The Confidential Lifecycle of Selling a Business - “The Process”

Selling Your Business: Dance of a Seller and a Buyer - The Process

One of the most overused words by Business Advisors, Consultants and Intermediaries is the word “Process”. The "process" of selling your business. That’s all the Intermediaries and Brokers talk about – "process".

Let’s take a look at what this encompasses and all the challenges along the way. Selling a business involves a number of steps, it takes time (sometimes 9 – to as much as 18 months or more) and for the business owner, it is emotionally and psychologically draining. The single most important aspect of this experience though, is – confidentiality. Simply, tell no one what you are doing.

from: howtosellmybusiness.com : A M&A information website and business Intermediaries dedicated to helping small and middle market privately held companies improve the value of and assist in - the selling of their businesses.

The graphic below illustrates the Lifecycle of successfully selling a business, working with an Intermediary and the challenges and steps each owner will face. In the end, it becomes a dance, if you will, between a business's Seller and a potential Buyer. Long in duration, grueling emotionally and psychologically, and if you try and sell the business yourself, it can be very time consuming, extremely frustrating and oftentimes you wonder...is it worth it? Just understand these steps and remember...patience.

The Steps in a Successful Transaction: 

1. Initial Meeting: Deciding on Your Objectives

The first step is deciding what you want to do - the sale and exit of your business. Next, consider what you eventually will want to end up with, that is, where would you like to be financially and emotionally the day, weeks and years after the divestiture. And finally, how will you go about selling your business - your marketing plan (that encompasses identifying the prospective buyers), the buyer interviews, your pricing and the limits to your terms and conditions that ultimately are acceptable. If you have an Intermediary, together you can discuss your objectives and create a plan of action, from there, the Intermediary will do the rest. Just remember, managing and experiencing the sale process does take time. Again, keep everything confidential and above all, bring your patience.

2. Valuation: Evaluating and Valuing the Business

If you work with an Intermediary or do this yourself, dispassionately look at your business. What would you pay for it? Time to be honest, what would you - really - pay for it? You need to realistically value your business.

You first start with a financial analysis. The essential number discovered is the Seller's Discretionary Cash Flow (“SDCF”) or referred to as "adjusted" EBITDA. This is the most important metric used in valuing your business. It is the bottom line! Why? It demonstrates what funds will be available for the acquisition to pay for debt service, new owner salary, and a return on the down payment investment. It is the "science" of the valuation step.

SDCF is the company’s profit, as shown in the tax return, plus adding back the owner’s salary, bonuses, distributions and any other financial benefits (insurance, phone, car etc.) paid for by the company. It includes income taxes, interest expenses, and any non-cash expense such as depreciation or amortization.

The SDCF needs to show good growth or stability on the tax returns year to year for three or more years. From this number (the SDCF) a “multiple” is applied and with adjustments for inventory, receivables, payables etc., a value is derived.

Although cash flow is king and the principal metric, the management team and management systems are critical elements that enhance the value of your company.

Applying a multiple: If there is an instance in this process where the title “art form” exists, it’s the application of a multiple. The “multiple” will factor into account all of the value drivers a buyer considers and also discounts all the negative aspects of the business that are perceived. By nature it is subjective and the beauty, or value, is in the eyes of the buyer.

Remember, the business is worth what the buyer believes they can make with it, not what you think they should make.

This is why knowing who your buyer is can be important in understanding how a market values a business. An experienced intermediary knows the market and who the preferred buyers might be. Simply, some buyers will pay more.

3. Client (Business Owner) Review and Engagement

If you feel comfortable with the valuation and costs of going-to-market, the grueling journey of marketing and meeting buyers – it’s time to say - let's go. This is why it is both helpful and important to engage a business advisor or intermediary to properly prepare, market and complete the sale of the business. For many business owners, the sale of your business is not just the closing of a long journey, but the most important business and financial decision of a lifetime.

4. Marketing Materials Produced: Planning and Go-to-Market Strategy

The initial marketing step is the creation of the public marketing materials, that includes “blind ads” for social media sites and a Confidential Business Review ("CBR"), or Offering Memorandum ("OM") for a serious buyer. The CBR or OM should address all aspects of the business, including the financials, complete story of the company, infrastructure of employees, marketing initiatives and general company information, as well as all the items that will be included in the transaction. This document contains the important facts of the company, an industry opportunity analysis and should include the last 3 -5 years of tax return information, or yearly P&L's and balance sheets.

Finally, identify who your probable buyer might be. It is very important to understand the type of buyers who would have an interest in the business. Generally, they come from Strategic/Synergistic Buyers, Investment Groups, or Individual Investors.

One last point, competitors and family members will usually pay the least for a business. Why? They know your business, the strengths and weaknesses and easily can duplicate (or at least they think they can) much of your operating structure. The further removed from the business for a potential buyer (if possible) the more substantial the offer. Buyers will pay a premium if you offer something they do not have, or if they lack knowledge and/or experience operating the business model.

