How to Sell Your Business
All business owners will leave their business, one way or another. Smart business owners, however, prefer to transition out of their business on their own terms. For some owners, this means selling their company so they can realize financial rewards from all their years of time, toil, and investment. As a business owner, you have probably asked yourself at some point, “How do I sell my business?”
The answer to this question will vary depending on the size of the company, your motivations for selling, your timeline for selling, and many other factors. The process of selling your company has multiple steps, so let’s get started.
HOW TO SELL YOUR BUSINESS
Before embarking on the process to sell your company, you should start by answering some basic questions about why you are selling. What are your goals?
Reasons to sell your business
For some owners, their goals are primarily financial – they have a specific dollar target in mind they want to realize when they sell their company. They have invested significant time, money and energy in their business and want to harvest their rewards.
For other business owners, the reasons might be more personal – they want to retire to spend more time with family, they want to start a new business, they have a health issue, or they are tired of the day-to-day grind of the business.
Still other business owners feel they have taken the business as far as they can personally take it, and are looking to find a new owner who can continue to grow the business and create new opportunities for their team.
Regardless of your reasons for wanting to sell, it is critical that you prioritize what is most important to you.
For example, an owner might have a health issue which drove the decision to sell, but as they got mired down in negotiations about price, they walked from a deal because the price was not high enough, yet they still have their health issue. Was the additional purchase price they were seeking more important than their health? Not likely.
Once you know your goals, it will be easier to chart your course.
Why not to sell your business
It is usually the wrong time to sell your company when you are tired and burned out. When a business owner is tired, more often than not it is because their business has reached a plateau, is not doing particularly well, or is suffering from a lack of attention, all of which typically result in lackluster business performance, or worse.
Why would someone sell a profitable business?
In most cases, buyers will pay more for a growing business than for a “steady state” or declining business. We have learned through dozens of transactions that in most growing and profitable businesses, the value of the business continues to increase through the sale process which enhances both a seller’s negotiating position and the likelihood of a deal actually closing. In a no-growth or deteriorating business, its value will decline over time, which means buyers are more prone to get cold feet or question the original deal they proposed, which only prolongs the transaction process and increases the odds for a busted deal. As a result, tired sellers make for unsatisfying transactions.
On the other hand, business owners who are enthusiastic about their business and its potential, but want to consider their exit options, are much more likely to secure a transaction that meets or exceeds their needs and expectations. When a business is growing and has solid prospects for continued revenue and profit growth, it will command a premium valuation in the market.
A seller’s excitement, enthusiasm, and optimism are all contagious to potential buyers. Buyers will in turn build on the seller’s enthusiasm with their own ideas and plans, which should result in a higher valuation and a deal that is more likely to close. Sometimes an owner of a growing business can feel like he left money on the table after a sale, but in our experience growing businesses sell faster, at higher valuations, and with more predictability than shrinking or stagnating businesses. We advise clients to “sell on the way up,” as it is hard to predict when the “top” will be reached, and selling “on the way down” is a tougher proposition.
HOW TO SELL YOUR BUSINESS
There are several ways to get a sense for how much your business is worth. The first is a formal valuation done by an accredited valuation expert. These will usually cost $7-15,000 and will provide a detailed analysis of what your business is worth using a variety of valuation methods, and will also provide some analysis of what is driving value higher or lower, which is valuable information. Valuation experts can also provide a shorter market assessment that does not provide as much detail for $3-5,000.
You can also ask an investment banker or business broker to give you an estimate of what your company is worth, but you need to be careful. Some investment bankers or brokers will inflate the value of your business because they want to get your business and represent you in your sale (we have seen this frequently). The best way to protect yourself in this situation is to ask them to provide the underlying private company and public company valuations they used to come up with your valuation. With the underlying valuation data, you can do your own back-of-the-envelope assessment.
