There are no short cuts to selling your business unless you are in dire needs. If that is the case, you must read our article – How to sell my business fast. The average small to medium scale business sells in 9 months. It can be more depending on the complexity of the deal. However, it is rarely less than 9 months. There are ways to hasten the process. But short cuts never end up with the best results for either side of the party.
This is a long article because I wanted to give you everything you need to sell your business. Selling a business is an involved process and there are no shortcuts to a great result. If you do not want to read all the sections, we have listed the topics in a table of contents here as well.
Table of Contents
- Why did I write this?
- How this article is organized
- The very first step that is often missed
- Analyze why you want to sell your business
- Build a winning team
- Decide on type of exit
- Do proper exit planning
- Do detailed tax planning
Prepare marketing package
- Confidential Information Memorandum (CIM, Memo)
- Email Templates
- Rehearse due diligence
- Market the business
- Screen prospective buyers
- Shortlist buyers
- Execute the “Letter of Intent”
- Go through due diligence
- Engage attorney
- Close the transaction
- Transition the business to the buyer
- Plan your separation
- Final Thoughts
Why did I write this?
I have worked as an M&A advisor for 2.5 years and have also reviewed 100s of companies with an intent to buy one. The challenges and successes that I have seen, puts me at a vantage point to cover this very important topic. Exiting a business is most likely the single most important thing a company will do. As such I felt compelled to create this resource for small to medium sized businesses preparing their exit strategy. If you have any question or comment on anything please feel free to reach out to or comment here.
How this article is organized
I have written this article from your perspective, that of a seller. It is written in a way that will help you, in case you decide to go about the process without a business broker. I will never recommend that you try to sell your business on your own because of the amount of work and experience required. But if you do decide to go about this on your own this article will help you. I have sold a business on my own. It was not an easy thing unfortunately. But it can be done and although the results are far better by engaging an experienced broker or consultant, one that partners with you to sell your business, this article will give you all the tools you need if you were to go at it by yourself.
The very first step that is often missed
Create a non-business email for yourself and anyone else in your company that will assist you with the sale. Also create a document repository that is not connected with your business. Gmail and Google Drive are good resources I can recommend. Do not use your company email to discuss anything regarding the sale with anyone. After the sale your email and files will become the property of your buyer. So do not discuss anything using the company email that you do not want your future buyer to see.
Analyze why you want to sell your business
There are many reasons why you may want to sell your business. And, although it seems to be an obvious point, I want to emphasize this point. Every time I have asked this question, to thousands of business owners, the answer is never straight forward. Write it down “Why do I want to sell my business now?” Almost always, it spurs questions, concerns and new ideas. And in the end it is the obvious that trips us more often than not, because we choose to ignore it.
Here are reasons that you might want to sell your business.
Most business owners are extremely passionate about the business they have built. In fact, many of them continue to operate them till they feel they are ready to retire. And soon, Baby Boomers are going to a big percentage of all the businesses for sale. Nearly 2.5M business owners are Baby Boomers in the United States. A lot of them are turning to alternative options of employee ownership. But, many would like to exit their businesses with cash for retirement. Asking yourself why you really want to sell your business will have a big impact on your exit strategy.
Focus on something else
Business owners by default suffer from some degree of attention deficit disorder – it is not a bad thing actually. In fact it is one of the entrepreneurial traits and can be used as an asset. Firstly, entrepreneurs are risk-takers and they are always looking for new opportunities to exploit. Secondly, the environment around us is changing faster than ever and new opportunities are popping up everyday. And finally, diversification may be challenging or not an option. In such cases, business owners often feel the need to sell their business to invest in better opportunities.
Volatility in markets, political unrest, new regulations, compliance changes or technological disruptions can create anxiety in business owners. Many of them opt to sell their company in such conditions. It is normal to feel anxious or uncertain about the market forces. As such, it is important to write out the exact reasons as to why you want to sell your business by doing deeper analysis of the factors. In these situations, you can always bring on a business consultant. You can read articles from credible sources. Discussing your fears and anxiety with your team, your family and your friends always helps. You are always welcome to call us or talk to any business broker about the state of the business world.
Illness or family problems
These situations may arise and could prevent the business owner from operating their company properly. In a lot of cases I have found alternative solutions, especially when situations are temporary. For example, you can appoint a CEO to run your business. You can look towards employee ownership. You can even bring in “fractional” or “interim” CEO services. However, there are situations when selling the business is the only option.
Some industries see a big surge in new entrants, or disruptive forces start to encroach heavily on existing companies. As such, business owners may choose to sell their businesses instead of trying to revamp their operations and strategies. In these cases it is critical to stage the organization properly. If buyers perceive any weakness they will low-ball your offers.
