Preparing Your Private Business for Sale

Once you officially begin the process, selling your business can take between six and nine months, on average, to complete. However, preparations to sell should begin at least 12 to 24 months in advance to ensure you get “full price” for your company.

There are several things to take care of to ensure your company is ready, attract the best buyer, and see to it that the entire process goes smoothly. And since most business owners go through this process only once in a lifetime, you don’t want to learn on the job. Here are a few important tips to know about preparing your private business for sale.

Define the Company’s Future and Your Role Post-Sale

What direction is your company headed and what are your plans for the future (both personal and professional)? Selling may be the end goal for you, but for your business, it’s just the beginning. And if the sale is out of necessity, your priorities and timeline may change. Regardless, it’s important to have a clear, agreed-upon business strategy before you start the sale process.

Be thoughtful about the goals you set and know that you will be asked to explain them in detail. The buyer will want to see that you have a compelling vision for the future, but they may modify where the company should go once they take over.

Most importantly, involve your entire company’s leadership in setting the business direction, and make sure everyone is on the same page. Assuming you involve your top leaders in the sale process (and some owners choose to exclude leadership until an LOI is signed), what do they want from the sale of the company, and how do they see the future of the organization after the sale is completed? Once established, you can look for buyers whose goals are aligned with that direction. If you plan to stay involved as a minority shareholder, board member, and/or employee, it is important everyone have the same expectations about the direction of the firm and your new role.

Some middle market owners choose to involve their leaders only after a buyer has been identified and due diligence begins. They will often provide stay bonuses to ensure their top people remain with the company through the sale. This is perfectly acceptable, but recognize that if you don’t ensure your top people are in alignment with the sale process, it may require you or the buyer to establish some “golden handcuffs” to ensure they stay with the business through the sale. So, think carefully about who among your top people, if anyone, should be notified of the sale process.

Make Yourself Redundant

 Many owners entertain the thought that their company would be lost without them, but if you’re going to sell it, that should not be the case. Buyers will be reviewing the competencies of your management team as a whole to see if they are capable of running the business moving forward. The goals and objectives you’ve put into place will be integral in this regard.

Remember, you are not the product. The business is. The pitch for your company goes well beyond showing what you’ve done with it. You need to demonstrate what the business is capable of doing once you are no longer leading the firm. If you replace yourself with a solid leadership team, you can exit the business when you sell it. But if you don’t install competent leaders, and remain stuck in the “founders trap”, your options are limited. As you think about how potential buyers will view your company, there are three paths you can elect:

  1. Build a leadership team that can effectively run the business when you leave, which will enable you to sell to both strategic and financial buyers
  2. Remain indispensable to the company and stay in “the founders trap,” which dramatically narrows the pool of buyers. Market only to buyers who can supply a new CEO to run the company after you sell it.
  3. Tell potential buyers up front that you will remain running the company post-sale. This usually requires you to roll a large portion of the sale price into future payouts from the new buyers, based on performance. This will “align your interest with theirs,” often for many years, until a leadership team can be formed that will replace you. The challenge with this option is that many private owners chafe under the disciplines imposed by external ownership and often leave the business, and much of the earnout, within two years.

Maximize the Value you Receive from the Sale

Although the process of selling your company can be very time consuming, it’s important to continue focusing on running the business throughout the sale process.  But how can you lead the sale process and focus on running the company? Owners who have lived through this process often remark that these are two full-time jobs.

This leads to the important topic of how to sell your company. Do you try to run the sale process on your own, or do you hire an investment banker to lead the process for you, and pay them a small percentage of the sale price? It is interesting to note that the vast majority of larger companies (those over $250MM in sales) employ an investment banker. While there are a number of compelling reasons to retain an investment banker, the most important reasons include:

  • They know how to run the sale process and can insulate you from many time-consuming issues, so you and your team can concentrate on running the business. There will still be time you need to invest, but it will be substantially reduced.
  • They will know what your company is worth and who the likely buyers will be, including buyers that you may not have considered who are looking to enter your industry, often from another country. This allows them to set realistic value expectations and allow only buyers who are able to pay these amounts to participate in the process
  • They will create “the book,” also known as the CIM (confidential information memorandum), that explains your company and the value it brings to potential buyers. They’ll then reach out to potential buyers and build a competitive bidding process amongst them.
  • The best investment bankers, through this competitive bidding process, will establish a market price that is substantially higher than a seller would receive if they sold on their own to a single buyer. This price increase more than pays for the fee that the investment banker earns from the sale.
  • Perhaps most important, skilled investment bankers have a success rate of more than 80%, meaning more than 80% of the clients who they represent successfully complete the sale. Of the 20% who do not, most of these failed sales are because the seller (not the buyer) backed out of the sale, or their business profits decreased in the months after they placed their business on the market and the buyers wanted a price reduction.

There are a few cases where it may not be necessary to hire an investment banker to assist in the sale of the business, but for businesses with an enterprise value of more than $30MM, these cases are rare. However, the following situations may not require the assistance of an investment banker:

  • The industry is very specialized, and the handful of potential buyers are already known to you (the seller), you have a recent market-based valuation of your company, and you have been approached by a legitimate buyer who has offered you a price that is at or near the top of the value.
  • You simply want to sell the company, even if you do not achieve a market-based price at exit, and you do not want the “hassle” of going through a sale process.

