Selling your business. Step 5 to attracting buyers: timing is right.

As I worked with hundreds of businesses as they look at preparing their firms for sale, I developed the acronym FEISTY. To succeed you want your firm to be:

·           Financially stable

·           Easy to understand

·           Industry in favor

·           Size is good

·           Timing is right

·           You can leave the business without blowing it up

Timing is right

When we talk about the timing being right, it has to do with the willingness and ability of the business owners to sell the business.

Selling a business is a process that demands a significant commitment of time and money, stretching over several months. By the end of it, owners commonly experience “deal fatigue” as they respond to what seems like an endless list of due diligence questions as well as negotiate details of the purchase agreement. The business owners that succeed here are ones that have prepared themselves for the journey, and are in no doubt that if they get a fair price and good terms they will sell the business.

Sometimes we encounter business owners who are interested in what their business is worth, and even say that they would sell the business, “if the right offer came along,” but don’t have this level of commitment to actually selling their business. For them, the time is not yet right. It doesn’t mean they won’t be successful selling their business one day, but we advise them to hold off on initiating a sales process until there is some real fire in the belly.

How can you tell if the time is right for you to contemplate a business sale? Look at these three things:

There is consensus among the business owners that the time is right.

In 2005 we were selling a business that was owned by three men, each with one third of the business. One of the owners was 65, needed to make provision for sick family members, and was highly motivated to sell. Another was happy in the business, at 60 was not ready for retirement, and not really motivated. The third was open to selling, not really vested one way or another. The process took over a year, and ended in the sellers having a bid for the business, but declining to close. They eventually sold, but it was five years later, to pretty much everyone’s regret.

Why did the process take so long and end so unfortunately? The owners said they were willing to sell and signed an engagement letter, but had not really reached agreement among themselves on what would be an acceptable price and terms, and if they all really wanted to sell. This made itself felt during negotiations where it took unusually long to respond to the buyer’s deal points, and weakened the seller’s position.

A much better approach would have been for the sellers to talk amongst themselves, and wait until they had consensus on acceptable sale price and terms before going to market.

The life circumstances of the owners support the idea of selling the business.

A business owner is reaching retirement age and does not have a family member to pass the business along to; a founder has grown a business from the ground up and has reached around 50 employees; an owner experiences an illness or a need to relocate his family. These are all plausible life circumstances for selling a business.

Why does this matter? Buyers invest a lot of time and money in evaluating deals, particularly in the due diligence that comes between LOI and close. They will tend to pass on opportunities where there doesn’t seem to be a reason for the owner to sell, as it reduces their negotiating leverage and reduces the chance of a successful close.

The business can invest the money and time to support a successful sales process.

Owners of businesses in the $10-100 million sales range should plan on spending 3-5% of the sales prices on selling expenses. Some of this, like the banker’s success fee, is only payable at the end, upon completion of a successful sale. But other expenses, such as legal and accounting, are paid hourly through the sales process and an owner incurs a lot of these even if the deal does not close.

Spending this money is essential to a professional sales process, as it allows due diligence to be performed swiftly and the sales contract to be negotiated to the seller’s greatest advantage.

So one of our first questions to a client is to confirm that they’re willing and able to spend $50,000 on a quality of earnings report, or a $20,000 retainer to get the M&A attorney on board. If they can, great, let’s go! But if there is a reticence here, either because of lack of cash or an unwillingness to spend these amounts, then it’s probably worth putting things on hold until the issue can be resolved.

Just as important as money, is the investment of management time. While a lot of the activity around a business sale can be outsourced to subordinates (information requests) or your deal team (contract negotiations) there will be some things for which management time will be indispensable. In companies where senior management might be essential for key tasks like major sales, owners want to give some thought as to how they will support the sales process with their time.

If you do have consensus among business owners, life circumstances support the idea of a sale, and the owners can make the money and time investment to support the process, you are there: ready for a sale!

After ensuring timing is right, you want to see if you can leave the business without blowing it up. We’ll pick that up next week.