KEY ARTICLE TAKEAWAYS
Understand the potential pitfalls of engaging with an unsolicited buyer for you business
Learn the importance of certainty of close when selling your business
Identify what steps you can take to significantly increase your certainty of close
Has this happened to you before? You get a call from someone you have never met – they tell you they have been doing research about your industry and your company specifically, and would like to talk with you about an acquisition of your company. He sounds really knowledgeable and seems like he “gets it”.
What do you do?
Like most business owners, you have probably thought about the sale of your business, but it has always seemed like something that would happen years down the road. Besides, your business is doing well and you don’t really have time to think about a potential sale at this point. At the time you get a call like this, you probably haven’t done much work, if any, to prepare your company to endure the rigors of due diligence and a transaction process. But, this person sounds really smart, and at the valuations they tell you they are ready to bid for companies like yours, this could be a lot of money….
Want to get a sense for what it takes to sell your company? Start with this exit checklist.
So, you agree to meet with them. They ask for some information before the meeting – mostly financials. You haven’t scrubbed your financials yet or reviewed them with an eye toward how a buyer might look at them, but heck, it can’t hurt much, right? If the valuation they offer isn’t any good, then no harm done – what could possibly go wrong?
They review your financials, and you meet with them. They have some questions, which you answer, and they tell you they are very interested in pursuing an acquisition of your company, providing you an overview of how they will value it. It all continues to seem very compelling, and while you weren’t planning to sell, this offer just seems too good to pass up.
The send you a letter of intent which has a valuation that is really attractive – more than you ever thought your company would be worth. There are some structural elements in the offer you don’t quite understand, and you don’t have any other offers to compare it to, but this would set you up for life and allow you to retire after a transition period with the new owner. It keeps looking better and better….
The letter of intent references a 60-120 day period for due diligence, during which they say they will simply “confirm what we have seen in the financials.” Seems innocuous enough, and they sure seem like good people to work with. You ask your attorneys to run through the letter of intent, and they make some changes. You go back and forth a few times, and execute it – it feels good to have “a deal.”
You agreed to an “exclusivity period,” during which you cannot talk with any other buyers. No problem, you think, because if they try to reduce the offer or change anything, you can just walk away from the deal, right?
They send their initial list of due diligence items they need to see – it is about 12 pages long, single-spaced. You’ve never seen anything like this before, and it is quite intimidating. You spend the next few weeks gathering information, trying not to raise any suspicion among your employees that a potential sale is imminent.
You send the information over to the buyer, and they and their advisors (accountants, attorneys, consultants, etc.) send you countless e-mails with dozens of questions you feel like you have answered at least five times already. This process takes four to six weeks, and then the buyer comes to you and says they have found some things that are “concerning” – problems they did not know about when they put their offer together, so they’d like to discuss how to deal with it.
You have now been working for 2-3 months, answering questions, digging up documents, re-answering questions, trying to keep a lid on things in the business, and ignoring your traditional work duties because you have been so focused on this potential transaction. If only you could just get this deal closed and get back to your day job…
Given you have already spent all this time, money and energy with this buyer, and the issues they have surfaced are not unreasonable (you have known about them for a while, but just haven’t gotten around to dealing with them yet), you decide to talk with the buyer about adjusting the purchase price. You go back and forth, and finally agree on something that is less than what was in the letter of intent, but still a decent deal for you in your mind.
Then the buyer’s attorneys and your attorneys start working on the purchase agreement – it takes several rounds of back and forth to put this 40+ page document together, costing you tens of thousands of dollars in legal fees. It is mostly Greek to you, but you trust your attorneys to protect you.
While the agreement negotiations are going on, and you have been all-in, focusing on getting the deal done, your business performance has begun to slip – mostly because you haven’t been doing your day job and have been neglecting the business. Revenues are softening and profitability is slipping. The buyer sees this happening, and asks to meet again with you.
They reiterate the financial assumptions they made when they put their offer together, and walk through the difference between the initial financials you gave them and where the business is today. In short, they explain that the assumptions they made when they put their offer together are no longer valid, and they need to again discuss a price adjustment to the deal.
By this point, you are neck-deep in the deal – spending a lot of money on attorneys, your senior team is now aware of the deal because the buyer has asked to meet with them (a reasonable request given they are going to be working with them), your business performance is suffering, and you are simply exhausted. Yet, there is this nagging thought in the back of your mind – is this the deal I really want? Is this the best I can do with the sale of my company? There is a part of you that is really uncomfortable proceeding, but you have come this far… It is a difficult position to be in, for sure.
Certainty of closing and why it matters
Institutional investors typically do not have significant experience operating companies, and almost none of them have a stable of people ready to parachute in to operate a business following acquisition. A sophisticated buyer’s goal is to build on the existing team, not tear it down. They want to create growth opportunities that will be good for the existing team.
Failing to plan is planning to fail
If you are not prepared to sell your company, the odds of closing a deal, no matter who is the potential buyer, are low. Being fully prepared means examining your business in the way a potential buyer would – digging into all the diligence and other items that could impact value, understanding what risks you have in your business that could either reduce value or prevent a deal from happening, preparing your financials so they are 100% reliable, and having all your ducks in a row before you ever entertain a purchase proposal from a buyer. If you do the work to prepare your business well ahead of time, you maximize your chances not only of getting the very best deal for your business, you also maximize your chances that the deal actually closes.
If you have given yourself enough time to address these risks (ideally 2-3 years or more), you can incorporate strategies to address these risks into your strategic plans. Then, when the time comes to actually sell your company, you are well prepared and will fly through due diligence with no issues, no surprises for the buyer, and no adjustments to purchase price.
By doing this work well ahead of a transaction at a measured pace, you will also minimize the distraction to you and your team, which will allow you to stay much more focused on your company during the actual due diligence period of a transaction. This attention to your business means you will be able to continue to grow revenues and increase profitability, eliminating any risk of a further price adjustment because of deteriorating business performance.
You have worked hard to build your business – years spent making little or no profit as you reinvested for growth, the stress of the business and personnel matters, being first to arrive and last to leave, and being the last one paid. You owe it to yourself to put your business in the very best possible position when it comes time to sell.
If you are not prepared, it is highly likely you will waste time and money, and your business performance will suffer. Treat your business like the most valuable asset you have (which it likely is) – be deliberate, disciplined, and do the preparation required to present your business to the market in the best way possible.
Preparing your business for a sale takes time and energy, but it will be well worth it. If you think you might need some help putting your strategies together, please feel free to reach out to us at firstname.lastname@example.org.
If you’d like to learn more about how prepared your business currently is for a sale, click the red banner above to take our CoPilot Assessment. CoPilot will help you identify what specific risks your business has that decrease company value and reduce your certainty of close. The assessment identifies over 90 different types of potential risks your company could have that will make your business less valuable in the eyes of an investor. Get the test ahead of time and build value today with CoPilot.
Bobby Motch | Associate | Class VI Securities, LLC
As an Associate at Class VI, Bobby has experience in transaction execution and board advisory services for clients in a variety of industries, including consumer products, food and beverage, business services, software-as-a-service, manufacturing, and distribution. Additionally, Bobby contributes to the development of Class VI’s CoPilot services and Class VI content creation.