In our last enewsletter, we covered making opportunistic acquisitions to grow your business to the next level. We will now look at the exit or sale of your company.
Selling a business is likely to be the largest and most important financial transaction any CEO or business owner will make. For many owners, selling the business they have spent years building can be emotionally difficult. Unless you have sold a business before, you will have no experience to draw on and won't know exactly what to expect. I have performed mergers and acquisitions since 1983 so experience and expertise may be the difference in securing a buyer and a successful exit.
This newsletter outlines the main options available to you and will help you decide what is best for you and your business. It also covers the basic things that can be done to make your business more valuable and attractive to potential buyers, along with advice on how to find the right advisors.
The Decision to Sell
Before putting your business up for sale you must give careful consideration to your reasons for doing so. You will probably be asked about your reasons for selling by potential buyers, who will need to be comfortable with your motivation and answers.
You need to consider four key questions:
What are my objectives as the owner of the business?
What are my objectives as CEO of the business? For example, you might want to retire as soon as possible, or prefer to have an on-going involvement with the business.
What are my objectives for the business itself? For example, the business might need new investment in order to grow.
Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.
Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. You may also sell a majority of your business providing upside in the future due to additional investment and growth from the investor/buyer.
There is a range of other exit strategies that may suit your needs. If you want to retire but already have enough money, you could pass the business on to your children, or you could sell to your employees. It is critical that you gain the advice, experience and expertise of someone that can lead you through the entire process. You should also gain their negotiating expertise and not put yourself in the direct line of fire.
Methods to Sell
There are different methods to sell your business, with the options available depending on factors like your business type, size and market. Most businesses are sold in an Asset Sale to another business, usually to a public or private company operating in the same or a related industry. You want to make sure the prospective acquiring company has the funds to complete a transaction and that there is a proper fit.
Other options available to you could include:
Selling all or part of your business to a private equity firm (typically requires $10 million in sales and $1.5+ million in EBITDA (earnings before interest, taxes, depreciation and amortization))
Finding a private buyer who wants to run his/her own business
A management/employee buyout - perhaps with the help of a venture capital firm or bank loan
Attracting a private investor who acquires and invests in the business without managing it, and that typically sells it in 3 - 7 years
There are several different sale options - the one best for you will depend on your individual circumstances. The buyer will also have an opinion on deal structure and how they wish to make an acquisition, so you'll need to know what you want to achieve and how you would like to structure a sale early on. This will save time and money, and avoid unnecessary delays, taxes and other issues.
Instead of purchasing the business itself (a stock purchase), a buyer will initially provide a non-binding Letter of Intent (LOI) to purchase the Assets - the customers, contracts, intellectual property (technology, trademarks, patents, domains), etc., without the liabilities, obligations, employees and unforeseen lawsuits. In this case, the buyer will extend an offer to hire most or all of your employees at closing. You will be left with whatever assets and liabilities that are not included in the sale. Make sure to gain the needed business advice as an essential factor in deciding and formulating the most suitable deal structure.
Immediate or Phased Payment
You can ask for payment in full at closing (without a typical hold back amount) or you may be prepared to accept payment in installments. The buyer may well prefer to pay in installments, and you may gain tax advantages, as well. But you will be at risk if the buyer cannot make future payments causing you to exercise a claw back provision of the Asset Purchase Agreement to attempt to regain control.
Some buyers will want to make a series of payments based on profits, in the form of an Earn Out, in which case you may be contracted to stay on with the business for a period of time to meet certain sales and profit goals for additional compensation. In the case of an Earn Out, you need to structure the deal to accurately track your goals and results.
LOI - The Offer
There are many variables that can be presented in a Letter of Intent (LOI). Your goal is to attract an LOI or an offer to buy your business from a strong buyer that represents a good fit to your goals. A non-binding LOI typically will come early on in the process, after a meeting or two and a review of your financials. Since the LOI is non-binding and typically the optimal scenario (the buyer may negotiate to reduce the offer after due diligence), it is critical to have a 3rd party negotiator to assist you and help you maintain a good relationship with your prospective buyer. A seasoned business/mergers and acquisitions advisor can add tremendous value in negotiating the best offer and in getting the deal done.
Preparing to Sell
A CEO or business owner should always be in a strong position to sell, whether it is a planned sale or an unsolicited offer. Be proactive about fixing any issues that could dramatically affect the value of your business and making it as attractive as possible to potential buyers.
You also want to make sure your financials are in order and you are ready for the due diligence process. More importantly, you want to operate your business to ensure you have recurring revenue with one, two or three year contracts to provide real value as a seller.
When to Sell
Selling at the right time can have a significant impact on the price you get for your business. Plan ahead so that you can pick the best time rather than being rushed into a quick sale. For example, if you plan to retire in two years, it's a good idea to start planning the sale of your business now. The reality is that a great buyer may call next month and you need to be prepared at all times.
Choosing Advisors When Selling Your Business
Experienced business advisors such as a corporate transaction attorney, tax advisor and business/merger and acquisitions advisor such as CEO Advisor, Inc., are essential for an effective sale. The right business/M&A advisor can have a big impact on the preparedness and success of your sale, and the amount you receive. It is extremely important to have an experienced, third-party negotiator to help you through the sale process and negotiate a deal to your liking.
CEO Advisor, Inc. has several decades of experience in mergers and acquisitions, and we can optimize your experience in selling your company. Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. today to discuss your exit strategy at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit www.CEOAdvisor.com for more information.