desired level of involvement
• Risk tolerance and financial needs
• Trust in the acquirer's ability to grow the business
• Potential for conflicts with new ownership

6. Negotiate like a pro: Maximize your company's perceived value

The art of getting an acquirer to increase their offer is a delicate dance. Overplay your hand, and they may walk.

Effective negotiation requires a balance of assertiveness and flexibility. Key strategies:

• Quantify the strategic value of your business to the acquirer
• Use "normalized" or adjusted financial statements to showcase true profitability
• Highlight potential synergies and cost savings
• Create a sense of urgency and competition among bidders

Tactics to increase perceived value:

• Demonstrate how your company can help the acquirer grow their business
• Provide detailed projections of future performance
• Emphasize unique assets, customer relationships, or intellectual property
• Use industry benchmarks to justify your valuation expectations

7. Tell employees strategically: Balance transparency with deal success

Telling your staff you are thinking of selling may feel like the right thing to do, but in the end, keeping them in the dark may be the best thing for you and your employees.

Strategic disclosure to employees is crucial for maintaining business performance and deal success. Guidelines:

• Limit initial disclosure to key senior managers essential for the deal
• Provide incentives for those "in the know" to maintain confidentiality
• Prepare communication plans for different stages of the sale process
• Be prepared to address employee concerns post-announcement

Potential risks of early disclosure:

• Employee anxiety and reduced productivity
• Key staff members seeking new opportunities
• Competitors learning of the potential sale
• Customers and suppliers becoming wary of future changes

8. Calculate your "number": Determine when it's the right time to sell

When the value of your business to an outsider exceeds what it's worth to you personally at this point in your life, then it may be time to sell.

Personal readiness is as important as business valuation when deciding to sell. Factors to consider:

• Financial needs for post-sale life
• Emotional attachment to the business
• Future growth potential of the company
• Personal goals and desired lifestyle

Steps to determine your "number":

1. Calculate the market value of your business
2. Assess the personal value of owning the business
3. Consider the opportunity cost of not selling
4. Evaluate your readiness for a life change

9. Hire the right team: Leverage intermediaries and M&A professionals

Drumming up offers for your company—as Dan Sullivan, the founder of The Strategic Coach, likes to say—is a "who," rather than a "how" question.

Professional guidance is critical for navigating the complex sale process. Key team members:

1. M&A Intermediary or Business Broker
2. M&A Attorney
3. Accountant with transaction experience
4. Wealth manager for post-sale planning

Benefits of hiring professionals:

• Expertise in deal structuring and negotiation
• Access to a broader network of potential buyers
• Ability to maintain confidentiality throughout the process
• Emotional buffer between seller and potential buyers

10. Prepare for due diligence: Assemble information before going to market

To avoid guessing, owners often look for public comparables information, which leads to comparing themselves to a large publicly traded company in the same industry—and that is a recipe for regret.

Pre-diligence preparation is crucial for maintaining deal momentum and credibility. Key areas to focus on:

• Financial statements and projections
• Legal documents and contracts
• Operational processes and systems
• Customer and supplier relationships
• Intellectual property and assets

Create a comprehensive due diligence package including:

• Three years of audited financial statements
• Detailed customer and revenue analysis
• Organization charts and employee information
• Product/service descriptions and market analysis
• Legal and regulatory compliance documentation

11. Navigate the emotional journey: Embrace the freedom that comes with selling

Starting a business is not a life sentence. Nowhere is it written that you have to own it forever.

Emotional preparation is often overlooked but critical for a successful exit. Key considerations:

• Personal identity tied to the business
• Fear of the unknown post-sale
• Concerns about employee and customer well-being
• Guilt about "selling out" or abandoning the company

Strategies for emotional readiness:

• Develop a clear vision for your post-sale life
• Gradually reduce day-to-day involvement in the business
• Build a strong management team to ensure the company's success
• Focus on the positive impact of the sale on all stakeholders

Last updated: October 6, 2024