The consensus view about how to sell a business is authoritative, a business owner does not have a very good chance of achieving a good deal when selling their business without expert advice. This aid with the advent of technology, data and transparency this market is transforming, business owners can now achieve a low cost, DIY exit (sale of a business) by following some basic guidelines.
Related: How to value your business
Prepare to secure a sale
Prepare properly in advance of going to market and you dramatically increase the chance of a deal (and a decent price). Go to market prematurely, and you increase reasons not to buy + the risk of a painful deal collapse further down the line.
- Prepare up to date accounts (sell at or soon after year end)
- Tidy up leases, contracts, legal (major cause of due diligence problems)
- Settle litigation, employee disputes
- Push cash flow to bottom line (reduce personal expenses)
- Reduce owner dependence and increase management responsibilities
- Liaise with professional advisors to discuss best deal/tax structure
- Apply a lick of paint
Don’t overfocus on pre-sale business valuations
Pre-sale valuations (particularly for smaller businesses) are often a distraction and worse, they can distort seller price expectations versus the market reality. Value is driven and cemented by good preparation and canny marketing, concentrate on both.
Create a one-page business sales profile for prospective buyers
Prepare a one-page market ‘teaser’ with headline information about your business. Use this document as a template for circulation to buyers and advertisers; Include the following;
- What you do & approximately where you do it
- Points of difference from competitors (location, customers, contracts)
- Potential for growth
- Reason for Sale
- Headline Financial Information (Turnover, GP, EBITDA)
- Contact details (create unique yahoo/gmail email address to maintain initial anonymity)
Select the right marketing channels & maxmise your outreach
Finding a buyer is often a numbers game. Get in front of as many potential buyers as possible and aim to achieve serendipity of timing between your availability and their search (+ funding capability).
Consider these channels;
- Business for Sale Websites (google “how or where to sell a business”)
- People you already know (competitor, customer, supplier)
- Market Research (Who is buying, advising, commentating?)
- Agitate the Market (research potential buyers & send a copy of your profile)
- Social Media (Twitter, Facebook, Google+, Linkedin)
- Local Publications/Business Networks
- Google Adwords
Leakage about the sale of your business can be unsettling to different stakeholders (employees, customers, suppliers). If confidentiality is important, provide buyers with an NDA (Non-Disclosure Agreement) and request they sign before you release detailed information. No genuine buyer will refuse. There are lots of online NDA’s available or get in touch, and I’ll send you a copy.
Converse with & qualify potential buyers
Respond asap to buyer enquiries (they have a lot of opportunities to choose from) with an emailed copy of your headline profile and (if required) NDA. Within your response, request information about their motivations;
- Why do they want to buy your business?
- Where are they based and how long have they been looking?
- What are their current circumstances and any experience in your sector?
- How will they fund a purchase?
Eliminate the tyre kickers PDQ and concentrate on the genuine. Undertake desktop research on buyers via Google, Twitter, LinkedIn and www.duedil.com (free company/director information). Deals tend to occur in an environment of mutual respect and understanding (easier to manage that way!). Why not start the dialogue with an initial meeting via Skype?
Create a detailed information memorandum
Some buyers will ask for detailed information via a business summary or Information Memorandum. Don’t worry about this document. Many of the IM’s produced by ‘experts’ are over-engineered and about as riveting as a Sunday Times Opera Review. Most businesses are easy to explain, and buyers prefer a succinct, focused document. The easiest solution is to provide an expanded version of your headline profile.
I advise clients to be proactive and provide a mini strategy document. No-one knows the business better than the seller, so why not whet buyer appetite with personal insights about what you’d do if buying the business. This will create a more valuable sales tool than the traditional mixture of the historic and hyperbolic.
Be open, communicative and understanding with prospective buyers
Deals can be difficult beasts to knit together and require patience from all parties.
Many tripwires emerge. However, 2 of the most traditional roadblocks involve;
- Sellers inflexibility on price and terms (often affected by the pre-sale valuation)
- Sellers lack understanding about the market vulnerability of their business and/or bottom line and therefore, the buyer’s risk calculation
Avoid overestimating (1) and/or underestimating (2)
Advisor Warning: These final points (9-12) involve the most critical stages of a business sale and often require expert help – particularly if the buyer starts to introduce their professional advisors.
Be ready for a negotiation & to close a business sale
- What is a good price and/or deal?
- Without a valuation, how do you know if the price being offered is acceptable?
- By this stage, you will form a better view of how the market values your business. You will have an instinct about what you might be able (or need) to accept.
- Is this the only buyer in the frame?
- If you’re inundated, can you create an auction process?
- If you say no to this buyer, will another one emerge and what’s the value of your time between losing one and finding another?
Ultimately, getting an offer is great news and should not be dismissed lightly. If it falls short of expectations, is there enough goodwill to work out a solution? Can you create a deal structure that enables you to bridge a price gap i.e. some cash/some deferred?
