The sale of your business is something you can do only once. When you initiate the sales process and the first potential investors have been contacted, the process goes into overdrive. The time is limited to the exclusivity period or auction period. During this time there is the risk that the sale becomes public news, creating unrest under your employees, customers and suppliers. In addition, a sales process requires a significant investment from you, both in time and money. A failed sale results in loss of this investment and limits you to sell again in the coming years as potential investors are scared off or no longer interested. To ensure a smooth, fast and efficient sales process there are certain things to consider beforehand.
First off, what is the best time to sell your business? Investors are interested in the future of your Company. If your business is already over its peak and presenting decreasing revenues and profitability this means you are already too late. When your business is showing sustainable and consistent growing revenues at a constant or increasing profitability this is an indicator for a good moment to sell. If your business is now loss making it is unlikely it will attract many investors, unless there is a huge development potential.
The overall market and economy is another element to consider. If the economy is in a recession potential investors are more hesitant and diligent to acquire. Given the current low or even negative interest rates there is a lot of “cheap” money available in the market, which in theory should push M&A demand. However, the social and economic impact of the Corona virus (COVID-19) is still uncertain and has a negative impact on the M&A environment.
More demand and competition between potential Buyers increases the purchase price of your business. There are several external sources available to check if the current market situation is favorable to sell your business. For example, the CNN Fear & Greed Index. While aimed at the stock exchange market it does provide an overall idea of investor appetite. Also, the large investment banks (e.g., J.P. Morgan) and Big-4 accounting firms (EY, KPMG, PwC and Deloitte) publish periodically on the M&A outlook and M&A appetite.
Preparing your business for a sale
It takes around 2 to 3 years to prepare your business for a sale. The actual sales process can take 6 to 8 months, but varies significantly per deal.
The sale of your business is something best to consider on a long-term basis. Once that goal is set you can start making your business ready to be sold. The following steps help you to best prepare your business for a sale.
The value story of your business
What is the long-term strategy and how does the historical performance of your Company support this? For example, if you sell a specific product only in your native country but the long-term strategic plan is to sell it worldwide, it is important to present yearly increasing revenues in new markets to present you are working towards that plan.
The long-term strategy of a Company is presented in a 3- or 5-year business plan. The business plan is broken down in yearly budgets. If you can present realization of the yearly budgets this strengthens your business plan. The other way around is that if you never realized your yearly budgets a potential investor has little faith you will realize the future budgets either. Make sure you set challenging but realizable budgets. If not achieved, make sure you have clear reasons why not and also why next year budget will be achieved.
SWOT analyses are used to identify and qualify items which are key to the success of your business. SWOT analyses focuses on the business itself (strengths and weaknesses) as well as on the external environment it operates in (opportunities and threats).
Indicate how the strengths and opportunities are linked to your business plan. Know what kind of investor you need to mitigate or even resolve your weaknesses and threats. Presenting a SWOT matrix shows to investors you know your business and you know what is required to bring your company to a next level.
The value drivers
These are sector dependent. For example, for retail companies these are number of shops, volumes sold, price and margin. For IT cloud based solutions it are number of users, recurring revenues, average revenue per user.
Once you determined the value drivers, make sure you track and use them in your budgets and forecast.
The more detailed your forecast is, the better an investor can analyze it and value it. Ensure the historic performance of your business is aligned with the forecast or ensure you have a detailed plan why the future performance will increase. For example, if in the last 5 years your revenues grew with 5% per year and in the forecast you present 10% per year an investor wants to know what you will do to make this possible. Probably he will also ask you why you did not do this before if it is such a good plan.
Things to consider in a forecast are:
- new or lost customers
- new or discontinued products
- development of the overall market your business is active in
- your market share
- regulatory developments relevant to your sector
- development of gross margin %
- development of the number of employees
- salary development
- ending contracts (e.g., rent or lease)
For a forecast example in Excel click here.
Clear and clean financials
Potential Buyers will perform a detailed due diligence. You need to ensure your financials and accounting is clean and robust. If you currently have no financial accounting system, there are several online accounting tools available for free or low cost.
Your accounting records need to be up-to-date and there can be no backlog in processing of invoices or declaration of taxes
Make sure that all revenues and costs are recorded in the correct lines and accounts in the balance sheet and income statement. There can be no items “to be investigated” or unknown amounts in the “other” accounts. If there are personal expenses in the income statement identify those and mention whether or not those continue in the future.