Bored or exhausted
In many cases business owners are simply exhausted from operating their business over a long period of time. They really have no chance to take a prolonged break. Owning a successful business is very rewarding but it comes with its perils and costs. Owner fatigue, boredom is very common. In many cases the only way out could be to exit the business so that the business owner can focus on new ventures or just take a breather.
If you are sure that exiting your business is your best option, read on. If you are not sure you should reassess, consult and discuss with your team. There are several steps to selling your business. These are the most common. Some industries will have specifics but these are the steps that will always apply.
Build a winning team
It is a common practice for business owners to keep the sale process hushed and try to do it alone. But this is a big mistake because the last year of your business will be the most important year. You need to focus deeply on your core business so that it remains attractive to prospective buyers. Moreover, a business sale is a project and every successful project needs a winning team. So, you need to start by building an exit team. Typically these are the roles that need to be filled.
The business needs to be marketed to buyers and the marketing package has to be professional, well branded and above all, strategically drafted. You can take up this role, but it takes a lot of time, prior experience and research. As such, you should hire a consultant or a business broker to help you with setting up your marketing package. The marketing package is the most important deliverable in the entire process. A good package will get you the premium buyers you seek while a weak package will weed them out even though your business is a good target.
You will need to have very clean books, records and financials as well as a bullet-proof valuation of your business – the purchase price.. As such, your accountant or CFO has to be part of the exit team. If you cannot divulge the sale to your CFO or accountant, consider hiring an external accountant. However, I strongly advice that you bring your current CFO or accountant into the team. If you are worried about confidentiality leakage, you may need to reassess the whole process. A buyer will ask you for many types of reports during due diligence and you will need help from an accountant. Even if you are good at business math, you will not have the time to attend to the requests. Having your CFO or accountant in your exit team, also shows to a buyer that you have a well-knit and supportive organization.
Choosing the right lawyer is one of the important drivers to a successful exit. A lawyer will come in after due diligence is complete when closing documents are being drawn out. However, it is important you select the right lawyer before you get into the process. It is crucial that your lawyer has ample experience in representing sellers in a business transaction, preferable for your industry. If possible, interview at least 3 lawyers and pick the one that you feel most comfortable. When talking to prospective lawyers see if they are able to give you early advice and if they are taking the time to answer all your questions. Typically, lawyers will work on a retainer and will give you a cap. Finally, your business broker should be able to provide you a list of lawyers as well.
The business sale process is extremely rewarding but equally excruciating. There will be many times during the process that you will feel like giving up or you will feel disappointed. All this in additional to ensuring that your business continues to function at its best under the scrutinizing eye of buyers. You need support from your family, friends, confidantes and people you trust. When you are doubting yourself you need to seek solace from those that bring you peace, calm and can give you sound advise. Talking to other owners that have exited similar businesses is a great idea. Building a strong partnerships with a trustworthy and competent business broker will also help you greatly in the process.
A good business brokerage can fulfill most of the roles and partner with you to complete the project with excellent results. And your broker / consultant should give you complete comfort that you will succeed in the process.
Decide on type of exit
There are several types of exits. Each business sale is unique because of the agreements between the buyer and the seller. However, they fall under one or combination of these types.
You sign the papers and walk away forever. This is really uncommon because there is always a transition period required by the buyer to take over the business from you. If this is something that you wish to do, you have to create detailed documentations of every aspect of your business. Additionally, you need to hand over the keys of your business much before you exit to a trusted employee or partner. And, most importantly, your buyer needs to know this before you engage with them so they do proper due diligence and exit planning with you before the closing.
Here you sell the equity of your business. It could be a 100% equity purchase or a minority or even a majority equity purchase. Typically, the buyer will be a private equity or even a partner in your business
This is the most common type of sale where a buyer will buy out all the assets and liabilities of your company. They may exclude some assets and/or liabilities based on mutual negotiations. For example, a buyer may not assume a debt or take over a piece of real estate.
Sale with an earn-out
A buyer may want you to stay on with the business for a period of time after the sale. In this case a portion of the sale is paid at closing and the remaining is paid over a period of time based on targets that are set mutually by the buyer and seller prior to closing.
Most likely your buyer will not be able to fund a 100% cash buy out especially if the acquisition is financed through a loan. In this case you will finance a portion of the sale based on mutual agreements. You will be entitled to interest. Remember, everything is negotiable up to the point of accepting or rejecting the deal. You should have a clear idea of exactly how much net cash you want from the proceeds of the sale at a minimum. You will most likely pay lesser in taxes over time. Not an exact analogy, but this is somewhat akin to taking a lump sum winning or installment payments on a lottery. Except, in this case there are risks – if the business fails post sale, you may not get any or very little of the seller financed amount.
