CEO at Tresle, a tech-enabled platform and M&A services firm that simplifies the transition of ownership for small to medium-sized companies
Every transaction is unique and takes on a slightly different path. However, it’s important to understand the general steps involved in selling a business. As experts in mergers and acquisitions, we’re breaking it down into six distinct phases and highlighting some of the key points at each phase.
While the timeline of the sale ultimately depends on how long you stay in each stage, becoming familiar with the stages will allow you, as a business owner, to make well-informed decisions that can lead to more efficient and desirable outcomes.
Preparation
The preparation stage lays the groundwork for a successful sale through careful planning, clear goal-setting and organization. Knowing why you want to sell will formulate the foundation for your goal-setting. These goals should include financial outcome, transition timeline, ideal buyer type and more.
After defining your goals, you should begin organizing your operation to be ready for sale. This extends beyond simply obtaining a valuation (more on this below). Being “sale ready” means ensuring your company’s financial statements, internal processes, employee contracts and customer/vendor relationships are documented clearly for an outside party to interpret. What makes sense to you may not be so obvious to someone else.
Valuation
A valuation should be looked at as gaining a baseline understanding of what to expect on the market. However, valuation does not mean sale price. While historical valuations can be useful guide rails and should be performed with care, the price of a business is ultimately going to be what someone is willing to pay for it.
Getting a valuation done circles back to what was discussed in the first section: preparation. You will need to compile various supporting documents primarily centered around the income statement and the balance sheet for the past three to five years to prove your company’s value drivers.
Launching On The Market
There are two main methods to selling your business: through an intermediary or independently.
Intermediaries (i.e., business brokers, M&A advisors, investment bankers depending on scale/scope of engagement) are hired professionals who can help sell your business. Typically, they have an established network of qualified buyers and possess negotiation experience, allowing you to focus on running your business while they help manage the sale. Hiring an intermediary, however, comes at a cost, and like every professional service, there is a gradient of competency. It is therefore essential to understand the intermediary’s experience and processes prior to hiring them to help you with your sale.
Launching independently is another option but is most applicable to much smaller businesses where the transactions are generally less complex. There are various online marketplaces where business owners can list their businesses for sale, connect with buyers and manage the process digitally. This “web-first” approach is measurable and allows for the immediate exchange of information, making it a prominent method for the discovery of new opportunities for buyers.
The Offer
After interacting with buyers on the market and sharing preliminary information, an offer may be presented. While it is typical for most terms in an offer to be non-binding, it is crucial to carefully review an offer’s terms to gauge their equitability and alignment with your goals.
The whole point of a buyer’s offer is to communicate their preliminary understanding of the value of your business and a proposed deal structure to match it, based on the facts they’ve analyzed up to this point. If an offer isn’t acceptable, now is the time to negotiate to see if there is a middle ground that satisfies both parties. This could be the overall price, deal structure, length of due diligence, seller involvement post-sale or more. As they say, the price is one thing, the terms are another.
Due Diligence
Due diligence is a process where buyers will investigate your business to verify any and all claims made about the business, and use their discoveries to test against the terms they proposed in their offer. Buyers may adjust their terms based on what is discovered. During this time, it is important for sellers (and/or their intermediary) to further investigate the buyer’s background and confirm whether they have the financial capacity to close the sale.
This is a good time to reiterate the importance of organization. Being able to swiftly provide relevant documentation to objectively support your initial claims speaks volumes about you and the business you’ve built. Another thing to note is that every business has its issues. Be upfront and discuss them with the buyer. These issues will inevitably be uncovered so it is best to have control over how and when it is brought up, as context can be crucial. In my experience, most of the time things can be overcome.
Closing
When buyers are satisfied with their findings, they can conclude due diligence and move toward the closing.
What comes next is a purchase agreement, which is essentially a formalization and expansion of the offer. Contrary to the offer, however, it is a legally-binding contract that outlines the final sale terms. It is strongly recommended that sellers hire a qualified attorney to review it prior to signing. Typically, negotiations continue at this point while all final details around the deal are being ironed out.
Oftentimes for acquisitions in the small to medium-size business space, one of the conditions to closing is the buyer’s ability to secure financing. Depending on the route they have taken to finance the transaction, this can add time to (or even derail) the process even if the purchase agreement is signed. However, once both parties have signed the purchase agreement and the buyer has received confirmation from their lender, the deal is complete.
Congratulations!
Conclusion
These are the general stages of a business acquisition/sale. Ultimately, how long you stay at each stage determines a sale’s timeline, which can vary depending on factors like your preparation, the level of complexity involved in the deal, and frankly, some luck. However, knowing what these lifecycle stages are at a high level, and what’s involved in each one lets you plan ahead and take action with confidence.
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