August 2024 Newsletter
10 Important Aspects of Selling Your Business
- Selling a business is never a straightforward process. Unlike selling a residential or commercial real estate property, selling a business is very complex. In real estate you are dealing with a static, physical building that does not change and can be seen in plain sight.
- etermining a price for real estate is far easier given recent comparable sales in the area. The multiple listing service promotes all real estate properties online. All real estate contracts are standard and very straight forward. An appraiser and building inspector come in and write up a standard report in one day, and closing is lock-step and inexpensive by an escrow company. Yet real estate agents charge 5% or 6% of the purchase price for their services.
- Selling a business is far more complex and has a thousand variables to manage. One misstep can kill off the one buyer that you have secured. A business is a fluid, ever changing entity. Valuing a business is far more complicated and there may be no recent or even comparable business sales that makes any sense to you or prospective buyers (and you likely won’t have much access to information on privately held business sales).
- Preparation for a business sale by an M&A advisor is involved. There are many documents to prepare and many aspects of the business to present in the best light to optimize the value of the business. An M&A advisor must formulate a target buyer list of 50 to 100 prospective buyers with full contact information researched on all target buyers.
- Seeking out and securing a buyer for a business is a manual and tedious process involving a lot of outreach as compared to real estate. Due Diligence required to sell a company is intense and takes 4 to 6 weeks and many custom documents must be produced by the seller and their M&A advisor to satisfy the buyer. Legal contracts are very customized and negotiating the business and legal aspects of these documents are complex and extensive. Yet, M&A advisors tend to charge less on a percentage basis to sell a business than a real estate broker or agent to sell a house or a building. Thus, an experienced M&A advisor can be worth their weight in gold.
- However, the upside in selling your company can be a life-changing event. Additionally, the business owner or CEO needs to stay as focused as possible on running the business and generating profits. When you do decide to sell, there are ten key things you need to know that will help you to prepare for a sale, optimize your value and chances of a successful exit.
- Getting it wrong can ruin your opportunity of a sale and can mean many months, or even years, of wasted time and a major lost opportunity. Red flags will be detected by experienced buyers and they will quickly pass on your business or attempt to low ball an offer.
- Below are 10 critical things to focus on when selling your business:
- 1. Buyers Won't Pay More for Unproven Potential
- The valuation determined by prospective buyers for the potential sale of your business will primarily be based on the trailing twelve months (TTM) of EBITDA (Earnings Before Taxes, Interest, Depreciation and Amortization) times an EBITDA multiple. I regularly speak with CEOs who believe they have a potential "Home run" and expect to command a top sale price based on perceived potential of future Revenue alone or a big future Forecast.
- This is not how it works and buyers put minimal value on the future, other than certain industries such as software. If a business did $10 Million in Revenue last year, with $300,000 in EBITDA (just 3% EBITDA Margin), the value will be minimized in the eyes of the vast majority of potential buyers, despite your lofty future Forecast for $15 Million in Revenue and $3 Million in EBITDA next year.
- 2. Buyers are Interested in Profits, Not Revenue
- Another common misconception is that buyers are easily impressed with Revenue figures. This holds true with SaaS software companies, but only to a certain degree. Growth rate can be just as important or more important than Revenue. Revenue always sounds good, but when it comes down to it the only number that matters in the great majority of M&A transactions is the Net Profit and EBITDA a business generates (which is a close representation of free cash flow).
- Experienced business buyers want to see Net Profit and EBITDA, not just Revenue. Revenue of $7 Million or $10 Million or more will attract them as a potential buyer, but EBITDA is primarily the factor for their interest level in the business and valuation (outside of the software industry). For the software industry, a combination of Revenue, Growth Rate, Renewal Rate of Recurring Revenue and low Customer Churn, Revenue Churn and Net Revenue Retention Rate are critical.