A common option for many retirees is to sell their business to their employees. Executive management could buy out a portion or all of your business. Alternatively, you can turn the organization to an employee owned company. You can stay on with a Board Seat and also structure an annuity and Board compensation.
This is not preferred because you are selling off the assets of your business for what it is worth in the market today. Sometimes this may be the only option depending on the environment or your personal situation.
Hire a Managing Member
You can hire a CEO and hand over the organization to him/her. Normally you will retain certain stock options and control of the company.
Each of these have pros and cons as well as tax exemptions. It is important to weigh them in before you decide which path to go. In many cases I have seen business owners spending months with a buyer without discussing the exit type. And, in the end they are forced to go with an option that may not be the best option for them because of all the time and money they have already spent on the project. If you are not sure please feel free to reach out to me or comment here.
Do proper exit planning
Once you have a winning team and you feel confident you can rely on the team to execute the project successfully, you need to create a proper exit plan. A good exit plan is like a project management plan. It should have the following components.
What defines success
You need to define success for the project. How do you and your team know that you are successful at each stage of the sale? Typically you should have success criteria defined for each of the stages of the business sale. The criteria should have the following.
- How much money am I going to spend in this step
- How much time should I spend in this step
- What is the best outcome from this step
- At what point do I need to throw in the towel and reach for help from outside
- How do I know this step is successful and cannot have a better outcome
This may seem like an obvious step but having clear goals for your entire team upfront is important. You will avoid a lot of arguments, headache and resources if you define your success factors early on and continuously measure the progress against them.
You should have a list of stakeholders that will be both positively and negatively impacted by the sale of your business. This list would include yourself, your partners, key employees, teams, customers, vendors, partners, landlords, competition, family, friends, business associations, services and so on. Remember to work with your team. Once you have your list you should write out how the sale will impact each of them positively and negatively.
Confidentiality during a business sale can be tricky. You need to expose your business as transparently as possible to a prospective buyer. Yet, you cannot divulge the project to everyone because it would create unnecessary confusion and fear. For each of your stakeholders you need to have a clear communications strategy. This would include the following.
- At what stage should they know about the sale and why
- How will you communicate the message? In person, over email, over a call? Why?
- What happens if they find out before or in an unplanned manner?
- What is the communication map for each stakeholder?
If you have a big company with many locations this may seem like a daunting task. In that case do the best you can. Breaking up the organization into teams might help. If you have a large number of customers or vendors, breaking them up in terms of importance, size or closeness to the organization will also help.
You have to get a complete understanding of what the process will cost you. This will include all the hours you and your team intend to spend on the project. If you keep time sheets in your business this might make things easier. If not you should, at a minimum, track the hours on a weekly basis that you and your team plan to spend on the project. There will be other costs based on consultants, brokers, lawyers, accountants that you plan to hire. You may have to purchase industry reports to backup your marketing package and forecasts. You might have to create marketing material with the help of a marketing company. If you are not sure about all your cost you can always reach out to us to understand costs of selling a business like yours based on your situation.
Plan your months first and then break them down to weeks. At the exit planning stage you should know by week what you need to accomplish. This list will help you get a good start. A timeline should include tasks and should back up your budget. Reach out to me if you want a template timeline that you can use.
Every project has risks. There is also a risk of not doing a project. If you have reached this step, by now you should have no doubts that you want to sell your business. If you have doubts go back to the prior steps and retrace back here. It is important to create a business sale risk register. This will have the following
- Name the risk – examples include customers finding out and leaving, key vendor leaving, key employee not cooperating etc.
- Write the probability of occurrence
- Write the impact of the risk on a scale of 1 to 3 – 1 being low, 3 being high
- Multiply the probability with the impact and get a risk score
- Sort the list by the risk score and you will have a risk register
- Now you can tackle the biggest risks
- Plan the mitigation steps – accept the risk, mitigate the risk, transfer the risk (outsource)
- Put an amount to mitigate the risk – you will get your risk cost
Without measurements you will not know if you are making the right progress. “If you cannot measure it, it did not happen.” How do you know if you are on the right path? Especially if you have not done this before? Some of the measurement tools you will need to set up and monitor are as follows.
