When is the right time, and what are the steps in selling your business?
The ideal time to sell your business is when there are positive trends in revenue and earnings with the expectation of more to come. Growth is very influential in attaining a strong valuation multiple and, while valuation is technically determined by future prospects, historical performance is the most common way to get comfort with those prospects.
By historical performance we mean at least two to three years of consistent growth. Many businesses grow in steps. A pattern of revenues at $20 million for several years and then jumping to $25 million does not present a convincing growth trend. Another jump to $30 million the next year will go a long way to realizing a growth multiple. Ultimately, whether a buyer is convinced depends on how the growth was achieved and what the current prospects are.
Selling a Business takes Time
The process of selling a business is one that takes seven to ten months to complete and therefore you will always run into the question: “Are you on track to achieve your expected results?”..and “Can we have a look at the latest quarterly numbers?” To under-perform at this point would be a worst case scenario. If you are four to six months into the sale process, then you will have already received a number of expressions of interest and are likely working with a small group of seriously interested parties. A quarterly profit number below expectations will open up the possibility of a revision to the value/structure in an LOI and may cause serious delay in the process as an alternate buyer may need to be found.
Decide What is Most Important in the Outcome
The second most important consideration when you sell your business is who to sell to? We have written several posts about how to identify the best buyer but, as an overriding comment, we would say your M&A advisor needs to run a thorough and diligent sale process. The four phases of a divestiture are: plan, prepare, market and complete. A critical factor in achieving a successful sale is to keep as many options open as long as possible. The seller has power when he/she has choice.
Why Sell Your Business?
Finally, the why of selling is not a key driver from the perspective of realizing the most value in a transaction but it is a factor in the form of consideration and how long the process will take. Remember, if the business is dependent on the owner-operator, he/she will not be able to leave the business upon its sale. If the owner-operator has spent 20 years in the business, is nearing retirement, has made him/herself redundant, then he/she is in a position to structure the transaction to include as much cash as possible and make the transition period as short as possible. However, if the reason to sell part or all of the business is to take advantage of an opportunity to accelerate growth then, by partnering with a well capitalized entity that can bring investment, sales or distribution resources to the table, you may expect to spend many more years with the business. Finally, the best time to sell may have passed if the owner is no longer interested in the business (he/she is spending more time on other interests) or, he/she is compelled to sell for health reasons or changing competitive/technology dynamics that are substantially reducing the economic prospects for the business.
The sale process, from consideration to 100% out, can take many years and with economic uncertainty as it is, it is best to start the planning from a position of strength.
Steps in selling a business include four phases of progressive information release to smaller and smaller audiences.
Phase 1: Prepare Marketing Materials
The first document used is called a teaser and is typically only one to three pages in length. The teaser is a “blind” (i.e. it should include no specific information from which the company name can be deduced) overview of the acquisition opportunity and is sent to pre-approved qualified buyers whereupon interested parties must sign an NDA to receive a CIM. The teaser is constructed so as not to be able to identify the company specifically and can be sent to as many as hundreds of potential acquirers (particularly as there are thousands of private equity funds out there).
The second document is the Confidential Information Memorandum (“CIM”) where the number sent maybe several to as many as twenty or more. CIMs are only sent to qualified buyers who have signed an NDA. CIMs vary in level of detail but typically range from 40 to 100 pages. A CIM describes the nature of the business (i.e. product/service range, revenue model etc), suppliers, customers, competitors, a management profile, high level financial information such as historical revenues and EBITDA and a balance sheet. In many cases it will also describe the market the company competes in and the competitive dynamics and growth opportunities the company faces.
One must appreciate that a CIM is a selling document and therefore opportunities tend to get more time than threats. However, it is important to provide all relevant information in a CIM because potential buyers will be asked to issue an expression of interest based on the CIM and they will then be afforded due diligence to verify for themselves that all that is represented in the CIM is accurate and complete. Customers, key suppliers or key management are not necessarily mentioned by name in the CIM. The CIM undoubtedly raises questions which are typically answered by the agent or in concert with management. It is important to protect competitive intelligence at this point as there will be only one successful buyer and this company should not be put in a position where its competitors now know sensitive information about the company.
Phase 2: Go to Market
Once you have decided on your buyer list, the process of approaching and engaging with buyers can take several months. While the top five strategic buyers are easy, they may not all be ready buyers, see: Finding a Buyer: it is Rarely the One You Expect, and sometimes the best buyer is not an obvious one. The “in-market” solicitation phase is critically important and addressed here in both the “Finding the Right Buyer” and “Choosing an M&A Advisor” sections of this site.
Phase 3: Negotiate Terms
The third stage in selling a business is one where, based on an acceptable expression of interest, seriously interested parties are afforded a management presentation. Only the top three to six (depending on the price range, the quality or potential threat of the bidders) are typically selected for this phase. At this point more detailed information is shared with the goal of securing a LOI that will contain as few conditions as possible. The dance here is one between protecting sensitive information and disclosing enough information to ensure that the final LOI is one that will be quickly translated into a purchase and sale agreement.
Phase 4: Due Diligence and Closing
The final stage in selling a business is exclusive due diligence and closing. At this point the seller is an open book, so it is of utmost importance to have a high level of confidence in the selected party. Private companies are typically not ready for due diligence. Such a detailed level of record keeping is not required and generally not a priority for private companies. The agent will usually issue a due diligence request list early in the process and it often takes some time for the company to prepare the information. Each request is different but some items to expect include: monthly financial statements, a receivables aging list, revenue analysis by customer/by product/service, customer/supplier/strategic agreements, details on patents/IP/software architecture, employment policies and contracts, details on any environmental/legal claims and more.
Recommended Further Reading
For more on private company valuations, see: Why Are Private Companies Valued Lower Than Their Public Company Peers?
For more on how long a sales processs takes, see: How Long Does a Business Sale Take?