The 10 Steps to Selling your Business

Selling a business can be a long and meticulous process. The preparation alone may take up to twelve months. Once a buyer has been found, the actual sale process may well drag on for another six months. The process of selling a business, from intention to completion, can be divided into 10 stages.

1. Determine exit strategy

When an entrepreneur is considering selling a business, he has a variety of transaction options to sell his business. The owner and the board of directors should be aware of these options, as they can influence the purchase price. In the lower middle market, however, the choice of buyer often depends solely on the owner's objectives. The range of buyers can generally be divided into employee buyers, financial buyers and strategic buyers.

• Employee buy-out: An owner can sell to an insider or the management team of the company or through an ESOP (Employee Stock Ownership Plan). An ESCOP allows full-time employees to participate in the ownership of the company. These options may be attractive to an owner if the company's internal team is the best option for the future growth and success of the company.
• Financial acquirer: Financial buyers make up a large part of the buyer pool in low and mid-market transactions. Financial buyers look for companies that they can buy with debt financing for 50% to 75% of the price. For them, sufficient cash flow is important to service this debt.
• Strategic buyers: Strategic buyers expect synergies with their other companies. They buy companies that fit their future business plans. Sometimes strategic buyers pay a premium to gain a company's customers or know-how. On the other hand, sellers may not want to work with strategic buyers who are competitors.

All options have advantages and disadvantages. Sellers often prefer a certain type of buyer and gear their business towards it. M&A advisors therefore work closely with business owners to understand the sale requirements, range of valuation expectations and strategic objectives.

2. Determine the value range

Determining an appropriate valuation range is a crucial step in the sales process. The owners should make a realistic valuation so that the buyer and seller have similar expectations of the value of the business. An M&A advisor can help the parties agree on a factual basis.

The value of a business can be determined through various methods. Sellers can hire valuation experts to help them value the business before it is put up for sale. This valuation helps the seller understand the value of the business. However, a strong buyer pool will also convey to the seller how the market values the business. At the same time, a seller can apply standard earnings multiples to get an indication of how the market values the business. Ultimately, the market of potential buyers, the quality of the business presentation and the negotiation with buyers will determine the price.

3. Value enhancement before sale

M&A advisors often review a company's strategic plan, growth opportunities and financial status and make suggestions to shareholders and the board of directors on how to improve the company's performance over a 6-12 month period, for example by focusing on core competencies, streamlining processes and reducing expenses. Working with a knowledgeable M&A advisor who has relevant transaction experience and understands the company can thus lead to a significantly higher valuation.

4. Presentation of financial information

A critical element of the sale process is taking the time to properly evaluate and present a company's financial and business history and future projections. Since business owners usually prepare their financial statements for tax purposes and not for the sale of the business, it is often a matter of reassessing and convincingly preparing the financials with the help of an M&A advisor. If a company's earning power can be presented correctly, this has a major influence on the willingness to buy and the purchase price.

5. Compilation of due diligence information

When potential acquirers evaluate a business, they expect the records and facts to be properly organised and documented. Owners should review their founding documents, governance documents, permits, licensing agreements, employee agreements and leases. These documents are shared in a "data room". A data room can be a real room with bank boxes full of data, but nowadays a data room is often cloud-based. The sell side needs to organise the data room so that buyers can find information about the company quickly and easily. A poorly organised data room reflects badly on the seller and can delay the due diligence process. Both are detrimental to the seller.

A good M&A advisor will use the company's financial information and due diligence to create a high-quality company summary. This summary allows the company to tell its story, share financial information, describe its market niche and outline its growth opportunities. The business summary, often referred to as a CIM (Confidential Information Memorandum), is a great way to capture the interest of a potential buyer in a quick and easy-to-read format.

6. Research target buyers

For companies in the lower and middle market segment, there are often a large number of potential buyers. Usually, companies do not identify the potential buyers themselves. This means that the company's advisors and the company's owner must have tools and resources to research the largest and most qualified buyers. Competitors, customers, strategic buyers, private equity firms with relevant are to be screened. This is one of the most time-consuming elements of the process, but necessary for a successful closing.

7. Qualify potential buyers

Many potential buyers who express interest in a business are not qualified to buy the business. A good M&A advisor is able to ask potential buyers the right questions to screen them. With a pre-screening of buyers, the owners and management team of the company can continue to focus on growing the business instead of wasting time talking to unqualified buyers.

8. Negotiation of the deal

The purchase price is only one component of the overall outcome. Other terms that the buyer and seller negotiate include: Sale of shares as opposed to sale of assets, profit sharing, terms, financing by the seller with appropriate collateral, liabilities assumed by the acquirer, employment contracts, non-compete agreements, current assets retained by the seller and equity participation.

9. Written expression of interest

As a rule, buyers express their interest in a company in three stages through three documents: the IOI ("Indication of Interest"), LOI ("Letter of Intent") and the purchase agreement. The IOI is non-binding and contains the proposed terms, valuation and structure for a transaction. The owner decides on the basis of the IOI whether or not to proceed with a buyer. Letters of intent are already a serious expression of interest by the buyer. The letter of intent contains the terms of the contract and usually gives the buyer an exclusivity period to evaluate the business. During the exclusivity period, the buyer must quickly decide whether to move forward with the deal. At the same time, the purchase agreement and other transaction documents (employment contracts, non-compete agreements, etc.) need to be drafted to set out all the details of the transaction: legal and financial aspects, representations, warranties, etc. The purchase agreement is the final document setting out the terms of the sale.

10. Handover of the company

The transition phase usually involves a period of cooperation during which the seller assists the buyer in handing over the business. This usually includes introductions to key customers, handing over financing and accounting functions, gaining a better understanding of operations and handing over other proprietary information and trade secrets necessary for the optimal operation of the business.

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