- Track your actual expenses on the project every week
- Actual time being spent
- Number of inquiries on your business over time
- What questions have prospective buyers asked and why
- How many interviews did you have from prospective buyers
- Number of Letters of Intent received
- How long is due diligence taking and why
Do detailed tax planning
An excellent article to read is from SBA on this – 7 Strategies to Consider When Selling a Business. If you do not have a good accountant that can advise you on tax implications based on the type of exit you desire, you should research or reach out to a tax consultant. The little that you will pay for consulting is minuscule that you will pay if you do not plan for taxes at the outset. At a minimum, you should factor in capital gains tax based on your state – typically no more than 20% of the total proceeds. There are some excellent articles on business sale taxation that you should read from Google.
Prepare marketing package
If you do not do any of the steps, definitely do this right. Unless you can market your company correctly, you will not get the value it deserves. Creating a marketing package is not very difficult, but it requires strategic thinking and planning. You will be creating the following documents.
Confidential Information Memorandum (CIM, Memo)
The CIM is a document that markets your company to prospective buyers. Buyers request the CIM after reading a “teaser” or executive summary of your business first from all the places where your business is marketed. The CIM contains all the information needed to get a buyer to engage with you to buy your company. Your broker will send buyers a CIM after they have signed an NDA. Reach out to me if you need a bullet-proof NDA.
A CIM should contain the following sections. Different industries will have additional sections that addresses things like regulations, compliance, specific inventory elements, pricing factors etc. However, the following are must.
Executive Summary: this is the overview of the company. In 10 or less sentences describe the industry, operations, markets, your key employees and the future prospects.
Create a table that shows historical revenue (at least 3 years), EBITDA, SDCF, cash flow summary and balance sheet summary.
Legal structure of the business
Year of registration, State, Type of business, Taxation structure.
Key investment highlights
In 5 or less sentences articulate why buyers should pay the price you are asking. Most buyers will read till here and jump to the financial section. So make this portion compelling and signpost to the financials. Do not overdress or oversell, but market aggressively. If you are not sure, discuss with your team and your broker.
Purchasing some industry reports and statistics may help you tremendously. Credible sources will make your package much stronger. It might also help you address concerns that you never thought about which could peek their ugly heads during due diligence. In this section you should discuss about the conditions of your industry – impacts of legal, regulatory, political, technological, economic and environment on your business. Next discuss the competition and how your business is protected or manages the competition. Point out the value propositions, unique positioning if any, any niches, patents, intellectual property or why your customers love working with your organization. You can also add a Porter 5 force analysis that can structure your arguments better.
This is the section where you present your company. This will showcase the operations. Areas that you will cover are history, milestones, legal structure details, business model, key assumptions, values, mission, vision, segments of business, product lines, customer details, segmentation, partnerships, supplier relations, banking relations, investors, references, associations, networks, and finally the activity map of your operations – key personnel, sales, marketing, HR, R&D, procurement, inventory, logistics, production, services. You want to lay out how your business got to where it is today through the eyes of an auditor or inspector. Most CIMs also present a SWOT analysis. Here is an excellent article on how to create a SWOT.
New Segments and Markets
You will discuss growth opportunities in new customer segments, new industry segments and new markets. It is important to cite industry statistics and reports to justify your reasoning and add credibility to your assumptions. Add opportunity numbers to the growth areas.
What marketing improvements can be done to grow your business? Write out the costs, expected returns and risks. You should also add why you have not done this yet for your business.
Sales Process Improvements
What new sales tools, resources and processes be adopted to close more and better deals? You should add details like costs to implement, improvement of sales cycles and acquisition costs. Additionally, explain how you can sell deeper into your existing customers.
New product lines and services
Discuss how the business can create new product lines and services by adding some features or elements to your current operations. You can discuss possible doing joint ventures and partnerships, leveraging certain suppliers and distribution channels, marketing and selling internal processes and systems. You can use a Blue Ocean Strategy to better structure your reasoning. Remember to use include business environment conditions in new markets using a PESTEL analysis as well.
List out all risks of the business. Do not give away the farm. But do not hide the problems if you cannot fix them before listing your business for sale. For each risk lay out the mitigation steps and the cost of the risk.
Finally you should have your detailed financial presentation. If you have audited financials that is always preferred, but most small businesses do not have audited financials. In that case, this should be created with assumptions that can be validated. At a minimum you should have – basis of preparation, tools used, legal entities and relationships, one off adjustments, profit and loss statements with details and explanation for each line, any add-backs with proper validation and explanation, balance sheet, cash flow statement and financial projections.
Your business will be marketed to pubic with the help of a teaser. A teaser is typically a one-pager of your business summarizing your CIM. Teaser will not have any information what can be used by anyone to decipher your company. Remember, the teaser will be floated publicly to attract buyers. So it cannot give out any information that can be traced to your business or anyone connected with your company. Yet, it needs to have enough information so that buyers will be attracted to the listing. Typically a teaser will have company overview, industry details, location, financial summary, value proposition, customer overview, purchase price, structure and details, and how to contact the business to get more details and engage with the seller.
