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March 2014
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June 2014

Will you be prepared for your moment in the sun?

As a business owner, you too need to be prepared when opportunity strikes. The two most common reasons owners sell their business are getting approached with an unsolicited offer and having a health scare. Either way you’re not in control of the timing, but you can be in control of how prepared you’ll be when opportunity knocks or necessity strikes.  Here’s 7 things to do right now to get your business ready to sell

Seven1. Make sure your customer contracts include a “survivor clause,” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business.

2. Cultivate a group of a dozen “reference-able” customers that an acquirer could interview. When you sell, the buyer will want to speak with your customers; so you need a group of people – customers who are also friends – that would be willing to say good things about your company. In particular, the acquirer will be looking for assurance that the customer will keep buying after you leave, so make sure your reference-able customers are loyal not just to you but also to your business.

3. Keep in mind your elevator pitch to a potential acquirer. Writing your elevator pitch now will crystallize the important attributes of your company and ensure you focus on the right metrics in the coming years. It should the Who, What, Where When and Why of your business:

  • Who: describe why your management team is a winner. 
  • What: describe what you sell and why customers choose you.
  • Where: where are you located and what is the potential to expand geographically? 
  • When: how long have you been in business? 
  • Why: What are the strategic reasons someone would want to buy your company? Do you have a niche? Is your product a world-beater? Make decisions for your business now through the lens of how the results of your decisions would be perceived by a potential acquirer down the road

4. Identify 10 companies with a strategic reason to buy your business. Once you have a short list of potential buyers, study their M&A activity. What do they buy? What do they list as the strategic reasons for their acquisition in their media releases? Who are their lead corporate development executives?

5. Do business with your short list. Once you have a short list of potential acquirers, try to do business with as many of them as you can. Companies buy companies they know; so if you can find a way to work with a potential acquirer (either as a partner, supplier or customer) it’s a chance for them to become familiar with your company.

6. Professionalise your financial management – there’s nothing that freaks a buyer out more quickly than disorganised accounts.

7. Stop doing the selling. If you’re the rainmaker, nobody will buy your business without a soul-crushing earn out. Keep in mind that sales people take time to train and to hit their stride. Depending on your industry, it may take them a year or even two to start cranking out deals, so now is the time to hire and train them – not six months before you want out.

Process makes perfect

Last year I met with the owners of an engineering business because they had had an approach from a possible buyer for their company. It was a good business, and the owners liked the people who had approached them. At the same time they were wary of business brokers (having previously signed up a big company which had charged up front fees yet achieved nothing) and of the perceived disruption of a sale process. They also felt that their business had an intrinsic value that the buyer was bound to appreciate and to pay.

I can understand their reservations – but the idea that a buyer would blithely cough up the “business value” – even if it could be known – is dangerous. This ignores the huge amount of the exit value which is down to a good exit process.

How a business is sold has as much to do with the eventual value obtained as the characteristics of the business itself. If you are selling a house you can get a good idea of what it’ll go for based on the other houses on the street, you can even do this yourself using Zoopla. That makes selling a house much more about finding the buyer rather than extracting the value. And yet some business owners believe their business has given value and once the right buyer comes along, a deal will get done at their price. Alas nothing could be further from the truth, for a number of reasons:-

  1. Business value is much more subjective than property and other assets. You can’t go and get Short-sale-processdefinitive comparables for businesses. The packaging and process play much more critical roles when selling a business.
  2. The “best” buyer for your business might not be “on your doorstep” nor a close trading partner or competitor. If you have a decent sized business the best buyers might be scattered all over the world. Appreciation of business value is pretty subjective and so you will need to court multiple motivated buyers. This takes a lot of specialised knowledge, skill and perspiration.
  3. The devil is in the detail in most M&A deals. Many companies for sale will have amongst their circumstances a few potential deal killers. A skilled advisor is essential for avoiding these “unexploded bombs” and getting the deal done.
  4. Selling a business is a sales process. Without good comparable sales data (i.e. competing offers), it becomes a negotiated process.
  5. Most business buyers know what they’re doing and are intent on buying low and out-negotiating their adversary on the deal terms. You need to at least match their knowledge of the art of the deal to can maximise value for the seller.

Alas some folk, like the owners of the business I spoke to last year, try to do it themselves or delegate it to their lawyers or to the local accountants. Even if the seller thinks he’s done well, money has probably been “left on the table”. Selling a business is complex. There are a lot of moving parts and many business owners and, and especially accountants, don’t quite realize it. They think that because they’ve been tangentially involved in a few deals they can run a process and manage it effectively.

Selling a business for maximum value is the realm of the specialist. Company owners fail to hire one at their own risk.

Business sale value upon exit is made up as follows:

What you get for your business = Enterprise Value + Packaging + Process + Deal-Maker Skill

Enterprise value is the intrinsic value of the business. In theory this might be obtained by the DIY business owner/seller or the novice business broker (if they can sell it at all).

Packaging is putting together the Information Memorandum. Skilled packaging can in itself make the difference between a sale and no sale.

Process includes both process design and execution, and it’s about locating the highest and best buyers and working them all at the same time.

Deal-maker skill is the secret recipe. It’s the skill, knowledge and experience of the individual (or team) running the process through to closing.

In short, there is real benefit to be had from working with a specialist M&A adviser, a specialist in company sales. Look for someone with demonstrable experience, plenty of credentials to be found on the internet, and someone who will help you get the deal across the line. Ask your peers for references, talk to your existing lawyer or accountant, search the Internet.

If y ou are thinking of selling, which you will surely have invested lots of personal and financial capital into, then its worth getting the right people working alongside you to make it happen.