Be as flexible as possible and don’t dismiss out of hand – even if your instinct is hostile. Understand the justifications behind their offer. If the gap is unbridgeable, what can you do to help address and alleviate their concern(s).
Create the Heads of Terms document
Once you’ve agreed on a price/deal, make sure the buyer confirms everything in writing via Heads of Terms. This is not a legally binding document but provides both sides with clarity about what’s been agreed and becomes the deal template to take forward into due diligence and the sale & purchase agreement.
May require numerous redrafts until all parties agree so don’t be afraid to ask questions. Any misunderstanding of the terms today will create problems tomorrow.
Be prepared for due diligence
Don’t reach the due diligence stage and think it’s all over. You’re about to enter the most difficult and stressful part of the process, with everything still to play for.
As the buyer (and/or their advisors) gets under the bonnet of your business, they might use this opportunity to price chip or even consider withdrawing.
This is when your good preparation chickens come home to roost because the cleaner your business, the less potential for problems to emerge during DD.
One absolutely crucial area to box off early is with issues relating to leasehold properties – don’t find yourself at DD having to get hold of a disinterested or unavailable landlord with the deal hanging on their consent.
Protect yourself & your business
It’s quite easy to download a sale & purchase agreements (www.lawdepot.co.uk) – ideal for a small, asset sale.
For larger and/or share sales, it’s advisable to get a solicitor on board, with the following considerations;
1. Request evidence of genuine deal experience;
2. Don’t bring them in too early – more than one good deal has been lost due to the inexperience and/or interference of lawyers;
3. Request confirmation of their workload/holiday plans through the DD/completion process. Delay can kill deals. Don’t instruct someone who hasn’t got the immediate capacity to help drive the deal to completion.
Bonus: How long does it take to sell a business?
My 2nd favourite question from a business owner is: How long does it take to sell a business? My favourite response from a business broker is, “that depends.” I don’t have a Scorcese gift for dialogue, so will refrain from extending the hypothetical conversation but, the duration of a business sale process is entirely dependent on a bunch of variables (if variables can be entirely dependent on anything?) of which, the elements of market readiness, sector and seller expectations play critical roles in answering that question alongside some of the more detailed points below.
Deal longevity is also dependent on a bit of luck. One business might go to market at just the time a Financial Director (FD) has received a green light from the board to engage in an aggressive acquisition strategy and wants to drive quick deal flow.
Timing can affect a sale
Conversely, another business might hit the market at the wrong time (board have just stopped FD’s flighty acquisition spree) or encounter a problem during the process itself that dramatically shifts the time scale out.
So how long does it take to sell a small business?
From personal experience, I advise clients to prepare themselves for 9 – 12 months between signing up to the process and signing away their business. If a business needs to prepare in advance of going to market, extend that by the weeks/months required to get all their ducks in a row. I’ve seen a wide range of deal completion times, from;
10 weeks (The former business owner found a buyer and heads within days of going to market).
110 weeks (Target buyers were found quickly but having started the negotiation of selling the business, the seller found themselves having to deal with an intransigent 3rd party issue and therefore, a badly stalled completion date. As a yardstick, for the smaller, straightforward business, assume 3-6 months.
Mid to large SME’s take longer
For mid-range and larger SMEs, brace yourselves for a 12-18 month process, particularly if you need to prepare in advance of going to market. Another key psychological issue (bear in mind that trading performance of selling business has to be maintained throughout this period) is for the business owner never to assume that heads of terms will automatically mean completion.
Heads of terms are followed by a process of Due Diligence, where a buyer (and/or their advisors) gets under the bonnet of a target business and undertakes a micro investigation of their operation. It can be a nervous and complicated process, not helped by the contrasting expectation and competing agendas of different parties.
The key to minimising the risk of the DD process torpedoing a deal is to undertake up front DD in advance of going to market. The potential of future deal breakers and stress will be minimised by… “something you prepared earlier”. Think of it as the ‘Blue Peter’ approach to due diligence.
The buyer also needs to pay for the business and may require external finance, which can take time to prepare and approve. The vendor should check the buyers funding position as early as possible in negotiations and not take what they say at face value. See some proof. There is no point negotiating a great deal with someone who can’t afford to pay, If they can’t fund it, the deal is going nowhere fast.
Don’t be forced to sell and don’t be rushed into agreeing terms. The key to any business sale process is to retain control at all times. When control is lost by the vendor (and/or their advisors), then a deal can get fragmented, and the timings start to stretch out. One thing is for sure in corporate deals, time kills deals.
Selling a business is difficult
The above-mentioned advice is generic and is certainly not based on an individual deal, business, sector, scenario or eventuality. No-one reading this article should underestimate that to sell a business (however big or small) is rarely less than complex, time-consuming and ridiculously stressful. Even the most straightforward of deals contains twists, turns and the potential of disappointment. The article is intended to illustrate that the process is not rocket science and for the smaller business, in particular, does not require the cost and complication of instructing agents.