Are any of these thoughts keeping you up at night?
- I am getting tired. I have been running my company for many years. Maybe it is time to think about selling the business.
- I started this business with a plan to get my family involved, but the kids have other interests. Maybe it is time to think about getting others involved.
- I see my competitors raising capital and expanding quickly. Maybe it’s time for someone with fresh ideas and capital to take it over.
- I built a solid company with the potential to be much larger; great time for new management and capital to scale the business.
It is not time for a fire sale, but time to develop a well-thought-out plan to achieve the best deal for you, any other investors and your employees.
Businesses are generally bought, not sold, since the purchaser writes the check.
Your opportunity is to position and prepare your company for the best outcome by considering the following steps in your planning.
You will undertake a company sale process with assistance of a lawyer and an accountant. Depending upon the size and complexity of your company as well as your own skills, you might engage other professionals to assist. The definitions of small, medium and large are very fluid. Whichever path you select, the basic tasks are the same, just a matter of who is strategizing and who is executing which parts of the plan.
- If you have a small company, you will probably sell it yourself.
- If you have a small to medium size company, you might engage a business broker
- If you have a medium to large company, you will probably have an investment banker.
Take an external perspective--figure out who might be interested in buying your business and what they look for in an acquisition
- Determine what types of businesses might be interested in buying your company, rather than specific company names. For example, are there direct competitors wanting to grow larger; companies with similar products/services desiring to enter your market territory or channels; companies with associated products needing to expand their product lines; companies wanting your customer list, your technology, your employees; or other possibilities?
- Develop a list of a few specific companies in each of the categories you have just identified.
- Get to know the companies on your list. Do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis, research their plans and aspirations, get to know their customers, learn about their history in making acquisitions, etc. According to David Krauskopf, Entrepreneur/Investor/Expert in early stage startups/former SCORE mentor, “For each potential buyer, put yourself in their shoes, understand what they look for and what they could do with the combined companies.”
Identify the decision makers; determine which associations/organizations they are involved with. If you are not already a member of those groups, consider joining as a speaker/exhibitor at their meetings, trade shows, etc.
Consider becoming a customer or supplier to the companies on your list. Bottom line: you want these decision makers to know you in the normal course of business and, of course, you want them to think highly of your business. You want them to recognize the value your business can bring to theirs.
- Have “your number” in mind. If you receive a surprise telephone call with an offer to buy the company, know in advance what range of value will be of interest to explore. This number will change over time as your business changes and your eagerness to sell changes. If there are other company investors/owners, you might want to initiate a discussion about “the number,” so the people who will eventually vote on a company sale will have common expectations.
- Build a list of three to five CEOs who might be interested in buying your company. If/when you receive an offer to purchase your company, you or your banker/broker, can call them and essentially say, “We recently received an interesting offer to buy our company (never mention the offeror’s name). Are you interested in making a bid?” To get the best price and terms, it is helpful to encourage a bidding competition.
Take an internal perspective—look at your business to ensure it is attractive to yourself and a potential buyer and is ready for a sale
- Make your business attractive to yourself as well as a potential buyer. A company sale might never occur so you need to have a business to support your goals. This includes having a growing group of customers who pay on time. It could also include developing customer/business attributes that you have identified to be of interest to potential acquirers. Elma Levy, coach/entrepreneur/SCORE mentor who sold her systems business says, “This is critical. An acquisition process is very disruptive, and your team might hear about it and begin looking for a new job. You have to run your business as if nothing will happen.”
- Get your company financials in good shape—both accounting policies & practices and preparing monthly/quarterly financial statements (income statement, balance sheet, cash flow statement), as well as A/R status, sales pipeline, financial models, tax returns, etc. It is best that you show positive performance, be it sales growth, margins, backlog, or other metrics used in your industry. A sound financial reporting and forecasting pipeline reports create a professional and mature look for a potential buyer. David Krauskopf further advises, “Know on what basis your type of company is sold; service businesses are usually sold on a multiple of cash flow, while a fast-growing product business might be on a multiple of revenues. Each industry has its own multiple averages.”
Do you have a financial audit or review? Think about it, while it might be pricey, if the results are good, the fees will be recovered in the sales price as an audit reduces buyer’s risk. If your financial and business information is not already in electric form, think about converting to make the buyer’s due diligence much easier.
- Update your company governance processes. If you have a board of directors, do you have board meetings and record minutes? Are your licenses/registrations/bylaws current? Have you documented your employees’ compensation and benefit plans, and employee agreements including retention and non-compete agreements?
- If you do not already announce big “wins” like new contracts, partnerships, and hires of key employees, you might consider doing so in press releases, newsletters, LinkedIn notices, etc. that potential acquirers are likely to see. Of course, some “news” might be confidential or there might be concerns about having competitors know about your progress. Deciding whether or not to broadcast these wins might be a balancing act.
- Update your business plan and have a financial model that projects company performance three years hence. Use it with your team to track actual performance. Maybe even start working on a “pitch deck”—a 20-page PowerPoint presentation that tells your story and its attractiveness to a potential buyer.
- If you do not already have advisors, consider engaging a few, especially those with industry experience who can provide contacts with the company CEOs on your list of potential acquirers, and maybe someone with experience buying or selling businesses.
- Ensure you have sufficient cash resources including a line of credit. If you receive an inquiry to buy the business, it often takes several months to close the transaction. You do not want to be in the situation where cash is tight and you need to take whatever terms are offered. Having sufficient cash, or access to cash, gives you the ability to negotiate the best terms.
- Elma Levy also recommends, “Talk to your customers and make sure they are happy with your company because you want them to be ongoing customers and to provide positive feedback when a buyer inquires as part of the due diligence process.”
Nicole Geller, board member/angel investor/entrepreneur sold her large government contracting business. She summarizes the sales process with the following thoughts:
- “Getting ready for an exit requires a good strategic plan and execution to drive value to your business in ways that appeal to buyers.”
- “It is a good practice to meet with an investment banker or two in your space to gauge current buying activity.”
- “If there was an opportunity to do things over, I would have had an exit timeline from the beginning to make better business decisions for an eventual sale.”
- “Buyers are buying your executive team, so hire the best you can; it helps drive your business value in an exit.”
We have discussed positioning your company to be acquired, not the transaction terms. These important terms might include:
- The purchase price
- If the purchase will be for cash or equity in the acquiring company
- If the purchase payment will occur entirely at closing or some will be paid upfront and some over the next few years upon certain agreed upon milestones
- If you and your employees will continue to be employed by the acquirer
- What representations and warranties you might have to provide, etc.
Companies are bought, not sold. You can position your company so it is noticed and structure/operate your business so it will be attractive and ready for a sale. Company sales are not a frequent event, so surround yourself with advisors and a lawyer who can share their experiences and knowledge to get the best outcome for yourself, your other investors and your employees. If your business is of size or complexity, consider engaging a business broker or investment banker.