How to Sell Your Business – Process

Every entrepreneur eventually faces the daunting task of selling their business.   The questions begin with what is my business worth?  Who will buy it? What are the buyer’s expectations of me post close? What will my employees think?  What if it doesn’t sell? How do I run my business in the interim? Do I re-invest capital back in, stay the course or minimize expenses?  This blog will try to answer these questions amongst others and provide a roadmap for entrepreneurs as they begin to approach the most important financial transaction of their lives.

A well executed sales process can take anywhere from a few months to a couple of years to successfully complete and there are some distinct stages that naturally take place.  With a quick google search, you will find many examples of “The fast five” steps, the “9, 10 or 11 successful steps”, etc. but they are all basically nuances of the following.

1. Initial Assessment – Even before an owner has decided 100% that they want to pursue a sale, we recommend they get an initial assessment of their business from an outside party. Sometimes these are called “valuations” or “formal valuations”, which are exactly what the name implies, a third party estimate of the company’s enterprise value[1].  We provide this service, but what makes ours unique is that we not only provide a value range, but we provide you with an assessment on the overall attractiveness of the business to third parties and recommendations on what and entrepreneur could (and in some cases absolutely should) do prior to launching a formal sale process if they want to maximize a businesses value.
2. Preparation – Once an owner has decided to pursue a sale, an advisor will begin to work on the marketing package that is needed. Some “business brokers” prefer speed to accuracy and rush this step – they are often more concerned about getting the mandate than maximizing value for their client, so their materials are vague and overly optimistic.  In contrast, at Redcap&Truss we spend a great deal of time on the preparation.  We create the marketing materials that highlight everything a buyer will need to evaluate the financial, operational and growth prospects of a business (often a 1-2 page non-confidential, no-names teaser document, a confidential detailed management presentation and an online data room that contains items like financial reports, tax returns and detailed equipment listings).

As important, we ask all the tough questions ahead of time that a buyer is likely to ask.  We don’t want surprises, so we do our own due diligence[2] of a business before ever taking the business out to market.  We do it for two reasons – first, to successfully represent your business, we need to understand it inside and out, so that we can highlight the attractive qualities while also being able to address any of its perceived faults. Secondly, we want to minimize the disruption on the sales process to the ownership – they need to run their business while a process is going on, so by being pro-active in our diligence ahead of time, we can reduce the disruption once we are “in the market”.   We also lay out ahead of time the marketing plan, which includes who we would propose reaching out to, who we think will have the most interest and why and we jointly identify parties that we may not want to approach for whatever reason.  Processes can be broad (where we identify and talk to as many people as possible) or focused (generally a short list of parties which keeps the process more confidential, but may also reduce the chances of maximizing total value).  We also highlight the timelines and key dates that we work towards.

3. Marketing and Negotiation – This is the process of talking to buyers, providing them with enough information that will allow them to make an initial offer (often referred to an “LOI”[3]) and evaluating proposals and ultimately agreeing on the broad strokes of a deal. This is where the power of the process is key – providing a structure to buyers so that they know that an owner is serious to sell while also ensuring there is competitive tension in the process.  During this step, buyers will generally make their initial offer based on the information provided but will require additional time to complete their own confirmatory due diligence.

4. Due Diligence and Definitive Documentation – Once an LOI is agreed to, a buyer will seek to answer any outstanding questions they may have on the business, which may include things like talking to a couple of key employees or customers, a more detailed real-estate site inspection (including an initial environmental review) or an equipment appraisal to assist with their own financing. This is also the step when lawyers begin working on the definitive documentation[4],  creating communication plans to employees and a deal closing date is set.
5. Closing – Signatures, handshakes, fist pumps and the passing of cheques. This is the date when the business legally transitions from old ownership to new.

6. Post-Closing – Depending on the deal and how it was structured, this may or may not come into play. If the prior owner is walking away from the business, there are generally no meaningful post closing tasks to complete on a day-to-day basis.  There may be some legal obligations that remain, but these are items that generally fall away over time.  However, depending on the circumstance and a buyer’s ability to successfully run the business on their own post closing, a great number of deals are structured so that the prior owner stay involved with the business post closing, either in a direct operations role for an agreed to period of time or in more of a consulting role, where they are available as needed, often to assist with items such as client transition tasks.  Many deals are structured with an earn-out[5] component to them, which may also impact when an owner ultimately leaves the business.

We plan on going into a lot more detail on these topic areas (and many more) in subsequent posts.

One final note – ultimately the goal for any entrepreneur is to sell their business for the highest price.  We call that the “headline number” and that is the value they tell their nosey brother-in-law or golf buddy what they sold the business for.  But there are so many things that going into a sale that influences that value (working capital levels, building lease values, ongoing work commitments, etc.) that it is not always a true representation of value.  Our goal is to help you maximize total value, whether it is associated with cash today, tomorrow or the offloading of bank debt or other risks.  This is the roadmap to get there.

We would love to hear your story – please feel free to contact us anytime (we are good with evenings and weekend chats).

[1] Jargon Alert – Enterprise Value is not to be confused with equity value.  Enterprise value is generally defined as the overall market value of the business; what someone would pay for the entirety of the business whereas equity value generally enterprise value LESS any associated debt or other obligations on the business.

[2] Jargon Alert – Due diligence is the act of investigating the background of the business.  It often includes a financial review of the business, a review of key contracts, mechanical inspections and appraisals on vehicles and interviews with key staff or customers.

[3] Jargon Alert- LOI stands for Letter of Intent, a non-binding offer that outlines the initial proposal of the buyer to the seller.

[4] Jargon Alert – Definitive documentation refers to all the legal documents required to complete a transaction.  They include documents like a Purchase and Sale Agreement, Employment Agreements (if key employees are going to be retained by the buyer), Confidentiality Agreements, Non-Compete Agreements, Lease Agreements (if for example a buyer is going to enter into a long-term lease on a property) as well as any Banking or Shareholder Agreements required to complete a transaction.

[5] Earn-out is a structure where a seller must “earn” part of the agreed upon purchase consideration based on the performance of the business following the acquisition. Some earn-outs are structured where the prior ownership remains involved in the business (allowing them a certain degree of control over the outcome) whereas others are simply a deferred payment over a period of time.