We have written a lot of technical stuff about selling a business. But we’re finding that more and more people want to understand the best high-level strategy to actually conclude a deal. Set out below are the key steps.
Commit to selling (or not)
Sometimes people think about selling as a ‘way out’. After a hard week in the trenches, this is understandable. But when push comes to shove, they aren’t ready to sell. Although running your business is hard, it may still be your best option. Even a big lump of cash doesn’t return much passive income these days. Don’t waste your time, or the time of potential purchasers. Make sure you are fully committed to doing something.
Know what you’re offering
You need to clearly define what you are selling. This includes the hard assets. But a lot (if not most) of your business’ value is going to be in the soft stuff. This includes:
- Whether you’re willing to offer a restraint of trade;
- If you will work in the business post sale;
- Access to key assets and real property;
- Potential claw-backs;
- The extent of warranties and indemnities; and
- Any vendor finance that may be available.
If you don’t clearly know what you are prepared to offer, then don’t expect someone else to work it out for you. You will have a much higher chance of getting what you want if you know what you want. Obvious, right?
Some people will set out what they are selling in a detailed ‘Information Memorandum’. Others will write up a straightforward ‘Term Sheet’. Either way, you need to be able to present a clear picture of what you are selling to potential suitors.
Identify the likely buyers
You’re in the best position to identify who is likely to part with cold, hard cash for your business. The buyer is likely to be a supplier, a client, an employee, or a competitor. You know who these people are. If you go to a business broker, their first question will be who are these people? Do the work yourself and potentially save some commission.
Once you have identified likely purchasers, think about how you can prepare and present your business to them in the most attractive way (including your soft assets and financial performance). Get external help to take you outside of your internal mindset so that you can identify risks and opportunities from the buyer’s perspective.
Don’t hide your light under a bushel
So many people we talk to want to sell their business, but they don’t want to tell anyone. This is a fatal flaw. This will cost you a significant portion of the value of your business.
You will not be able to create competitive tension (see below), and therefore sell your business for its full value, unless you are prepared to tell the appropriate people that it is for sale. You don’t need to advertise to the general public, and there are ways to shelter your employees and clients, but you need to get the word out to the relevant people that you are up for sale.
Create competitive tension
You will not sell your business for its full value unless you are able to create competitive tension. Full stop. (In fact, without competitive tension, you probably won’t be able to sell at all.) This means you either need at least two people genuinely interested in buying your business, or you need to have a credible ‘Plan B’ that does not involve selling your business (e.g. putting it under professional management or selling it down to your employees over time). You cannot create competitive tension by dealing with potential purchasers in series, you must do this in parallel. This takes coordination and management. You need to create heat.
Set a time frame, and stick to it
Part of competitive tension is a time constraint. You need to get the potential buyers to the same post at the same time. You will find that buyers want to hold off or get in front so that they avoid competitive tension. Purchasers will do this naturally, seemingly without thinking. They will want to ‘go exclusive’. They will talk about their ‘investment’ in the sale process, etc. Ignore them. You want bidders to invest in the sale process, but you don’t want them to own it. Sometimes a seller will offer to meet some of a bidder’s costs if they are not successful – this takes away the bidder’s argument that they need exclusivity to justify the cost of due diligence.
Don’t negotiate for yourself (or with yourself)
The reason that real estate agents, business brokers, recruitment consultants and lawyers exist is because it is very difficult for most people to effectively represent themselves. You need someone who is prepared to be the bad-guy, enforce a structured sale process, say no to exclusivity, create competitive tension, push the process along, and defend your value when it comes under attack without getting too emotional.
Be open-minded about what your business may be worth
You may be wondering why we haven’t mentioned price yet. The truth is, value is in the eye of the beholder. You need to work out what the business is worth to you, i.e. your Plan B ‘minimum’ value, (for what you would ‘buy’ the business back for). But then you need to leave it to the market to determine the price (the market you have created through letting the relevant people know you are for sale). The strategic value of your business to a current supplier may be a lot higher than you think. On the other hand, people just may not see the same value in your business as you do. There are people who can give you an idea of what your business may be worth (and you may already have a fair idea), but the best estimates seldom survive contact with the market.
Dedicate serious time to the exercise, and get experienced help
The process of selling a business is a huge distraction and requires a big investment of time and emotion. You cannot do it alone. But no matter who you retain to help you, it will require a material investment of your personal time. So, prepare for this. Take a break before starting the process. Eat well, get some sleep, and then buckle up for the ride.
How can we help? In many ways. We have helped people buy and sell a lot of businesses, of all shapes and sizes. If you want to chat about setting yourself up for an exit, email email@example.com or call Andrew on 0400 832 534.