You might have heard of “rules of thumb” in your industry. For example, say companies in the construction industry sell for 3-5 times EBITDA (earnings before interest, taxes and depreciation). Well, if your construction company made $2 million last year, the difference between $6 million (3 times $2 million) and $10 million is substantial, and could be the difference between meeting your goals or not. It can be misleading to rely on these rules of thumb, particularly knowing each business is unique and will have distinct factors that drive its value up or down.
There is one mistake we see business owners make frequently, however. An owner will receive a call from a potential buyer who tells the owner they are interested in buying the owner’s company. With some preliminary information, the buyer will give the owner an offer, which tends to anchor the owner’s expectations for what their company is worth. Because the information on which these offers are based is usually high-level, and because the buyer’s incentive at this point in the negotiation is to tie up the owner so the owner does not talk with any other potential buyers, these offers are not reliably indicators of a company’s value. It is best to not use these as your benchmark for the valuation of your company.
One final note on company valuation calculators. There are dozens of online business valuation calculators business owners sometimes use to value their business. It is unwise to rely on the valuations that are generated by these calculators because they simply do not collect all of the relevant information and will give you a false sense of certainty about the valuation of your business.
HOW TO SELL YOUR BUSINESS
Once you have a sense for what your financial goals are in a potential sale, and you have a good sense for how the market would value your company, you can determine if there is a gap. If the expected valuation for your company is lower than your financial goals, then it probably makes sense to wait until your business grows into something more valuable before you sell (or you can adjust your financial goals).
If the valuation of your business exceeds your financial targets, then you must look at the impact of deal structure and taxes to get a sense for what your actual take-home cash will be from a sale.
What about deal structure?
In evaluating whether a potential transaction could meet your financial goals, you will need more than just your company’s valuation. You will also need to account for typical deal structures.
Most deals are not structured to pay 100% in cash at closing. Most deals will involve an escrow (5-10% of the purchase price) that is held to ensure compliance with all the representations and warranties you will make about your business. Other deals will involve contingent consideration or “earnouts” that pay the seller a prescribed amount provided the business meets certain performance or other hurdles following closing. Other deals might involve payment of the purchase price in some combination of cash, notes or equity in the buyer.
Escrows, earnouts, notes and equity mean the cash at closing will be less than the overall valuation of the business. For example, if your business is worth $20 million, but there is a $2 million escrow account, a $2 million earnout, and a $2 million seller note, then the cash you would receive at closing is only $16 million. If you were counting on $20 million to meet your financial needs, then this deal is not going to meet your requirements.
We also advise clients that they should only include the cash at closing in a transaction to determine if the transaction is going to meet their objectives. Escrows, earnouts, notes and buyer equity are all uncertain payments in the future – if they happen, then these would be “gravy”, but you should not count on them in determining if a potential transaction is going to meet your goals.
What happens to cash when selling a business?
Many businesses hold substantial cash balances, and many businesses also have debt (whether term loans or working capital lines). In almost all deals, the seller will keep the cash on the balance sheet, and will be responsible for paying any outstanding third-party debt. For example, if your company is valued at $20 million and has $3 million in cash on the balance sheet and $5 million in debt, you as the seller would receive $20 million plus $3 million minus $5 million, or $18 million (not accounting for deal structure elements like escrows or earnouts, etc.).
Do I pay tax when I sell my business?
Unfortunately, yes (provided you have taxable gains). If you are selling the stock in your company, you will pay capital gains taxes on the difference between your basis in your stock and the sale price. If you are selling the assets of your company, you will pay taxes on the difference between the tax basis in those assets and the purchase price for the assets – in some cases, these taxes will be at capital gains rates, and in others, they will be at ordinary income rates. The structure of a transaction is particularly important to determining what taxes you will owe, so be sure to consult your tax advisor.
Once you have considered your company’s valuation, potential deal structures, and estimated taxes, you should now have a good sense for the amount of cash you will net from a transaction (not including deal expenses, which we will cover below). If this amount is greater than your financial goals, then you should be in a good position to start a sale process.
What if my business is not worth as much as I need?