Work with your broker to ensure you have proper email template for all communication with prospective buyers. These templates will include the following – introducing your company, follow-ups to the teaser, NDA email, presenting the CIM, follow-ups to the CIM, response to requests before LOI is signed, financial reports responses, due diligence responses – these are templates and your broker should have them ready to save time, confusion and more importantly show professionalism to the premium buyers you want to attract.
You can pose as a buyer and get the marketing package from other business brokers for similar businesses. You will have to sign an NDA, which is actually a good thing – it protects everyone. This will give you an idea of what your competition is doing. While this may sound wishy-washy, it is something that is constantly being done. Researching competition is not a bad thing, it is what you do with the information is key. So, bear in mind, do not plagiarize or steal information.
We are working on a template for a CIM that you can download shortly from our site for free. Please stay tuned by subscribing to our blogs and newsletters
Rehearse due diligence
Most business owners like to execute and while learning by doing is a good thing, this is a project that requires planning and testing. Firstly, you need to understand what due diligence entails in general. You will also have to consider extraneous items that pertain to your industry and then to your business. Below, I have provided details on due diligence, so you can use that to create a due diligence rehearsal plan. The goal here is to be as ready as you can be. A well-prepared seller will attract premium buyers. Banks and lenders love good records and processes and most buyers will come with a lender to buy your business. Below are some rehearsal steps
Create a data room
A data room is an online repository where you will dump all documents and data that will help a prospective buyer learn about your company. There are specific categories that you will need. The due diligence section below highlights them. Eventually your broker and/or your buyer will most likely create a data room for you. But being prepared early on will save you a lot of questions and concerns later down the road.
Practice communication strategy
Go over the communications strategy with your team. Pick key customers and run down the communication plan you have created for your customers. Do the same for key employees, vendors and partners. You will find out new reasons, assumptions, new information and even new avenues. Your team will also feel more confident about the process.
Do a dummy audit
Ask your accountant to do a dummy audit of your financials. This should not become a large drawn out project. It should be a simple exercise. For example, your accountant can take sample contracts, orders, statements of work and tie them to invoices, checks and returns. Or, your accountant can ask you for your top 20 customer run-down report.
Ask a friend to visit your company posing as a buyer
Use your communications plan and see how your employees react. A good buyer, especially strategic premium buyers that will pay your bigger premiums on your business, will want to walk through your operations. You will find out a lot about your employees and operations just by doing this simple exercise
Market the business
Once you have your marketing package and feel confident on your team and the whole project it is time to beat the drum. Typically your broker will take care of this. Good, experienced brokers have their own database of buyers. This will be the biggest source of prospective buyers. Brokers also list the business in the different listing sites (BizBuySell, BizQuest, LoopNet, BusinessBroker etc.). Additionally good brokers will market your business through traditional marketing channels like SEO, networks, LinkedIn, Twitter etc. The steps involved are as follows.
Engage with prospective buyers
Work with interested parties to get them to sign an NDA so that they can receive the CIM. Typically this is not a difficult task, but buyers get busy and so it is important to be aggressive and proactive. Nothing kills a deal more than wasted time. If the buyer is not known research the buyer to ensure that it is not your competition sniffing for information. It is a good practice to screen buyers by asking them specific questions like source of funds, reason for purchase, experience and resume. Many sellers and brokers ask for proof of funds. While that may weed off a large number of buyers, it can also bring in only the serious buyers. I always recommend starting with this and then easing off depending on the results.
Sign NDA and present CIM
Ensure that a buyer signs the NDA and then present the CIM. It is a good idea to get the buyer on a conference call and walk them through the CIM. This is because, a CIM like a proposal. It gives you and/or your broker to sell the business right from the get go, especially if the buyer is promising. Presenting in person will also save everyone time by answering the most important questions right away. If you do not have to time to travel or meet face to face, at least do a screen share video call.
Do not stop marketing your business
Most buyers will make you sign an exclusive LOI which means that during the due diligence process you will not be marketing your business to other buyers. This protects the buyer’s investment of time and resources during due diligence. However, there are many times where I have been successful in negotiating a non-exclusive LOI with a buyer. Remember one thing – no business sale is like another, and no deal is off the books as long as it does not get on the wrong side of the law. For example, in exchange for a slightly longer due diligence or some shared costs a buyer may decide on a non-exclusive LOI. If you have multiple offers you might be able to negotiate as well. The more prepared and solid your business sale process is, the better are your chances.
