Selling your business is a major milestone in your life. The selling process can be daunting, but with the right resources and knowledge, you can make the process easier and maximize the value of your business. In this blog, we will provide you with three tips to make selling your business a successful experience.
Choose the Right Merger & Acquisition Advisor (M&A Advisor)
The right advisor can be your greatest asset when selling your business. M&A Advisors facilitate the merger and acquisition of businesses, assist you in preparing your business for sale and manage the entire selling process. From pricing your business to attracting qualified buyers you advisor leads the activity. Throughout the selling process, advisors will help determine your business’s marketability, negotiate the sales price, navigate due diligence, legal, and close the sale. Their industry experience also gives them insight into possible financial and legal considerations that otherwise may be overlooked.
When searching for an M&A advisor, look for someone who has experience selling businesses in your industry. Organizations like the M&A Source and The Alliance of Merger & Acquisition Advisors have free tools to help you locate advisors in your area by their specialty. Be sure to interview multiple candidates to find the best fit for your business. Ask about their credentials, commission structure, confidentiality procedures, and references from past clients. The right advisor will instill confidence, be attentive to your needs, and go the extra mile to put your interests first.
Present Your Business Professionally
Presentation is everything when selling your business. A well-presented business will attract quality buyers, obtain better sales prices, and streamline the sales process. If you’ve hired an advisor, they will take on the job of marketing your business to potential buyers. They’ll highlight its strengths and potential, communicate assets and liabilities, and protect the confidentiality of the sale. M&A advisors typically have a larger network of buyers and can list your business in suitable marketplaces to attract ideal candidates.
Valuing Your Business
Understanding the true value of your business will help you present your business accurately and professionally.The valuation of a business accounts for all its assets, liabilities, annual earnings, strengths, risk factors, and financial projections to determine its fair market value. Knowing the fair market value of your business will prevent you from under or overvaluing it in the sales price. Consequently, you’ll also be better prepared to negotiate a fair deal and avoid low-ball offers. Your advisor should be able to assess your business’s value and identify areas of improvement to address prior to its sale.
Structure a Good Deal
The M&A advisor’s strategy should be to bring multiple competing offers. Businesses rarely sell for 100% upfront cash. Instead, buyers and sellers will reach a deal that dictates how and when the business is sold. Beyond just the sales price, a well-structured deal accounts for every aspect of the sale, including:
1. Buyer Down Payment and Financing
In the lower middle market, i.e., businesses with revenues from $10 million to $250 million, most buyers are private equity, public companies, family offices, or large private companies. These buyers normally buy many businesses and have financing sources with long-term relationships. They typically use leverage to enhance their return on investment, and seller notes to test and see if you really believe in the future of the business. The capital stack may include senior debt, subordinate debt, mezzanine financing, seller notes, earnouts, and equity rollover.
2. Transaction Structure
The transaction structure of a sale determines how ownership is transferred to the buyer. A business can be sold as an asset or equity sale. An asset sale transfers the ownership of assets to the buyer and any unsold assets are returned to the seller. The typical structure is a “cash-free, debt-free” asset sale in which the seller retains cash and pays off all liabilities. The buyer gets all other current assets including inventory, accounts receivable, etc., and fixed assets. The usual amount of working capital is typically included so the buyer will usually assume accounts payable and other current liabilities. An equity sale transfers outstanding shares of the business to the buyer. There are advantages and disadvantages to each kind of transaction structure, and you should consult with your M&A advisor to determine the ideal structure for your sale. Most private equity investors prefer a two-stage transaction in which the seller retains a minority stake and continues to run the business for a few years. The private equity firm will invest in “professionalizing” the business to install superior infrastructure, diversify the customer base, deepen the management team, and build value for a sale at a scheduled date. The value growth may be so substantial that the seller gets more for selling his minority stake than he gets for selling the majority.
3. Non-Competes
A non-compete states the seller will not do anything that might compete with or harm the business he sold within the market area of the business for a specified time period. It is very unusual for a business to sell without a covenant not to compete since a seller would be able to take customers away after the sale if he/she chose to do so. Covenants not to compete protect the buyer’s investment in the business.
Selling a business can be a difficult process, but with the right preparation, it can be a rewarding and successful venture. Choosing the right advisor, presenting your business professionally, and structuring a good deal are all essential steps to ensure that you get the best outcome from the sale of your business. With these three tips, you can be sure that you're giving yourself the best chance of success when it comes to selling your business.
Interested in selling a business? Get in touch or book a confidential consultation with one of our advisors.