5. Confidentially Creating Buyer Interest

The marketing initiative will utilize a “blind ad” that is posted on various web sites and is offered directly to selected and qualified possible buyers which engenders market interest. There should never be any mention of the company or its precise location in a "blind ad". Once a Non-Disclosure Agreement ("NDA") or Confidentiality Agreement ("CA") is executed by a prospective buyer a business review can be extended. Only then.

This step is where an intermediary comes in handy for both the gathering and screening of multiple buyers.

The aim is to gather a simultaneous audience of numerous buyers that will eventually lead to a process induced atmosphere of buyer tension resulting in the best possible offer to the seller.

Throughout this journey (prior to the signing of the NDA and/or CA for a buyer) confidentiality is critical to the success of selling your business. The Intermediary's job is to handle the process's noise and you as owner - manage and operate the business aggressively everyday to the very end of the lifecycle, the closing table... that is, until documents are signed, money has been exchanged and hands are shaken.

6. Buyer Screening, Meetings and Negotiations

When there are inquiries, it is important to identify who is a real buyer and who is just kicking the tires. The potential buyer must possess the skill sets in his professional history and the capability to finance the transaction. If bank financing is involved (and there usually is) banks will investigate a buyer's character, capability for capital, conditions in the economy, the market space for this business and the quality of any buyer collateral if necessary.

Keep in mind, the construction of a business sale oftentimes involves three principals - the seller, the buyer and the buyer's banker.

After the reading and consideration of a Business Review is completed, and if the buyer has interest and wants to move forward, a meeting or teleconference with the buyer and seller is arranged. Once the buyer is satisfied that the opportunity is worth seriously pursuing - a Letter of Interest or Letter of Intent is submitted.

Letters of Interest are initially submitted for lower middle market and middle market acquisitions which lead to a Letter of Intent. The non-binding Letter of Interest just outlines, in general, the pricing, terms and conditions the buyer would like to extend.

When a Letter of Intent is submitted, then in addition to the pricing, terms and conditions, all the contingencies the buyer would like to investigate in 'due diligence' are itemized. This information request can be substantial both in number of items and complexity, so be prepared, relax and just know you will work through it - each step and item at a time. The dance (Due Diligence) between the Buyer and Seller begins. The importance of an Intermediary comes into play while choreographing these critical steps with all the participants.

7. Due Diligence: Working towards a Definitive Agreement to Purchase 

The purpose here - after a Letter of Intent ("LOI") has been submitted, mutually agreed upon and signed - is to work toward the writing of a final "Definitive Agreement to Purchase" which would be executed at closing. The attorneys for both sides work toward taking the items outlined in the LOI and incorporating them into the final Agreement to Purchase.

In Due Diligence, a buyer with his advisors investigate all the conditions and contingencies of the business outlined in the LOI. A checklist (and better yet, a time line for each item) is often supplied by the buyer's (or seller's) attorney and crossed off as each item has been satisfied. It's helpful to have a series of sign-offs for the buyer to document that each contingency has been completed to their satisfaction. This process takes time, is exhausting and easily becomes frustrating for the parties involved. Patience is needed.

Keep one thing in mind, lawyers, accountants and fee based advisors are paid by the hour. And some, unfortunately, feel they are hired to "win" a deal. Carefully monitor the time and expenses.The Buyer and Seller just want a mutually agreed deal consummated. (A deal they both have previously agreed to in general and have expressed in the LOI.) This is the stage in the transaction process where many deals fall apart. Buyers and Sellers become exhausted and frustrated and just say - "enough". Make sure the lawyers understand the objective and everyone works towards the goal - a transaction.

8. Successful Closing: The Music Stops, The Dance Ends 

If all the above steps have been successfully taken, and all is good, a Closing Meeting is scheduled, agreements are signed, money exchanged and hands are shaken. Done. The the dance is over.

One Last Consideration:

Prepare yourself for life without the business and all the people who have become an integral part of your professional and personal life each and every day. Sometimes that is the hardest step to take in this divestiture journey – leaving all the people who made this happen. Think through what direction you want your life to go post transaction, and enjoy all the new experiences to come.

If you personally, or your company, would like help in marketing and selling your business or more information and knowledge of the "best practices" necessary to make your business more valuable and salable visit:www.howtosellmybusiness.com 

Or please contact directly:

Rex Rossi

rexrossi@howtosellmybusiness.com | 708.433.9410

Founder and Executive Director - howtosellmybusiness.com 

Senior Intermediary and Business Consultant: Premier Business Group, Inc.

Preeminent M & A Specialist to Privately Held Companies: Manufacturing, Distribution, Service and Agencies in the Chicagoland and Midwest markets.

Copyright 2017 R.M. Rossi