Business owners need to proactively prepare for a sale to maximize your sale price.
I’m going to let you in on a little secret. You’re not the only business owner who doesn’t understand how to sell his company. Actually, most business owners have never sold a company and wouldn’t know where to start. That’s completely understandable. You have spent your career developing great expertise in manufacturing and selling engine parts, or in software development, or whatever it is that your business does. But that shouldn’t dissuade you from selling your company when the time is right, because while you were building your company, my partners and I were developing an expertise in selling companies. We have helped numerous business owners sell companies and can guide you through the process of selling your company.
There is one other secret I will let you in on. Successful exits don’t just happen; they need to be planned. What I mean is that business owners need to proactively prepare for a sale, then let all potential buyers know the company is for sale and give them an opportunity to make a purchase offer. The reason I make this point is that far too many business owners sell their company in response to an unsolicited offer from a competitor. In doing so, they sell when they are unprepared, and they engage in a negotiation with a single company. Neither of these is likely to result in the maximum sale price for the company.
Maximize Your Sale Price
Proactively preparing for a sale will make the sale process go much smoother and will likely increase the sale price. Preparation starts by obtaining a due diligence list appropriate for your company or industry (call us and we can put one together for you), then gathering all the information requested in the list (preferably in an electronic data room). Review those documents with an investment banker such as Waypoint Private Capital and try to identify any items that may be potential red flags for buyers. Red flags include items such as customer concentrations that are too high, deteriorating gross margins or market share, or bloated operating expenses.
If you started preparing early enough, you will have time to fix those red flags before commencing the sale process. Another benefit of being well prepared before engaging with potential buyers is that the seller can be responsive to requests for information and present themselves in the best possible manner. When companies prepare on the fly after conversations with a buyer have already started, they often don’t have the bandwidth internally to be responsive, so they are typically delivering information that is rushed and in a piecemeal manner that makes evaluation difficult. In either case, the company isn’t putting its best foot forward and leaves the buyer with a bad first impression of the management team that can cause the offer to decrease or executives to lose their jobs after the sale has closed.
While being prepared is essential to a successful sale process, the most important element of the process is creating a market for the company and avoiding negotiations with a single company. It is unlikely that the competitor making an unsolicited offer for the company is going to start with the maximum valuation they are willing to pay for the company. It is also unlikely that they are the only company that would have an interest in acquiring your company. Thus, all business owners selling their company should strive to bring multiple potential buyers into the sale process. Potential buyers might be competitors in the same business, companies in tangential businesses, companies with strong distribution in your industry, professional financial buyers such as private equity firms, or individual financial buyers who want to buy and run a company.
A good sale process will engage all potential buyers in the process of evaluating the company, first at a very high level, then at a more detailed level for those who are truly interested. The sale process will then guide them to make offers for the company at the same time, and upon receiving multiple offers, will put the seller in a position of strength when negotiating the sale price and other important terms. Opening the sale process up to multiple potential buyers and creating a market for the company will always result in a better outcome for the seller.
As unfamiliar as the process of selling your business may seem to you, it shouldn’t stop you from pursuing a sale in the right manner. Being prepared and creating a market for the company are two critical aspects of the sale process. The professionals at Waypoint Private Capital can guide you through the process and help to ensure that you receive the maximum value for the company you have spent years building.
Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2012 Waypoint Private Capital, Inc. All Rights Reserved.