- 3. Buyers Will Verify All Information in Due Diligence
- Once an LOI (Letter of Intent) is secured and negotiated, Due Diligence begins to verify a lot of seller information in a 30 - 45 day period. Due Diligence requires expertise, organization and preparation. In fact, a substantial amount of this information will need to be prepared in advance and placed in a secure virtual Data Room. You will not progress to the next step of the sale process - the legal agreements - until you pass the Due Diligence phase. A strong M&A advisor like CEO Advisor, Inc. will head off the buyers possible discussion on price or terms adjustments so make sure you have the needed expertise in a sale process by a seasoned, experienced M&A firm.
- 4. Be Both Expeditious and Patient
- The sale of your business will be time consuming and require a lot of experience and expertise. You want to keep the sale process on track and make progress on a daily and weekly basis. Otherwise, the sale process will drag on and an excessive amount of your time will be consumed, and legal and other expenses will mount up quickly. At the same time, show poise, professionalism and patience as the buyer may become your future employer. An M&A advisor is critical to lead the sale process due to the time and expertise required to consummate a transaction and manage the entire sale process.
- 5. Be Honest, Flexible and Extremely Prudent
- The truth will prevail and you need to build trust with the buyer. Experienced buyers understand that every business is going to have positives and negatives. There is no such thing as a perfect business so the best method is to be transparent and respond timely to the buyer's requests. If you are honest and transparent from the start there is less risk of a deal going sour because the buyer uncovered something during Due Diligence that wasn't accurate or an instance where the truth was stretched.
- Honesty is the best policy in all business transactions and selling your business is no different. With that, you must be very prepared and prudent in how you present the information to maximize the business value and get the results you desire. Again, an M&A advisor should manage and lead the sale process, as well as, communicate with the buyer on your behalf a great majority of the time.
- 6. Don't Live in the Past
- The previous success of a business (three or more years prior) is largely irrelevant at the time of sale, especially if it has been struggling in the last year or two. Buyers are interested in recent performance (Valuations are primarily based on the trailing 12 months) including your future sustainability and viability along with your current Sales Pipeline, Backlog of work in process and Forecast to a lesser degree. Failure to grasp this concept will be very costly and waste a lot of time.
- 7. You Will Need to Stick Around
- To optimize your chances for a sale of your company, you should represent to buyers that you plan on staying on as part of the acquiring company for 1 to 3 years. At a minimum, represent that you are all-in for the long-term, at least until you understand the needs and plans of the buyer. In certain circumstances, such as illness or age, you can be transparent with prospective buyers so as to set realistic expectations early on.
- 8. You Should Never Represent Your Own Company in a Sale
- Even with all of my mergers and acquisitions experience and expertise, as CEO of my software company I hired an M&A advisor to represent our company. As CEO, you need to focus on the business, assist in the transaction, and be the "good cop", while your M&A advisor uses their expertise to get a deal done and be the "bad cop" in the negotiation, as needed.
- 9. It Takes a Real Commitment, Time and Money to Sell a Company
- Don't think that you are going to cash out big without investing (yes, investing) time and money into maximizing your sale price and your chances of getting a transaction done. A transaction will take 6 to 9 months to complete and that is if you are organized and prepared with strong, accurate financial statements and other needed information to satisfy buyers.
- 10. You Need an Experienced M&A Advisor to Ensure a Successful Sale
- The goal is to actually consummate a sale and at an optimal price and terms. This will require the experience, expertise and a tremendous amount of time invested by an M&A Advisor - from the preparation leading up to the sale, securing a buyer, conducting Due Diligence, advising the CEO through the entire process and keeping the sale on track all the way to the closing.
- Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information or to schedule a no cost initial consultation at your office.
Four Growth Strategies to Maximize Your Profits and Value
CEOs conduct strategy and planning to grow their business and increase sales and profits, as well as, the value of their businesses. There are several methods for implementing a growth strategy. Common growth strategies in business include Market Expansion, Product Expansion, Diversification and Acquisition.
Below are four growth strategies that you can use in your planning to implement with your management team to accelerate growth, maximize profits and optimize the value of your business. The first three growth strategies focus on organic growth, while the last growth strategy focuses on acquisitions for growth.
