CEO Advisor Newsletter December 2020
10 Questions to Ask Prior to Selling Your Company
A significant benefit to our clients is that Mark Hartsell, MBA, President works directly with each CEO first hand on a weekly basis. Beware of M&A advisory firms that solicit your business and then assign a junior associate to handle the great majority of the process - an extremely risky roll of the dice that you need to avoid completely.
Mark Hartsell has 39 years of business experience with decades of mergers and acquisitions experience. He is certified in Mergers & Acquisitions from the Wharton Business School, University of Pennsylvania, achieved a Master's Degree in Business from Loyola University and has a hands-on approach to guiding entrepreneurs through every aspect of the sale.
Here are 10 key questions to ask prior to engaging an M&A advisor. Your business is your most valuable asset. Contact Mark Hartsell at (949) 629-2520, by mobile phone at (714) 697-3370 or by email at MHartsell@CEOAdvisor.com.
10 Critical Questions
1) Exit Strategy – What is my exit strategy? What are my options? Well, this is actually 2 questions but all point to one important issue - You never know when a potential buyer with a fat check is going to knock on your door, so Yes, every company needs an exit strategy. Simply stated, an exit strategy is a plan and process suited to you and your business to optimize the value of your business and to facilitate a sale at the proper time.
2) Timing - Is this the right time for me to sell my business? There are many considerations here, but I like to look at it slightly differently. I ask CEOs and business owners, when is it too late to sell your business? Meaning, what could happen that would make it very difficult and burdensome for you to sell your business? These issues include, A) A deep recession and now you have to wait 7 more years to sell to retrieve a good value or to find a legitimate buyer; or B) If I become ill or my illness was to return, how much risk would occur to my business surviving or how much burden would it be on my family and employees; or C) If stiff competition surfaced or a disruptive and far less expensive technology, product or service directly encroached on my business how would I recover or reinvent my business and how long or how much investment would that take?
3) Market Timing - Is the market timing right to sell my business? Today, valuations are still extremely high. The economic cycle is now 10+ years old with the average economic cycle ending at 7.9 years over the past 75 years. With high valuations and a low interest rate environment, it has never been a better time to realize the best value for your business in our opinion. And this window of opportunity will not last indefinitely; in fact it is shrinking by the month with volatility in the financial markets.
4) Readiness - Is my business ready to be sold? The answer is typically a resounding, No. Preparing your business for sale can take up to a few months or longer. Optimizing the value of your business can take years. At a minimum, you want to always be prepared to sell (when that proverbial buyer comes knocking on your door) and this is where an M&A advisor is extremely valuable. An M&A advisor will optimize your value and attractiveness to buyers during this preparation process and greatly increase your odds of a successful transition. And remember, to optimize your purchase price and likelihood to complete a sale you want to prepare for and target many potential buyers. Don’t get captivated by one buyer who will know there is no competition!
5) Time Commitment - How much of my time will be involved in selling my business and how long will it take to sell my business? Selling your business is a commitment and will take a substantial amount of time over six to nine months or longer. With the right team of experienced advisors, your time involved will be weekly, but far more manageable, predictable and minimized with a far greater opportunity of success. To minimize your time and optimize your value, efficiency and likelihood of securing a buyer, you will need to engage a team of advisors up front to zero in on a buyer and complete a transaction.
6) Team of Advisors - What is the team of advisors I will need to take me through the sale process and how do they benefit me? It is absolutely critical that you continue to manage and grow your business, keep it on track and not have any downfall in your revenues or profits if you expect to find a buyer and optimize the sale price.
An M&A advisor will initiate, manage and drive the sale process from the start to closing including the following responsibilities:
- Create the needed materials in preparation for the sale, such as an Executive Summary, 3-Year Forecast, PowerPoint Presentation specifically for buyers, make sure your financials and tax returns are in order and current, and many other preparation steps and information that will be requested by potential buyers.
- Strategize, research and create a list of 50 - 200 prospective buyers.
- Contact the prospective buyers multiple times by phone and email to arrange conference calls and meetings to provide requested information by potential buyers and secure a bona fide offer in the form of a Letter of Intent (LOI).
- Negotiate and finalize the Letter of Intent.
- Prepare for, gather and coordinate the extensive amount of Due Diligence information the buyer will require to validate your valuation and proceed with the sale, including organizing this information in a Virtual Data Room.
- Coordinate with your CPA/tax advisor to ensure your tax situation is optimized.
- Complete the rigorous Due Diligence process timely.
- Coordinate the legal documents with your corporate/transaction attorney and assist you in negotiating the many business issues that arise from these documents.
- Negotiate your future compensation for after the sale.
- Prepare for the closing of the transaction and coordinate all aspects of the sale to completion.
7) Valuation - How will buyers value my business? Most businesses are acquired based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The multiple varies based on your type of company, growth rate, your gross profit margins, your profitability, the size of your market, the strength and depth of your management team, and many other factors. In some cases with technology companies, in the absence of profits, but in the presence of an extremely high growth rate, margins and size of the market, businesses may be valued on a multiple of Revenue, as well as, other factors.
8) Cash at Closing - Will I receive 100% of the sale price in cash at closing? Unlike selling real estate where comparable properties are common place and basically 100% of the property can be inspected, tested and validated, a business has many variables that are fluid and cannot be validated easily, and comparable deals are very hard to come by. Realistically for small to mid-size private companies, buyers will pay you 50% to 80% in cash at closing, occasionally ask you to hold some stock to keep you fully vested and committed to the business, and the balance in the form of an Earn Out. The Earn Out is paid yearly once you meet milestones, including your forecasted revenue and profits each year over a period of two to four years after the closing. An all cash deal is possible, but you need to be realistic when selling your business.
9) Continued Service - Will I need to stay on with the buyer after the sale? Every situation is different, but 99% percent of the time the buyer is fully expecting you to not only stay on, but help them to further grow the business and meet your financial forecast. Taking your cash and heading for the beach is not realistic and this is one more reason to devise an exit strategy while you are still willing and able to work for at least 2 years after you close the sale of your business.
10) Alternatives to Outright Sale - What are the alternatives to an outright sale of my business? I speak with many CEOs and business owners and many feel that they can simply sell their business to the employees. Others want to find a person to run their business for them so the owner can move on and do other things, while pulling cash out of the business each month. These alternatives are rarely feasible in realistic terms.The best alternative to outright selling your company is to team up with a Private Equity firm by selling a minority or majority equity stake and taking money off the table, while still having substantial upside in the ultimate sale of the balance of the business three to seven years in the future.
The Private Equity firm will provide money for you, growth capital for the business, highly experienced management help and an opportunity to ultimately sell the business at an optimal sale price. A seasoned M&A advisor should have many relationships with Private Equity firms focused on small and mid-size companies. CEO Advisor, Inc. has developed relationships with many Private Equity firms over the past two decades.
Selling your business is a very complex and time consuming undertaking requiring tremendous experience and expertise. Mark Hartsell has 39 years of professional experience and 16 years of experience advising some of the most successful CEOs and business owners of companies in the Southern California area.
CEO Advisor, Inc. has the expertise and experience to guide you through this exciting process to sell your business. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc., for a free initial business consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us today at www.CEOAdvisor.com for more information.