Imagine you come back from your annual trade show, and John Smith, who you met at the trade show, calls you up to arrange to meet with you the next time he's in your city. He's a bit cryptic about the reason why, but he's a credible person who runs a solid company, so you agree to meet with him.
Four weeks later he's there in your office feeling you out about selling him your company.
Would you be ready?
This was exactly the situation one of our business coaching clients found himself earlier this year.
He had built a great company with sales up the past year to just over $14 million, and now he had this unsolicited offer to purchase his company.
Here are 15 tips to help you be better prepared to do the dance of selling your company.
- Get signed confidentiality and non-solicitation agreements in place.
You want what you share to stay private. And you don't want your prospective buyer poaching customers or team members.A well drafted non-disclosure agreement (NDA) with a clear provision for non-solicitation of your staff or customers is a key protection you must have before you move past any generic, early conversations of selling your business.
- Let the "pre-dance" inform you on what the "main event" will be like.
If the buyer is hard-nosed but fair, and always well prepared and with solid follow through, that tells you one thing. If the buyer is flakey and unprepared in the early stages, that tells you something very different.Don't let your excitement and desire to close a deal (or some inflated number your prospective buyer drops in the early stages of the negotiation) blind you to the character of your buyer. And that character is often previewed in how they behave in the early stages of the sales process.
- Be very intentional about when you tell your team.
Generally, your CFO will know right away (she's no dummy--when you ask her to prepare all those financials she'll know something is going on--talk to her and ask for her discretion.)Wait until the later stages to tell your leadership team, ideally you'll even have thought through a way for key team to have financial incentives to keep the company performing well through the sale (in fact, most savvy buyers will require employment contracts with incentives to keep your key staff onboard well past the sale date).Likely you'll only tell your whole company after the deal is closed.
- Set up an outside "nerve center" for the due diligence process.
If you are working with an investment banker or reputable business broker this will likely be an online document vault. (Remember tip #1--have a signed NDA first!)
- Share the most sensitive information at the very end (unless you know there are "surprises" in which case disclose them appropriately earlier in dance so you don't waste either party's time.)
Yes, they signed a NDA, but they could still hurt you with what they learned so only share it after they have jumped through all the earlier hurdles or at least enough of them that you know they are a legitimate buyer.
- Understand that it's a marathon NOT a sprint.
It is common for a sales process to take months. I've got one client who sold her company for just over $40 million dollars. It took her over 2 years and three attempts to close the deal. Pace yourself. You have to run through the finish, not to the finish line.
- Make sure you keep your eye on RUNNING the business and not on the exit door.
It's a strange dynamic--you emotionally start distancing yourself from your business, almost as if you were in a romantic relationship that you knew you were about to end. But you've got to keep running the business through the closing because if the sales falls through or stalls, and the trend line drops down, it could literally cost you millions of dollars of enterprise value.In my opinion, this is the biggest reason why you want a talented broker or investment banker representing you and running the sales process--to leave you focused on running a great company.
- Normalize your financials early.
Talk with your CPA or CFO about "normalizing" your financials. This means correcting them for strange idiosyncrasies so your buyer sees what they expect. The more you have to "explain away" some part of your financials, the more your prospective buyer will start to question their accuracy (or at least posture that way to negotiate a lower price or some other security provision to protect themselves in their purchase.)If you own the building in a separate entity (see Tip 9 below) then make sure you're paying yourself some reasonable rent and that this shows in your P & L. This also includes things like no longer running your legitimate but excessive owner perks through your company.At the very least, restructure your Chart of Accounts to move these expenses to be "other" and below your operating profit shown on your P & L. This means your $56,000 of pension contributions for you and your spouse; your leased sedan; your bi-annual company board meeting in Maui expenses; etc.
Remember, your buyer will want a full three years of financials, so start normalizing them now.
- Pull real estate separate prior to sale and lease to company in an arms-length transaction.
Two reasons to do this. First, you may just have created a way to sell your business, but to still keep an ongoing passive, residual income stream from the lease back from your real estate entity to the purchaser of your business. Second, in most cases, you'll be able to negotiate for a higher total sales price by selling the real estate to your purchaser in a second, separate transaction.The earlier you pull the real estate into a separate entity the better; it legitimizes the arrangement (plus, it is good asset protection.)
- Beware dramatic margin or key ratio discrepancies on your financials relative to industry norms.
They become read flags. For example, I have a client who runs a very successful professional services firm with a 42% operating profit margin. If he were to sell his company his buyer would likely discount his operating profit margin in its calculation of value since in his industry the norm is 35%, with 40% being the outside "legitimate" maximum. Understanding this doesn't mean he wants to lower his operating profit margin, of course not. He just understands that if he wants to maximize his value on the sale of his business, increasing his operating profit margin is not the best way. He needs to focus on growing his total sales (and hence increasing operating profit through a larger sales base versus just through increasing his efficiency in operating his business.)
- Beware allowing any one customer becoming more than 10% of your total business.
If you have too much concentration in a single customer, a prospective buyer will be nervous. "What if we lose this customer post purchase of the company?"To be clear, I'm not suggesting you stop selling to this customer, of course not. Instead, look for ways you can grow your other customers faster so over time you reduce your concentration issue.
- Beware of potential "channel partner" or other concentration risks you might have. Look at your business through the eyes of your potential buyer. What scares you about buying the business? What could go wrong post-purchase?For example, one manufacturer who is a business coaching client of ours has a key sales channel partner who is responsible for over 80% of his company's sales. A buyer would be nervous about this, after all, what if that relationship soured post sale? That risk would trigger the potential buyer to negotiate in ways to lower their risk (e.g. pay you less, require more of the purchase price to be paid over time and only upon performance contingencies of some type, etc.)What steps can you take today to lower your "concentration" risks tomorrow?
- Not all buyers are created equal.
Sometimes the best offer isn't the highest dollar offer. Factor in the certainty that they will in fact close. This means gauging your prospective buyer's commitment level, capacity to close (both your negotiating partners authority to decide and capacity to fund the sales), and track record with you and with other business dealings.Don't be shy about qualifying your prospective buyers carefully. If you're working with a seasoned business broker or investment banker, this is something she'll do for you.
- Know that it's normal to emotionally detach from the business as you go through this process.
Make sure you correct for that tendency by keeping your focus on running the business. You may very well stay as the owner. (See Tips 7 and 8 above.)
- Make sure you get all the buy in and input you need from your other investors before you go to sell so that you have a unified decision making team.
Keep them informed as you go. Enlist their help to find buyers, double check deal points, and be a one-step-removed perspective.
So there you have 15 directives to help you more effectively navigate the sale of your company. Whether this sale be in the coming 6 months or 6 years, you're now armed with 15 key insights to help you do this dance more gracefully.
One final thought: To maximize sales price (both through increasing your EBITDA and through raising the multiple you can command) you've got to find ways to scale your company and at the same time, lesson its reliance on you the owner. If you would like to get the in-depth details of how to do this, then please join me for a special webinar training I'm doing that's coming up very soon.