If the expected cash at closing from a transaction is not going to meet your financial goals, there are several ways to increase the value of your business. The first, of course, is to grow revenues and profits. The second is to critically examine the risks in your business that might be dragging value down and determine if there are things you can do to minimize or eliminate those risks.
Business valuation is a combination of a company’s expected growth in cash flows and the riskiness of those cash flows. The riskier a company’s cash flows, the less valuable it is. If you are able to successfully identify and then eliminate or minimize key risks in your business, then your company’s value will increase. In addition, having a clear and convincing growth plan can also add to your company’s valuation.
When to sell a business
Personal timing is probably the easiest to determine – are you personally ready to sell your business? Have you clearly identified what selling your business is going to make possible that is not possible today? Have you developed a post-closing plan for what you are going to do? For most entrepreneurs, many of whom are Type A personalities, having a clear purpose following closing is very important. Without purpose, life after closing can seem directionless and you will likely not be happy.
Business timing is based on how the business is performing. Trying to sell your company after a period of deteriorating or volatile earnings will be challenging. Selling your business when it is doing well, and when there is still some “gas in the tank,” is your best option. Buyers want to see the potential for continued growth, given they are buying the future.
Market timing is probably the most challenging component to determine. Given most sale processes take 6-12 months, even if the M&A market is great today, it might change in 6-12 months. In general, if the market is poor today and there are not many buyers, it might be best to wait until the market recovers. If the market is healthy today, then it will make sense to go to market to sell, understanding that there is a chance the market turns during the process.
HOW TO SELL YOUR COMPANY
If you have determined now is the right time to start a process to sell your business, your next question is likely going to be, “Do I need to hire a broker to sell my company?”
When to sell a business without a broker
For very small deals where an investment bank or business broker’s fees would be too large, you might consider selling the business yourself using an online marketplace, of which there are several. However, understand that proceeding alone means you will be without the benefit of experience, which might end up costing you more money in the long run.
Can you sell a business quickly (and how to)?
The process is never quick, but hiring an investment banker or business broker will help facilitate your transaction process on a number of fronts. First, for most business owners, this will be their first time going through a sale process. Given the importance of this transaction to the owner personally and to the business and its team, getting help navigating all of the potential pitfalls of a transaction process will be a wise investment.
In getting multiple buyers to the table, they will likely increase the price you could get for your business, hopefully paying for their fees. More importantly, however, is the fact that having an experienced intermediary will significantly increase the likelihood of your deal actually getting done.
Having an investment banker assist you will also help in your negotiations. In many cases, following closing you might be working alongside your new buyer for some period of time, so having a healthy, productive relationship with them will be important. By having someone else handle the tricky negotiating issues, you help preserve the relationship you have with the buyer.
Do I need a lawyer to sell my business?
Yes. Selling your company is a complex legal transaction even in its simplest form. Sale documents have critical provisions around post-closing liability, indemnification, and taxes that if not handled appropriately can come back to haunt you. The last thing you want is to have sold your company only to be involved in litigation after the sale regarding legal provisions that were poorly constructed.
Our recommendation is to hire an attorney who is very experienced in, and primarily works on, mergers and acquisitions. Having a general corporate attorney represent you in a sale transaction can sometimes make negotiations last longer, increasing legal fees and frustrations. Just like going to the right type of doctor for the specific ailment you have, having the right legal expertise is critical to getting a deal done on time and without unnecessary legal fees.
Documents needed to sell a business
There are typically several documents involved in selling a company. The core agreement will be a sale agreement or unit purchase agreement in the case of a limited liability company. In this sale agreement will be the purchase price and deal structure, representations and warranties that you as a seller are going to make to the buyer, provisions for indemnification in the event there is a breach of the representations and warranties, provisions around taxes, and other components.
In addition, a transaction might involve an escrow agreement, employment agreement(s), consulting agreements, non-compete agreements and other transaction documentation. As you can see, you will want to have competent legal representation to help you navigate the transaction.
Do I need an accountant to help me with the sale of my company?