Screen prospective buyers
This is part of the marketing process but I always like to look at this as its own step and scope in the project. The goal is to get you a strategic buyer rather than a financial buyer. Such a buyer is seriously looking and will be best fit buyer for your company. This is important, because a best fit buyer will be able to transition successfully from you. Also, the business will continue growing after the sale which protects your employees, customers and your legacy. Strategic buyers pay higher premiums than financial buyers who are most likely shopping to either flip or strip your resources to retro fit into their portfolio. This is how you should screen.
Setup screening criteria
Ideally you want your buyers to give you proof of funds. Many will not do that till they are ready to send you an LOI. If they do not, you can use that as leverage to negotiate a non-exclusive LOI. At the early stage at a minimum your prospective buyers should tell you their source of funds. They should also tell you their experience and provide you with their resume. Finally, they should give you the reasons why they are interested in your business.
Validate the sources. Research your buyer and ensure they are who they say they are. Look beyond page one of Google. Search social media – at a minimum Facebook, LinkedIn, Twitter. If you are not confident and you like the buyer you can ask them for references. A good buyer will not hesitate to provide you with references. Remember, you are in the drivers seat.
Ask your buyer to introduce themselves
You should talk to you buyer on the phone and get a feel for their credibility. Ask them the same questions that you have asked them over email and see how they answer. If possible do a video call. Remember, a serious buyer will have no issues introducing themselves early on. They want to do the same level of due diligence as early as possible to save their time and resources as well.
Do the screening interview
This is the chance where you want to “wow” the buyer. Do not assume that the buyer has read or understood anything in the CIM. Tell them that you want to err on the side of caution and want to go over the entire business and its ecosystem on the call. Ask the buyer to start by asking any opening questions. Then deliver your pitch. Preparation is key here. Always prepare this pitch. Ideally it should cover your entire CIM and it should be between 10 to 15 minutes. A video interview is the best. Your buyer will then ask y0u questions. Answer them confidently, and with details. Have someone keep notes and record the meeting. Finally ask your buyer all your questions. Here are the questions you must ask.
- Are you able to decide a go / no-go by a week because I have other buyers?
- Do you have anything specific you need from me to help you prepare an LOI?
- How do you plan to grow this business if you were to buy it?
- Are you confident of funding the acquisition?
If you have done the above steps well you are guaranteed to get multiple buyers. By now, you should have had screening interviews and good notes and recording of the screening interviews. List the buyers and sit with your team to rate them on a scale of 1 to 5 along these points.
- First impressions
- Can I work with this buyer for the next 1 to 2 years (assume due diligence and transition period)
- Do I trust what the buyer said in the call?
- Can I be confident that the buyer can fund the acquisition?
- Do I have all the information about the buyer to shortlist him/her?
- Will the buyer be a cultural fit for my employees?
- Can the buyer work with my customers and vendors?
- Will I be proud to let my family and friends know that I sold my business to this buyer?
Once you have the list rate the buyers and pick the top 3. You can pick more, but remember it takes time and resources to work with each buyer. If you have less than 3 buyers, you should do a deeper analysis of why your business is not attracting more buyers and try to fix them.
Execute the “Letter of Intent”
A letter of intent is not a legally binding document unless the parties agree that it is. Typically it is not. The LOI is used to establish the terms of the sale, deal structure, timing and purchase intent between the buyer and seller so that both parties can go into the due diligence process. Most of the time the buyer will ask for an exclusive LOI which means that the seller will not market the business until the LOI expires or the deal falls through. It is very important to read every point in the LOI so that you do not sign a document that binds you in ways that you do want to. Typically an LOI will have the following.
- Buyer name and details
- Seller name and details of the company
- Transaction details
- Purchase price and details
- Type of purchase and details
- Any contingencies
- Due Diligence details, expectations and timing (typically 60 to 90 days)
- Covenants and restrictions
- Closing and Termination Clauses
It is exciting to get an LOI. It is a first major milestone to the project. But be careful and read every word carefully with your team before you sign the document. If you are not sure engage a consultant or even your attorney.
Go through due diligence
Due diligence scares a lot of business owners. However, it should be a very rewarding part of the process if you have gone through the process I have laid out here. Preparation is key and if you have prepared well, this would be an easy process. Moreover, you will feel proud and excited to walk your buyer through the well-rehearsed due diligence with your winning team and the communication strategy that you have laid out before. Any buyer would appreciate a well planned due diligence because it will also save them valuable time and money. The process will have some of these steps
Financial Due Diligence
Buyer and his/her team will inspect a minimum of the last 3 years of financial statements, sales and profits by business line, product and service categories and customer segments. There will be a detailed analysis of A/R and collections, inventory, real estate and equipment, projections with assumptions, risks and opportunities. There could be several other financial documents that could be requested. Have your accountant handy. Be prepared to provide a full back-up of your accounting file and be ready to answer any question that pertains to your financials. If you have taken add-backs there needs to be very good reasons with proof. Remember, that if the buyer is using an SBA lender there are several regulations on what you can claim as add-backs to normalize your P&L. This would have serious implications on the deal and the purchase price.
