CEO Advisor Newsletter June 2022
10 Critical Things to Know Before Selling Your Business
- Selling a business is never a straightforward process. However, the upside can be a life-changing event. When you do decide to sell, there are seven 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.
- 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 buyers for the potential sale of your business will primarily be based on the trailing twelve months (TTM) X an EBITDA multiple. I regularly speak to 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 sales last year, with $300,000 in EBITDA, the value will be minimized in the eyes of the vast majority of potential buyers, despite your lofty Forecast for $15 Million in Sales 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.
- Experienced business buyers want to see Net Profit and EBITDA, not just Revenue. Revenue of $10 Million or more will attract them as a potential buyer, but EBITDA is primarily the factor for 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 and Revenue Churn are critical.
- 3. Buyers Will Verify All Information in Due Diligence
- Once a Letter of Intent is finalized, 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 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 firm.
- 4. Be Both Expeditious and Patient
- The sale of your business will be extremely 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 expenses will mount up quickly. At the same time, show poise, professionalism and patience as the buyer is 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 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 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 and 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.
- 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/intermediary to represent our company. As CEO, you need to focus on the business, assist in the transaction, and bring 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 with strong, accurate financial statements and other needed information to satisfy buyers.
- 10. You Need an Experienced Business/M&A Advisor to Ensue 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 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.
Joe McCarthy Joins CEO Advisor, Inc. in Southern California
- CEO Advisor, Inc. is pleased to announce that Joe McCarthy has joined as a CEO Advisor in Southern California. Joe has in-depth financial expertise as a former CFO and strong relationships with Private Equity firms and corporations from multiple industries.
- Joe McCarthy is a seasoned business advisor, with an expertise in mergers and acquisitions due diligence, company financings, company sale preparation, growth, strategy and turnaround expertise. Joe has extensive experience in working with Private Equity firms and their portfolio companies, in acquisition integrations and turnarounds.
- Prior to becoming a business advisor and fractional CFO, Joe McCarthy was the Sr. VP/CFO of Sunrise Growers, Inc., EVP/CFO of Trojan Battery, EVP/CFO of Case-Swayne Company, Director at Ashton-Tate Software Company, KPMG and other positions.
- Joe McCarthy achieved a Bachelors in Science, Business & Accounting from Pennsylvania State University. He achieved both CPA and CMA designations during his career.
- Contact CEO Advisor, Inc. at (949) 629-2520 to discuss your specific needs, or visit www.CEOAdvisor.com for more information.