Sophisticated buyers will perform extensive due diligence on your company, especially your financial statements and your financial projections. As a result, having an accountant (preferably one who has worked with your company for a while) help you prepare your financial statements will help you get through due diligence with fewer issues.
For any transaction we work on where the expected sale price is greater than $20 million, we strongly recommend (and in some cases, insist on) getting a seller-prepared quality of earnings report. This report is prepared by a third-party firm (an accounting firm or quality of earnings specialty firm).
This quality of earnings review will identify potential accounting issues you have and develop ways to address them, identify reasonable adjustments to your earnings (in some cases, increasing earnings so your purchase price will go up), and prepare you for when the buyer does their quality of earnings review. Having this prepared ahead of time will speed your diligence process and reduce the potential that your deal falls apart over accounting issues.
When should I involve my financial advisor when contemplating a sale of my company?
One of the most important goals in your transaction process will be the money you need personally to accomplish your financial objectives. For many business owners, they might have a vague sense for what this number is, but they haven’t worked with a financial advisor to nail it down.
A financially advisor can help you put a personal financial plan together, which includes your current assets, your current and future spending requirements, provision for significant one-time expenses like a new house, college tuition, or other expenses, and a forecast of how financial markets could perform under various scenarios.
With this information you will be able to determine how much cash you will need at closing to meet your goals. Many financial advisors will do this work for free in the hopes of getting you as a client, and some will charge an hourly or modest fixed fee to put the plan together. Having this plan eliminates a lot of uncertainty and will allow you to feel confident going into a transaction.
You should also have your financial advisor adjust your plan based on new information you get during the transaction process. Is the expected amount of cash at close higher or lower than you anticipated? Have you changed some of your spending requirements or desires? Keeping your financial advisor up to speed and having them update your plan will give you comfort that you are going to be OK following closing.
How much does it cost to sell a business?
There are several different expenses to account for when you sell your company.
Attorneys typically bill by the hour, although we are seeing more cases of attorneys being willing to use a flat, not-to-exceed fee estimate for their work on a deal. While you might be attracted by a low hourly billable rate from an attorney, don’t be misled. Some attorneys who have a low hourly billable rate might end up spending a lot more time on your deal because they are not as experienced or as competent. This simply means you will be more frustrated as the deal takes longer, they might miss important elements in the deal, and your total fees might not be any lower. Conversely, high billable rates are no guarantee of competence, so make sure to check references and talk with other owners and advisors to pick the right attorney for you. Some of the very best deal attorneys we work with have high billable rates, but they are incredibly efficient and the resulting legal fees end up being lower.
In general, we see deal fees range from $30-40,000 on the low end to over $250,000 in larger, more complex transactions. Talk with different attorneys and explain the valuation range you expect in your transaction and ask them to provide you with estimates.
Investment bankers or business brokers usually have two types of fees. The first is a retainer which might be billed up front or monthly over time. Some business brokers do not charge a retainer, but be careful as you will get what you pay for. Retainers for reputable firms will range from $5,000-$20,000 per month, and in some cases these retainers will be credited to success fees.
Investment banks and brokers also charge a success fee. This fee is payable at closing and is usually calculated as a percentage of the total transaction value. These fees might range from 10% for a smaller deal (less than $5 million) to 1-4% for much larger deals. Some banks structure their fees so that as the valuation increases, their percentage increases – in essence, rewarding the bank for getting a higher valuation.
For success fees, some banks charge all of their fees at closing. For example, if the total deal value is $25 million, but $5 million will not be paid until later in an escrow or an earnout, some banks will charge their fees on the full $25 million, while other banks will only charge their success fee on cash that has actually been received, so they will wait until the remaining $5 million is paid to get the remainder of their fees. The latter arrangement is obviously a better alignment of interests between the banker and the client.
Preparing a sell-side quality of earnings review will generally cost between $50,000 and $250,000, depending on the complexity of the company’s financials and whether the financials are “clean” to begin with. While these fees appear steep, in almost all cases a good quality of earnings firm will more than make up their costs in either preventing potential price reductions later in the process or finding adjustments to earnings to increase earnings (and therefore purchase price).