1. Market Expansion Growth Strategy
A Market Expansion growth strategy involves selling your current products and services into new markets, either in new industries or new geographic markets - or both. There are several reasons why companies consider a Market Expansion strategy. First, the competition may dictate that there is little room for growth within the current market. If a business does not find new markets for its products, growth in sales and profits will be restricted - in fact, profits will tend to decline over time. A business may also use a Market Expansion strategy if it finds new uses for its current products and services.
2. Product Expansion Growth Strategy
A business may also expand its product line or add new features to increase its sales and profits. When companies employ a Product Expansion strategy they continue selling within the existing target markets. A Product Expansion growth strategy often works well when market conditions change, such as competition enters the market, or technology starts to change. A business may also be forced to add new products as older ones become outdated or obsolete.
3. Diversification Growth Strategy
Growth strategies in business also include Diversification, where a company will sell new products to new markets. This type of strategy can be more expensive and risky, and companies will need to plan carefully when using a Diversification growth strategy. Market research is essential because a company will need to determine if customers in the new market will potentially like, need and purchase the new products.
4. Acquisition Growth Strategy
The above strategies focus on organic growth, and most CEOs and business owners focus solely on these strategies. Growth strategies in business can also include mergers and acquisitions. With an Acquisition growth strategy, a company purchases the Stock of another company, or purchases the Assets of a company without taking on the liabilities to expand and grow. A business may also use this type of strategy to expand its product line and enter new markets, as well as, acquire needed talent and deeper management or needed intellectual property.
An Acquisition growth strategy can also be risky, but not as risky as a Diversification strategy. One reason is that the products and market are already established in an operating company with an Acquisition strategy. A company must know exactly what it wants to achieve when using an Acquisition strategy, mainly because of the investment required to implement it.
CEO Advisor, Inc. specializes in advising on all aspects of growth for small and mid-size businesses. Our mission is to grow your business to the next level, as well as, advise you through the ultimate sale of your company. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Below are four growth strategies that you can use in your planning to implement with your management team to accelerate growth, maximize profits and optimize the value of your business. The first three growth strategies focus on organic growth, while the last growth strategy focuses on acquisitions for growth.
1. Market Expansion Growth Strategy
A Market Expansion growth strategy involves selling your current products and services into new markets, either in new industries or new geographic markets - or both. There are several reasons why companies consider a Market Expansion strategy. First, the competition may dictate that there is little room for growth within the current market. If a business does not find new markets for its products, growth in sales and profits will be restricted - in fact, profits will tend to decline over time. A business may also use a Market Expansion strategy if it finds new uses for its current products and services.
2. Product Expansion Growth Strategy
A business may also expand its product line or add new features to increase its sales and profits. When companies employ a Product Expansion strategy they continue selling within the existing target markets. A Product Expansion growth strategy often works well when market conditions change, such as competition enters the market, or technology starts to change. A business may also be forced to add new products as older ones become outdated or obsolete.
3. Diversification Growth Strategy
Growth strategies in business also include Diversification, where a company will sell new products to new markets. This type of strategy can be more expensive and risky, and companies will need to plan carefully when using a Diversification growth strategy. Market research is essential because a company will need to determine if customers in the new market will potentially like, need and purchase the new products.
4. Acquisition Growth Strategy
The above strategies focus on organic growth, and most CEOs and business owners focus solely on these strategies. Growth strategies in business can also include mergers and acquisitions. With an Acquisition growth strategy, a company purchases the Stock of another company, or purchases the Assets of a company without taking on the liabilities to expand and grow. A business may also use this type of strategy to expand its product line and enter new markets, as well as, acquire needed talent and deeper management or needed intellectual property.
An Acquisition growth strategy can also be risky, but not as risky as a Diversification strategy. One reason is that the products and market are already established in an operating company with an Acquisition strategy. A company must know exactly what it wants to achieve when using an Acquisition strategy, mainly because of the investment required to implement it.
CEO Advisor, Inc. specializes in advising on all aspects of growth for small and mid-size businesses. Our mission is to grow your business to the next level, as well as, advise you through the ultimate sale of your company. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
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