Operational Due Diligence
The buyer will go over the day to day activities of your business — sales, marketing, customer service, manufacturing, procurement, logistics etc. The buyer will want to understand your day to day involvement in detail because he / she will assume that you are going to exit the business at some point after the sale. Here you can demonstrate your preparedness by giving access to the data room your created early on during exit planning. You should not be afraid to reveal the nuts and bolts that hold your business together. Provide a historical view, as it has been and as it is today. Also, give the buyer a clear understanding of how the business will grow in the manner you have projected in your marketing documents.
Legal Due Diligence
The buyer will go over all the founding documents, articles of organization, structure of the business, tax structures and tax planning, shareholder statements, all legal entities (if more than one), debts, investments, all contracts with customers, vendors and partners, leases, all types of agreements, NDAs, employment contracts, trademarks, copyrights, patents, intellectual properties and any legally binding documents, covenants or restrictions you have in your business. It is very important that you do not hide anything. A business sale does not end at closing. A buyer can indemnify you or gross misrepresentation after the sale, if you hide anything that will prevent a buyer from running the business in the manner that was discussed at due diligence. The purchase agreement almost always protects the buyer from such calamities.
Things to watch out for
Part of the due diligence can be the lending bank’s due diligence if the buyer is financing the acquisition with a bank loan. Your broker might be able to get your business SBA pre-approved. This can attract a lot of buyers who seek SBA financing to buy a business. It is best to get your business pre-approved by an SBA lender (reach out to me for good nationalized lender contacts) before you list your business. You can then advertise the business saying that it is is SBA pre-approved. That not only saves a lot of time during due diligence, it also markets the business a lot better.
Additionally you need to be aware of the following during due diligence.
You need to separate yourself from the business
You have to do this before the due diligence process starts. Small business owners mix their personal data and finances with the business. Remove personal email, records and files from the business repositories. This may be difficult if the business has been running for decades, but it has to be done. You do not have your buyer to own your personal files correct?
Do not let the buyer lead the due diligence process unhindered.
You have to own the process and structure the due diligence process early on before you sign the LOI. Both of you should setup the right expectations. Due diligence can go on for a very long time. Beyond a certain time both parties feel obligated to continue on due to the relationship created, the possibilities ahead and the time and money already spent.
Do not feel uncomfortable to push back.
A buyer is still not a buyer unless the purchase agreement is signed. You need to stand your ground if you believe you are correct. Be professional and courteous but do not let the buyer run you over. Experienced buyers will use the smallest things to build negotiating leverage. No business is perfect. The buyer needs to understand that there is room for improvement and as long as the buyer is willing to work through those improvements the due diligence should not impact the final sale terms.
Do not rush or get ahead of yourself.
Let due diligence take its course. Maintain a steady pace and work through the plan set by you and then by both you and your buyer together. Missing key elements will only cost more down the road when omissions will cost money and unnecessary legal fees. During due diligence lawyers are not yet engaged, so work through the process in detail before legal fees start to pile up post due diligence and prior to the closing.
Once the due diligence process is done, the buyer will work with their attorney to draw up the purchase agreement. At this point you need to involve your attorney. Remember to discuss the attorney fees in detail with your attorney. Most attorneys will want a retainer to start with and they will also cap the total with some provisions and mutual understanding that the amount can increase if surprises creep up. That is why it is so important to go through the due diligence thoroughly.
The attorney process will entail the following
- You have to negotiate the total projected attorney fees upfront based on the LOI.
- You should have chosen an attorney as part of your team formation early on. If not you need to do that now. Interview at least 3 attorneys. You can also ask your broker to refer you some names.
- Buyer’s attorney will send your attorney, your broker and you the first draft of the purchase agreement.
- At this point both attorneys will duke it out with all the legalese. Do not get lost in this.
- The purchase agreement is the legal binding between you and the buyer. Understand every word of the document, however difficult and time consuming it may seem. Ask your lawyer, research on the internet, sit with your broker and engage your team
- Remember not to rush your attorney but ensure they are keeping pace. If there are deadlocks, get on calls with all the parties and try to work through the issues.