HOW TO SELL YOUR COMPANY
Once you have hired your team (investment banker, attorney, accountant, and financial advisor), you are ready to begin the transaction process.
How long does it take to sell a business?
We generally advise clients that in today’s market transactions will take from 6-12 months from the date they hire an investment bank to when the wire clears at closing. There are several factors that will accelerate or delay a transaction, including the company’s level of diligence preparation, whether the company’s performance deteriorates during the transaction process, the condition of the market, and other factors.
Due diligence checklist for selling your business
The typical buyer’s due diligence checklist is many pages, single-spaced. Buyers will ask for all information you have regarding your financials, contracts, benefits, insurance, environmental issues, intellectual property, litigation (past and present), and dozens of other areas. In short, they are going to look at everything.
After you have hired your investment bank, they will send you their own diligence list which should mirror most buyers’ lists. Over the course of the next 2-3 months, they will collect all of your information and put it in an online data room which is organized according to subject area. While painful, the more work you do at this stage of the process, the better prepared you will be for due diligence.
Your investment banker and attorney will review all the due diligence documents and identify any contracts that need to be addressed (some might be unsigned, or pages missing, etc.) and review all other materials. They might also identify issues in a contract like rights of first refusal, the right of a party to consent to your transaction, and other important provisions that you will need to address before going to market. The goal is to have all of your due diligence information in the data room, organized, and without any obvious problems, prior to when you start allowing buyers to access the data room.
How do I tell my story to the market?
After your investment banker has collected preliminary diligence information and has talked with you several times to learn more about your company, its culture, your products and services, your customers, and other important elements to your story, they will start to draft a Confidential Information Memorandum (“CIM”). This is the “book” that buyers will review to quickly get up to speed on your company and your story.
It is important to invest time and energy in collaborating with your banker to make sure the CIM is as well-positioned as possible. This is your company’s first introduction to your prospective buyer and you want it to be a good one. Properly done, this process might require 4-5 drafts and back and forth with your banker. The CIM might take the format of a PowerPoint slide deck, or it might take a long-form document like an annual report with charts, graphs, and other important information.
Where to sell my business – How do I find buyers for my company?
While your investment banker is working on the CIM with you, they will also be putting a bidder list together in parallel. This bidder list will include private equity firms, strategic buyers, family offices and potentially high net worth individuals if it is a smaller deal.
Investment banks deal with hundreds (if not thousands) of private equity firms and family offices in their typical processes. Most banks will have databases like Cap IQ that help them identify the right firms for a specific company. In addition, they will do research to identify potential strategic buyers in and around your industry.
Some firms claim to be “specialists” in a particular industry and to know all the relevant buyers. This has pros and cons. The pros are that they know some of the buyers in your space, the cons are that they might unnecessarily restrict your potential buyer universe to the “usual suspects,” missing out an opportunity to find the outlier bidder who values your company more highly than the buyers that particular investment bank typically deals with. In our experience, if a bank is representing a great company, whether the buyer knows the banker or not is not terribly important to whether the buyer is going to be interested in the company itself.
Moreover, industry specialists may also have potential conflicts of interest if they work exclusively in a single industry. They might be helping some of the buyers on your list do buy-side work (locating companies for those buyers to purchase), and if they are going back to the same set of buyers time and again for each of their deals, they might not want to upset any of them by insisting on better terms or a higher price.
The work to identify the right bidder pool for your company takes time and energy.
Where to sell my business – How do I get buyers interested?
Once the investment bank has completed the CIM (and a shortened, sterilized version of it called a Teaser or Executive Summary) and has compiled a pool of bidders they will reach out to, they will start the process of “dialing for dollars.”
This process is a combination of e-mails and calls to talk with each of the bidders to determine their interest level in acquiring your company. They start with the Teaser to give the bidder a quick overview, and if the bidder is interested, will ask them to sign a non-disclosure agreement. Once the NDA is executed, then the investment bank will send the bidder your CIM to review the company in detail.
