The economic crisis caused by the pandemic and the flurry of M&A activity have made many owners think about selling. The decision to sell is a major undertaking and one not to be taken lightly.
Unfortunately, many businesses do not successfully make the transition to a new owner. That is why business owners need to educate themselves on the road ahead before starting a long and time-consuming process.
The risks of making a mistake are significant where most of an owner’s net worth is tied up in the business.
Understand the process and build a team
Most business owners have not been through the sales process before selling their life’s work. That is why it is important for owners to learn about price, process and to assemble a team of experts.
Business brokers and investment bankers can provide estimates of a business’ worth in the marketplace. Principals can also engage valuation firms to conduct valuations of their business. While more art than science, valuations can provide sellers with guidance as to the price range they might expect in a sale scenario.
M&A attorneys and tax CPAs are critical team members to have in place. Both can educate sellers on the process and main issues to be addressed once a decision to sell has been made. Both can also assist in formulating a flowchart for the sales process including suggestions as to what other advisers should be hired.
In addition to M&A attorneys and tax CPAs, owners should at least consult wealth managers and personal tax advisers to maximize the tax efficiency of the sale.
Find and address weaknesses
Most owners have not taken any real time to evaluate what their business looks like to a third party.
It is important for sellers to spend some time in the buyer’s shoes by taking a critical view of their company. Their advisers can play a pivotal role in this by preparing mock due diligence requests and reviewing the results.
The second step is addressing the weaknesses identified in the review of the business. Buyers will find the major problems in the business eventually. It is in the seller’s best interest to be aware of the issues and have a plan to address these issues with the buyer early on in the process.
Prepare your pitch
The final bit of information sellers need is which other companies are selling, and on what terms in the same industry and geography. In order to prepare the pitch, an owner should review the following:
- Valuation/price estimates
- Desired transaction type (asset, stock or a combination of both)
- Internal weaknesses and plan for addressing them
- Market developments
- Competitors’ sales terms
Combining the above information into a pitch is essential in obtaining the highest possible sales price for the business.
Qualify your buyer
In times of distress and periods of economic expansion there will be many parties acting like qualified buyers. Some parties pretending to be buyers are just larger competitors looking to weaken or spy on their smaller competitors. In either case, it is important to qualify buyers as early as possible.
Sellers who have engaged business brokers or investment bankers can utilize those professionals to verify the suitability of the potential buyer. Owners can also do the same by asking the potential buyer to provide proof of funds.
Protect against the downside
While many buyers are genuinely interested in the purchase there are always a number of strategic buyers who have no intention of acquiring the business.
Concerned sellers can add deadlines for various steps in the sales process such as a due diligence endpoint (e.g., 60 day due diligence limit), signing a definitive agreement, and closing. Failure to meet a deadline can give one or both parties the right to stop the process.
Savvy sellers can add break-up fees to transactions where the buyer is the reason that the deal does not close. Break-up fees should cover the seller’s expenses and some of the salaries for seller personnel who assisted in the sale process.
Have a plan B
Not all sales processes end in a successful sale. The aftermath of the coronavirus crisis is making this is even more true. Sellers are reporting worsening financial results. Buyers are going under or are getting into financial difficulties. Consider what you would do if the sale does not close for some reason. Would you need additional financing? What sources of capital are available to meet these needs? Would you be able to find an alternative buyer?
Sellers that engaged business brokers or investment bankers may be able to pursue the second choice buyer if the aborted sale did not take too long, or worsen the company’s financial condition.