Go through closing documents
The closing documents will list the purchase agreement binder. It will have several individual documents, contracts and covenants. Your attorney should patiently sit with you and go over every portion of the document. Seller fatigue typically creeps in at this point after a long process and especially because the end is so close. But do not jump through this step. This binder will seal your future one way or another. You are legally bound to all the clauses and contracts that you will sign. Typically the binder will have the following.
- Purchase agreement, terms, timelines, price, payment details, all parties
- Buyer and Seller Indemnification
- Schedule of Purchase Items (depending on type of exit)
- Exclusions and Inclusions
- Assumed and Unassumed Assets, Liabilities, Contracts
- Tax Clearance and Certificate of Good Standing
- Financial Statements
- Legal proceedings, if any
- Brokers and commissions
- Omnibus bring-down certificates
- Bill of Sale
- Any Consulting Agreements and Earn-out clauses
- Non-competes and confidentiality agreements
- Resolutions and other legalese
- Closing statement – accounting of all monies including working capital required to run the business
These are just a few of the typical items. Each sale is unique and agreements will have additional items. The binders are long and it is your responsibility to go through all sections. You cannot hand this off to anyone else.
Close the transaction
You are now at the closing table with everyone. Closings can be in person or even done remotely. They are typically held at one of the attorney’s offices. Brokers, attorneys, buyers and sellers are all present at the closing table where all documents are signed and the business exchanges hands. As part of the closing the buyer escrows the funds with his attorney and the escrow is made available to the seller’s attorney as well. During the close, the funds transfer from the escrow to the seller’s account. All parties are paid at the same time – attorneys, brokers, any outstanding debt that is getting settled or any partner stock or share.
We have seen deals that have fallen at the closing table. This is rare but it does happen. It is vital that all parties go over the documents in detail and come to the table ready to sign. There should be no discussion other than pleasantries and signatures. As a seller you have to ensure that you ask every party involved if there is anything that needs to be discussed. Do not go to the closing table unless you have everyone’s commitment.
Transition the business to the buyer
We will write a detailed article on how to effectively transition your business to a buyer. Please stay tuned for that very important article by subscribing to our blog and newsletter. Handing over the keys does not free you up from the sale unless it is an outright sale which is extremely rare and in all practical purposes should be avoided. You should plan the transition as part of the due diligence process. Buyers may not want to discuss transition. But a business acquisition is only successful if it can be transitioned to a buyer and the business objectives post-sale are met. It is not surprising that a large number of acquisitions fail post-sale leading to some sort of arbitration or even legal action. An experienced buyer will want to start a transition checklist towards the end of due diligence period.
Ask your buyer the following questions during due diligence
- How will the employees be communicated about the sale
- What will happen to all my employees
- How do we handle communication with customers, vendors, partners and my network
- Process of taking over all the services and accounts
- Learning the marketing and sales process
- Who will take over the responsibilities from me and all employees/partners that will exit the business
Do the transition like a project
- Detail out the transition plan that you started at the end of due diligence with your buyer
- If you are staying on as a consultant set up expectations. You are no longer the boss so you have to make adjustments.
- Create timelines, milestones and expectations
- Set clear ground rules for agreements and disagreements
- Remember at all times that you need to help your new buyer succeed
- You may have to run the business as before for a while till your buyer learns the business
- Be patient and stay humble – it may not be easy to have someone else call the shots in the business and yet need your help to run the show.
- Keep your head high and ensure there is mutual respect.
- Plan a clear communications strategy with your buyer and execute as per plan.
There are no magic beans to ensure successful transition. If you have followed all the steps here to a successful close, most likely the transition will be smooth. If there are bumps, you have to work through them like you have done for your business all along. Stay tuned for more on this from us.
Plan your separation
It is really difficult to separate yourself from your business, especially if you have operated it for a long time. If you feel like you cannot let go, it is not abnormal. Do not fight it. Then there are deals where a business owner never leaves – like a management buy-out or a sale where the business owner transitions to a key employee or management position. But most small businesses are sold with a view to move on. As part of the transition planning, you should plan your separation with your initial team and your buyer. As the sale concludes, work with your buyer to lay out clear-cut plans on the separation. It will be a gradual process.
A business sale is an extremely rewarding process for a business owner if it is executed correctly. As you can see it is quite involved and unfortunately there are no shortcuts if you want a great result. I always recommend hiring a professional that can get this done for you by partnering with you and your team. Educating yourself and preparing yourself for what lies ahead, is the only sure shot way of achieving the great result you are hoping for. Please feel free to reach out to me anytime if you need help or additional information or templates of anything. Good luck on the most exciting journey of your business.