Maximize Your Pre-Sale Profitability

It goes without saying that a key determinant of business value is the profit you make in the years and months prior to the sale. As soon as you start thinking that you might want to sell sometime down the road, be looking for ways to increase your profits and make your company look more financially appealing.

In many middle market businesses, owners adopt a “good enough” attitude, even though they know their business is flat and areas of the company are not performing.  But because your sale price is usually a multiple of EBITDA (free cash flow), by ignoring these inefficiencies you may well be costing yourself $millions in sale proceeds. For example, if you overlook areas that could be run with $250K less in expense, and your market commands a 7X earnings “valuation” – then you will be foregoing (7 x $250K) = over $1.5 million in incremental sale proceeds. We often work in companies where there are opportunities for profit increases of 2 to 5% of their annual sales.

So, what areas present the most immediate opportunities for profit increases? Supply chains are often fertile hunting grounds. Many firms do not practice strategic sourcing and competitive procurement. By adopting these practices, whether in manufacturing or services, it is not unusual to reduce your costs by 2-4%. There may also be volume discounts or opportunities for early payments available that you’re not yet taking advantage of.

The most overlooked opportunity is with pricing. Many companies do not understand that raising prices has a greater impact on the bottom line than cutting costs. And it starts with understanding your true “cost to serve” and your margins by customer and by client. We have worked in many companies where prices have not been raised for years, for fear of upsetting or losing customers. In almost every case, we have successfully raised prices for low-margin clients across the board, with close to zero client defections. And these price changes flowed straight to the bottom line.

Next, look at your growth plan. Your company needs to demonstrate historic growth and a path for future growth, and there needs to be room for the buyer to create new value when they own the business. In the example above, the company commands a 7X earnings multiple (for calculating their Enterprise Value at Sale), but if that company had flat growth and earnings for the past two years, they may only get a 5X multiple at sale.

We mentioned above the importance of understanding your cost to serve, and your margins by client and product. Ideally, these items will be part of a larger financial package that is prepared monthly, showing all the critical attributes of the business and how they are trending over time. If done correctly, these monthly packages will provide all potential buyers with the data they need to make an informed decision regarding the purchase of your company.

Finally, develop strong Financial Projections. Recognize that most buyers will see your business through the lens of financial data, so presenting them with a clear understanding of how you make money today and the financial elements that will contribute to your continued profitability is essential. It important to show how the business can grow profits over the next 3-5 years, but don’t fall prey to presenting a “hockey stick” projection for profit increases. When savvy buyers see projections of this nature, unless they are backed with a solid new client sales funnel that has delivered over time, they tend to discount your financial models altogether.

Tell a story of your business and the growth that’s to come. Use it to get your potential buyers interested in what your company has to offer. The future of your company is what potential buyers are most interested in. Your financial projections are how you show them that it has one.

Look for an Upswing

A general push to increase your growth and revenue is essential, but timing can also be a factor. An upswing in business can give you that extra push towards a sale. Of course, you can’t always control how your business fares at any given time, but with advance preparation, there are a few factors that you can control.

Start by looking at your company’s numbers over a given period. Is there a particular time of year when your company usually does better than other times? In particular, if you do seasonal business, your numbers probably won’t be as good during the off-season, making it not the best time to sell. Instead, try to shop your company around right as the busy season begins. If you have a seasonal business, schedule the sale process, and especially the buyer visits, at a time when you know you’ll be able to put your best foot forward and make your company look as appealing (and profitable) as possible to potential buyers.

Build a Team so you can focus on running the business

 If you’ve never sold a company before, you can’t be expected to handle the entire situation yourself. For instance, how do you assess the value of your company and its assets, in order to set a competitive price? As the seller, will you be expected to finance part of the sale yourself? For example, would you be expected to provide a loan to the buyer to cover part of the cost of the sale? If so, what would be the interest rate and repayment plan? Are you planning an asset sale or a stock sale? Finally, what are your tax obligations once you’ve sold the business, and how do you ensure compliance with them? More importantly, how do you get ahead of the process and ensure you structure the sale to maximize your after-tax proceeds and those of your heirs?

There are a number of experts you can talk to who can help you answer these and other important questions, guide you through the process, and help ensure everything goes smoothly. At a minimum, your team should include an Investment banker, an experienced deal attorney, and an accountant who is familiar with tax matters surrounding a sale. If you believe your business is not as profitable as it should be, you should also hire a middle market consulting firm that specializes in helping owners prepare their businesses for sale. In most cases, the fees you spend working with a consulting firm to improve your profits are considered one-time expenses and are added back to your annual profits in calculating the sale value.  For example, if you invested $250K to improve your supply chain efficiency, and your profits were $2MM that year, you would multiply $2.25MM times the sale multiple to calculate your Enterprise Value.

Conclusion

Preparing your business for sale can be a long, challenging, and often emotional process. And it should not be tackled alone. Your employees and leadership team can assist you to some degree, but you should also hire a team of experts to assist who have been through this process many times and can ensure that you are taking the steps required to achieve a successful sale at a full market price.

That’s what we do at FortéOne. We level the playing field and ensure first time sellers can go toe to toe with buyers who know this process cold. We work with some of the best deal attorneys, investment bankers, and tax accountants and we will be happy to refer them. And if you need help preparing your business for sale, we can assist with that as well.

Give us a call and let us help you think through the process of selling your company.