How to Successfully Sell Your Company
Tips for Privately-Held Business Owners
By Jason Pfannenstiel
Be clear about your motivation for selling. Reason for the sale is among the first questions buyers will ask. Your personal and professional reasons should be more than simply wanting to cash out for a certain magical dollar value. Before you decide to sell your company, focus on your true objectives.
Engage experts to ensure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction and may impact ongoing operations. Also, confidentiality works both ways. The broker will constantly stress confidentiality to prospective buyers. However, as the seller, you must remain confidential about a pending sale in your day-to-day business activities. It is virtually impossible for an owner to successfully sell their business on their own while maintaining confidentiality, and continuing to run the operation smoothly.
Prepare for the sale before going to market. Be sure your records are complete for at least three years prior, and do all pertinent legal or accounting “housecleaning.” Some buyers may be willing to buy potential, but they don’t want to pay for it (why should they—those future results will be based on their efforts and capital). Be prepared to provide detailed interim financial statements as well. Your consultant will help you anticipate information the buyer (and their lender) may request.
Here is a partial list of the minimum items that will be reviewed during due diligence:
Three full years’ profit and loss statements, plus interim P&L and balance sheet
Federal business income tax returns for the same three years
List of fixtures and equipment
Copies of any equipment leases
Place a reasonable price on your business. Remember, your business is competing for attention and investment capital from all kinds of prospective buyers—whether or not they are looking for your type of business. Since an inflated figure causes serious buyers to question the owners true motivation and “skip over” the company, rely on a consultant to help you arrive at the highest “win-win” asking price. The consultant will be able to support the price with marketplace data and industry-tested valuation methods. Remember that most successful transactions are successful because they create a mutually beneficial situation for everyone involved.
Achieve leverage through buyer competition. This can be tricky and is one of the primary reasons to engage an outside professional. Larger firms (50-100 brokers) who are experts in the business sale and transfer process are in the best position to identify the largest universe of qualified buyers for your company. Have them explain how their marketing and advertising activities are going to achieve this. To the extent possible, create a competitive situation with multiple pre-qualified buyers to position yourself better in the deal. Many owners think they already have “a buyer” for their business, when in fact, that one buyer is really no buyer at all. If the first (and only) buyer thinks they have the inside track, how motivated will they be to pay top dollar and negotiate terms favorable to you?
Be flexible about the terms of sale. It is not in your best interest to be the kind of seller who demands all cash at the closing, or who won’t accept contingent payments or an asset sale. Although a buyer might not have agreed to your original asking price, their offer may have other points that offset it, such as higher payments or interest, a consulting agreement, more cash than anticipated or a buyer that you are comfortable working with. You have probably spent years building your business–you want it to continue to be successful. Selling to the right buyer may be better than obtaining a higher price.
Keep time from dragging down the deal. Once you have a ratified offer, keep the momentum going. Rely on the advice of your broker/intermediary and CPA or attorney, and utilize their knowledge of business transfer marketing, financing, and associated tax implications to keep the deal moving forward. At this stage of the process, it’s a team effort, and both seller and buyer should be moving in unison toward a shared goal.
Be willing to stay involved, for training and consultation purposes. Financial/individual buyers are typically first-time business buyers and owner involvement post-sale is oftentimes one of the critical components of the deal. While these buyers may be well-capitalized and business savvy, nobody knows the business better than the owner. Be prepared to introduce the buyer to key customers, suppliers, and employees and educate the buyer on general business operations. Professional buyers, like private equity groups (PEGs) and other strategic industry buyers, may want you to stay within arm’s reach for a while to help train their management successor.