All Buyers check if your financials are GAAP compliant, meaning if they are in line with the generally accepted accounting principles in your country. An external financial audit would help with this, but is not mandatory. Just make sure you receive clean audit opinions if you choose to engage an external auditor; a qualified audit opinion only raises more questions and doubts. Before hiring inform the external auditor on the purpose of the audit. A Buyer will want to receive access to the auditors working papers. If your auditor is unable or unwilling to provide this access it might be better to choose another one which can provide this access to investors.
An accountant or external transaction advisor can assist you in preparing clean financials which can be used in the deal. This can vary from an Excel file, including your key financials with narratives (e.g., Databook or Fact book; click here for an example) to detailed reports (e.g., Sell Side reports or Vendor Due Diligence reports). These type of reports ensure consistency and quality of your financials; it includes analyses on the recurring underlying profitability of your business (Adjusted EBITDA) and shows the net debt position (including all cash- and debt-like items). Refer to the purchase price mechanics page for more details. Additionally, this report answers many questions from potential Buyers and saves you time to focus on other areas in the diligence. Detailed financial reports are common for large deals in an auction process. If you are negotiating on an exclusive basis it is more cost beneficial to not prepare detailed reports and let the Buyer perform its own due diligence.
If your business is small to medium sized, consider preparing a Financial Fact Book in Excel which provides an investor with the key financial overviews of your business. You can prepare this yourself without any external advisors. For an Excel template of a Financial fact book click here.
Adequate corporate legal documentation
When selling your Company all required corporate documentation needs to be available and completed. As part of the incorporation you need to have articles of incorporation. If have ownership with multiple shareholders there need to be a shareholder agreement and minutes of shareholder meetings. Also, a business plan can be legally formalized. As your business grows, you may need to hire employees, contractors, or consultants or enter into Service Agreements with other businesses. There need to be underlying legal documentation for these kind of arrangements. Check whether your contract and agreements contain a change of control clause. A change of control clause means that the underlying agreement can be terminated in case of a change of ownership of your business.
On internet several Do-It-Yourself (DIY) legal forms can be completed without hiring an attorney.
Management reports include an overview and description of the commercial and financial performance of your business compared against the budget. Indicate on a high-level the reasons for under- or over-performance against the budget. Depending on the size of your business, Management reports can be prepared on a monthly or quarterly basis.
A typical management report includes:
- Income statement
- Revenue and sales info
- Won or lost customers
- Revenue per product and / or region (where possible, supplemented with gross margin information)
- Projection for the remainder of the year (full year outturn)
- Net working capital overview
- Ageing overviews of trade payables and trade receivables
- Days metrics (days sales outstanding, days payable outstanding and days inventory outstanding, cash conversion cycle)
- Liquidity and cashflow overview (where applicable, calculation of the loan covenants)
- Other business or sector specific metrics (e.g., number of complaints, returns)
While it might seem bureaucratic and overly complex for your business, in 2 or 3 years from now during a sales process it will be difficult to remember the reasons for monthly or quarterly fluctuations in your numbers. When becoming part of a larger corporate or acquired by an investment fund a formal documentation process of your financial performance is required. Already having this in place provides confidence for an investor that a clean integration into their business is possible.
Clear Company structure
Have the roles, functions and responsibilities in your Company clearly defined. Make sure you have a Company structure and indicate areas where there are vacancies (if any). Your current Company structure must match the type of Buyer you wish to sell to and your own plans post-acquisition. If your plan is to sell your Company and no longer be involved post-acquisition, you need to have a strong and experienced Management Team. Your Management needs to be able to continue on a stand-alone basis with the business after you are gone.
If your business is completely dependent on you and you maintain all customer relations, you will not be able to sell and leave your Company.
Set expectations and plan ahead
When more close to initiating the sales process:
- Know the value of your Company; knowing a value range of your business is important. While ultimately the purchase price is determined by the market (i.e., what someone is willing to pay for it), it is helpful to have some idea and whether that amount is sufficient for you.
- Know who to involve; not only external advisors, but also employees of your own Company. While it is not advisable to communicate to all employees, a sales process is extensive, a lot of questions are asked and you need assistance from key people in your Company. At minimum, the following people are required: Commercial Director, CFO or Finance Manager, Technical or Operational Director. The deal will demand a lot of their time as well. Make they keep running your business as usual. Consider setting additional rewards for these employees to keep them motivated. For example, a transaction based bonus if the transaction is completed successfully.
You know the market in which your business operates in the best. If you know there is a high interest in your business, the sale is more likely going to be a success.
Consider whether any of your current managers might be interested in taking over the Company. Or perhaps your own children. In the last case, setting up a whole sales process is not required. However, good planning and ensuring the most tax beneficial method for a transfer is.
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