How to Sell A Business
How to a sell a business is no easy task. Sellers are often fooled into thinking that the process is as simple as finding an interested buyer, and then handing over the reins of the company at a good price. In reality, it is much more complicated than that.
The first step to selling a business begins with preparation. Before putting your company on the market for sale, you should take the time, often 18-24 months, to get your company’s affairs in order. That involves identifying the weaknesses of your business and mitigating them. The way to detect your business’s flaws is by hiring the services of a professional. Have a lawyer review all of your legal documents and an accounting firm perform an external audit on all of your financial statements for the past 2-3 years. True, these steps may be costly upfront but it will yield enormous return on investment in terms of getting a better valuation. It is far better that you uncover the weaknesses before entering the sales process than later; damaging a good sales prospect during due diligence. The right way to sell a business depends entirely on your preparation activities.
If you ask anybody with experience in selling a business, they will strongly recommend you seek the services of an experienced professional in an advisory role. The reason why some deals don’t cross the finish line is because of mistakes and errors made which could have been easily avoided.
Steve L’Heureux is the Vice-Chairman of Ryco Solution, and has worked with strategic buyers and private equity firms over the years to sell and buy companies. The single most important thing a seller can do, in his opinion, is to assemble an advisory team. The team should consist of a Mergers and Acquisitions (M&A) advisor, a CPA and legal counsel with deep M&A experience. The advisor can be either an investment banker, a broker or a consultant, or basically anybody with strong M&A experience, who can help the seller understand and get comfortable with the nuances of the deal business.
L’Heureux says in his own words: “It’s really important that the seller does their homework, does the housekeeping on both the financial side and the legal side before they start the sale process.”
The risk mitigation activity carried out by the buyer in due diligence focuses on 3 key areas:
- Financial risk mitigation,
- Operational risk mitigation, and
- Legal risk mitigation.
In the olden days of due diligence, gathering all the necessary documentation and organizing the information into folders in a physical data room was an enormous task. In today’s digital age, the process is comparatively easier. Virtual data rooms collect all the data electronically, in extreme detail. If it is a relatively small transaction and the seller is well prepared, the process can take a few weeks. Or it could take several months if the preparation process is not properly taken care of in advance.
The crux of a successful due diligence process is total honesty on the part of the seller. One of the worst things you could do in selling your business is to try to hide something under the rug. It will inevitably come back later and hurt the deal. If something you did not disclose is uncovered, you may end up having to indemnify the buyer.
Due diligence is not only viewed from a risk mitigation point of view, the buyer also looks at it as a standpoint for future collaboration and opportunity. Murray Rudin, Managing Director for private equity firm Riordan, Lewis & Haden, says that he looks out for elements that will happen looking forward. Entering into a 60-40 partnership with the entrepreneur, Rudin says that his firm is more interested in, “trying to learn about the business in conjunction with the entrepreneur to help map out strategy and opportunities, as well as needs for additional people in the organization.”
The beginning of the diligence process can be somewhat adversarial, but in a good partnership towards the end of it, the process becomes highly collaborative. Investment banker, John Hammett, always enjoys seeing this unfold in most of his deals. “The best private equity buyers do look at it as a partnership with the owners, and they do have legitimate interest in where the opportunities are, as well as the risks.” Hammett says, “In most cases it’s not a game of ‘gotcha’, oh look what I found here, but very much a collaborative thing.”
In any case, owners and entrepreneurs ready to sell their business should seriously look into the preparation phase of the sales process with an advisory team. How to sell a business is a delicate task and should be treated as such if you want to get the best valuation for your company.