The investment bank might also make other information available to buyers in a scaled-down version of your data room to help bidders get a more complete picture of your business.
The investment bank will then follow up with each bidder who has received the CIM to determine their level of interest, and answer follow-up questions. The investment bank will then set a date for interested bidders to submit an “initial indication of interest”, which sets forth the bidder’s estimated valuation range for the company, along with a high-level deal structure.
Once all interested bidders have submitted their initial indications of interest, you and your investment bank will select which bidders you would like to invite in to meet you and your management team. In most cases, the number of bidders you would ideally meet with is between 3 and 10.
The million-dollar meetings
For your management meetings, you and select members of your team will meet with each of the interested bidders whom you have selected to come in and meet with you. These meetings are typically 3-4 hours in length, and often involve a dinner the night before or the night of so that you and the bidder can get to know each other in both a formal and more informal context.
Your investment banker will spend several hours with you and your team to educate you about what is to happen in these meetings, help you get your presentation together, and then do several dry-runs where they ask you questions and then critique your answers. These meetings are worth millions of dollars and you want to execute them well. While this extensive preparation can seem laborious, it is well worth it.
Negotiating the letter of intent
After all of your management meetings have concluded, your investment banker will solicit formal letters of intent from the bidders. After the management meetings, some bidders might elect not to go any further in the process, while others are hopefully even more enthusiastic about your business.
An exclusivity clause means you as the seller are committing to only negotiate with this specific bidder and will not talk with any other bidder for a period of time (usually 45-90 days). This gives the bidder confidence they are not wasting their time on expensive and time-consuming due diligence only to be outbid by another bidder.
Once the investment bank has received all the letters of intent, they will review those with you, compare prices, terms, and then your perception of “fit” with each of the bidders. In most cases, 2-3 bids will rise to the top, and the investment bank will then go back to those bidders to see what else they can do “sweeten the pot” and hopefully increase their bids. After some back and forth, you and your investment bank will settle on either a single bidder to continue due diligence and negotiations with, or in some cases, the investment bank might recommend proceeding with 2-3 bidders.
In today’s market, the level of due diligence by buyers is quite extensive. Sophisticated buyers will have attorneys, accountants, benefits consultants, insurance consultants, IT consultants, and other advisors pour over your diligence materials, talk with you and select members of your team, interview customers, and otherwise look into every aspect of your business.
Simultaneously, your attorneys and the buyer’s attorneys will begin the negotiation of all the relevant purchase documents. The buyer might wait a couple weeks to begin this process until they have completed some of their diligence so that they have a better sense of which areas of the purchase agreement to focus most attention on.
The due diligence process is long and arduous. Buyers will ask you the same question ten different times, and you will get frustrated, particularly as you near the end of the process when everyone is tired. “Deal fatigue” is a real issue and happens in every deal. Keep this in mind as even small issues at the end of a deal process can take on disproportionate importance and weight.
Once due diligence has been completed by the buyer and you have finalized negotiations on the purchase documents, you are ready to close. For almost all sellers, this process is somewhat anti-climactic. You will get on a call with all the parties and their attorneys, confirm everyone is good with closing, and then the call will end. You will then wait for the wire to hit your account, and then likely go have a glass of wine (or something stronger).
After your transaction is closed, you will need to pay close attention to any post-closing covenants on either your part or the buyer’s part. This will include instructions for how to deal with escrow accounts, earnout payments, note payments and other matters. Put a calendar together with your attorney and investment banker of the important dates, and then make sure to follow up so that you ensure you are paid any contingent amounts.
Things to consider when selling a business
Selling a business is usually a once-in-a-lifetime event for a business owner. It is complex, the stakes are high, it takes a long time, and can be unduly frustrating at times. However, when done well, it can help you harvest significantly from all the work you have put into your business.
M&A consulting for your highest possible return
If you are considering a sale and would like to learn more about how to get started or hire the right team, please reach out. We have seen how successful strategies are executed and can help you think through your next steps. Please feel free to contact us.
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