Selling your business entails a well-crafted process enabling you to realize an optimal and successful exit. Your business is likely your most valued asset in terms of dollars and your retirement. With valuations remaining extremely high, and very unlikely to last through the balance of the decade, this is a tremendous time to sell your company.
Securing the proper advice on the sale process, maximizing your price and terms, and getting the deal done are critical, and are comprised of hundreds of small time-consuming steps. Your M&A advisor should work closely with you and manage the entire sale process.
Here are 10 critical points if you are considering selling your business in the near future:
Understand what the realistic value of your business is today and the varying ways a deal can get done. Make sure you understand the key components of an offer (non-binding Letter of Intent). Both buyer and seller need to agree on exactly how the offer is made up (cash at closing, asset vs. stock sale, price, terms, compensation, earn out, etc.). Your M&A advisor should inform and educate on valuations, comparables and valuation methods.
Focus on the Value to the Buyer
Potential buyers don't care how much it cost you to develop your products and services, or how much your investors have invested, or how much you need to retire, or how much you think your business is worth. Buyers look at the potential ROI (Return on Investment) in your company based on some reasonable valuation methodology or multiple of sales and/or earnings. CEO Advisor, Inc. plays a key role as your M&A advisor to prepare and present value to buyers and optimize your sale.
Understand Valuation Methods
The most common valuation method in a merger or acquisition is an EBITDA multiple for the trailing twelve months. EBITDA is simply an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA multiple is the standard for privately-held companies just as PE multiples are to a business valuation metric for publicly-traded companies.
There are additional valuation methods such as revenue multiples for unprofitable companies, discounted cash flows and others, as well. No matter your type of industry, size of your market, rate of growth, uniqueness of product or service, technology or intellectual property, barriers to entry or patents, gross margins, management team and other factors, the industry benchmark for the valuation of your business is a multiple of EBITDA. Your M&A advisor is responsible for finding a buyer, negotiating the price and terms, completing the due diligence, working with your corporate/transaction attorney and completing the legal documents, and getting the transaction done. These steps are critical and take a lot of time and expertise.
Get to the Offer Stage Quickly
Whether buying or selling a business, a well drafted offer letter in the form of a non-binding Letter of Intent is critical and provides a platform from which to proceed. It's in no one's interest to put a huge amount of effort and resources into a business sale before both parties can agree on an offer that represents a good probability of closing. Negotiate the offer in reasonable terms and do not "spook" the buyer with misaligned statements or demands. An M&A advisor is critical in this role of securing an agreed upon written offer.
Create a Win-Win Situation
Buyers have experience in making acquisitions in their space and have their business valuation metrics pretty much in stone. One of the most important roles of a mergers and acquisitions advisor is to devise a transaction value and negotiate the Letter of Intent (LOI) in a way that works for both parties. As a third party objective M&A advisor, CEO Advisor, Inc. establishes alternatives for both the buyer and seller to consider given their well defined valuation positions to create a win-win situation.
Manage Expectations and Be Prepared
Understand the other party's position. This is key in your negotiations with the buyer and successfully getting through the due diligence process. Do not provide information prior to an offer that would typically be information provided in the due diligence phase. When qualifying a buyer, do your research and consider the merits of seeking out additional potential buyers.
In all cases, prepare for the due diligence process by organizing and preparing several months prior to selling in order to make a deal work in your favor. Most importantly, have your financials, accounting and customer contracts in impeccable order. Your M&A advisor will coach and assist in this preparation.
Beware of Due Diligence
The acquiring company may start out at a strong and respectable valuation, price and terms, but as they go through their due diligence process they will find one issue after another that causes them to attempt to renegotiate and reduce their offer. The acquiring company will often throw out the term "material adverse change" in an attempt to justify their value reducing tactics.
A seasoned mergers and acquisitions advisor will be able to counter many of these points and keep the sale on track. Most corporate business development directors at strategic buyers are paid bonuses on how much below the original offer they can ultimately close the deal. To stem this buyer behavior it is important to have an expert advisor on your side to negotiate these issues during the sale process.
Determine Your Role in the Future
Negotiate your role and compensation fairly early on in the process before you are too deeply vested in time and resources. Far too often acquiring companies will push compensation off until it is too late for you to strike a favorable deal for yourself. You can make a substantial amount of money after the sale, and your involvement in the business for a period of time is critical to make the sale happen.
A key part of the process is understanding the other side's hot buttons, and structuring relationships so that both sides have incentives to deliver after the business sale is completed. This is an especially critical step where a M&A advisor can negotiate on your behalf where it will be extremely awkward for you to push this aspect of the deal on your own.
Hit Your Targets Along the Way
It is extremely important for both sides if the business for sale has a record of hitting, and continues to hit, its targets. Not managing to hit your sales and profit targets at a key point in the sale process is a common reason for business sales floundering or falling out all together. Your business isn't sold until the closing occurs and you never want to create concern or cause your buyer to walk.
Keep the Sale Process on Track
The process of selling a business can absorb more time and resources than you realize, resulting in high costs and you being distracted from your business. Be very clear early on how the selling process should unfold and make sure you are delivering on your side.
The process of selling a business can, itself, represent the initial steps in a trust building exercise which helps as you enter into legal agreements and negotiations. Keep on timelines and don't abandon them at any point. Instill deadlines, if needed, and lock in a closing date as soon as the due diligence process is complete. Your M&A advisor will be instrumental in keeping the sale on track to ensure a successful and closed transaction.
CEO Advisor, Inc. provides mergers and acquisitions advisory services to CEOs, presidents and business owners of small and mid-size companies. We address your specific needs with hands-on action, expertise and seasoned advice to meet your M&A goals and an optimal exit. Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.