At some point in every business owner's journey, they will face the pivotal decision of whether to sell their company. This momentous choice can significantly impact their financial and professional future. Selling a business is a complex endeavor, and for many, it's an entirely new experience. To navigate this process successfully, there are several crucial aspects to consider. Drawing from my own experiences in selling and acquiring businesses, I'll share six essential pieces of advice for potential sellers to secure the best deal with the right buyer.
1. Rely on Experts With Transactional Experience
Just as you wouldn't attempt to climb Mount Everest without an experienced guide, navigating the M&A marketplace without expert assistance can be a grave mistake. Engaging professionals with transactional experience is essential. You'll likely require the expertise of accountants, lawyers, and a transaction adviser who understands the intricacies of the M&A process. These experts will help prepare you for the sale, manage negotiations with potential buyers, and ensure a smooth transaction. Depending on the size of your business, you may engage investment bankers for larger deals or M&A brokers/advisers for smaller transactions.
While some business owners may consider handling the process themselves to save money, this DIY approach often leads to unfavorable outcomes. An expert-led approach enhances your chances of selling faster and at a better price. These professionals understand the nuances of the M&A process and the importance of creating a competitive environment to drive better offers from buyers.
2. Understand the Buyer's Mindset
Buyers are keenly aware of the dynamics of the deal process, including momentum and competition. It's crucial to maintain the right pace and level of competition to keep buyers engaged and motivated. An experienced banker or broker orchestrates this effectively, creating a competitive process with specific deadlines and guiding negotiations. This approach prevents potential buyers from exploiting a loss of momentum in your deal.
Moreover, experts in the field keep buyers honest by ensuring transparency and integrity throughout the process. Buyers often attempt to push sellers into signing a Letter of Intent (LOI) quickly to eliminate competition, with the intention of renegotiating terms or retrading before closing. A skilled intermediary keeps the process competitive and protects sellers from such tactics, resulting in better offers and terms.
3. Choose Your Team of Experts Wisely
Selecting the right team of experts is critical for a successful transaction. Avoid assuming that the lawyers, accountants, or advisers you have worked with previously are the best fit for the M&A process. Treat this decision as a crucial hiring process and exercise caution in your selection. Engage professionals with specialized knowledge and experience in M&A transactions.
For instance, your family lawyer or solo practitioner accountant may not possess the expertise required for the complexities of an M&A deal. To secure the best deal, assemble a team of experts who understand the nuances of your industry and the M&A landscape.
4. Understand the Market for Your Business
When assessing the value of your business, it's essential to remain objective and avoid overestimating your company's worth. Many sellers believe their business is more unique or differentiated than it actually is, leading them to expect a premium in the market. However, it's crucial to understand how your business compares to others in your industry in terms of size, profitability, growth rate, and business model.
Buyers are typically larger, more established companies within your industry or private equity firms that thoroughly analyze your industry's M&A market. To attract these buyers, you must comprehend the factors that determine value in your industry and evaluate how your company's size and pricing model align with market expectations.
5. Key Factors to Consider
The valuation of a business, especially one outside the realm of hyper-growth tech startups, often relies on specific core factors:
- Industry
- Level of Profit
- Growth Rate
- Business Model
For example, professional services businesses are commonly valued based on their profitability, typically assessed as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) over the past 12 months (TTM EBITDA). Companies with higher EBITDA levels often command higher multiples, especially when EBITDA surpasses significant thresholds like $5 million or $10 million, indicating stability and attractiveness to acquirers.
However, it's crucial to avoid comparing your selling price to companies that may appear similar but differ significantly in these core factors. SaaS (Software-as-a-Service) businesses, for example, generally receive higher multiples than traditional services businesses due to their recurring revenue and lower risk profile.
6. Expect the Due Diligence Grind
Undertaking the sale of your business while simultaneously running its operations is an arduous process that can take a toll on your mental and physical well-being. After identifying the right buyer, agreeing on a price, and signing a Letter of Intent (LOI), you'll face months of rigorous due diligence.
Due diligence entails exhaustive calls and meetings to validate every aspect of your business, often for several hours a day over many months. It requires meticulous data gathering and documentation retrieval, covering every contract, deal, or employee in your company's history.
Furthermore, during this period, you must ensure your business continues to operate at peak performance while your leadership team is heavily involved in due diligence. Any drop in sales or profit could raise concerns among buyers and potentially jeopardize the deal.
Closing Thoughts
Selling a business is a complex process that requires careful planning and expert guidance. Attempting to navigate this journey alone can lead to unfavorable outcomes. Engaging a team of experienced professionals, including investment bankers, lawyers, accountants, and advisers, is crucial for success.
Additionally, understanding the buyer's mindset, the market for your business, and the factors that influence valuation is essential to set realistic expectations. Finally, be prepared for the grueling due diligence process and its demands on your time and energy.
By following these pieces of advice and surrounding yourself with the right team, you'll significantly increase your chances of successfully selling your business and embarking on a well-deserved journey toward your next chapter.
