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I'm in the middle of a sale process for one of our portfolio companies and wanted to share some helpful tips to ensure that sales process it goes as well as possible. This article will focus on the actual selling “process” so you can better understand what levers you can use to get the fastest sale at the highest price.
When should you sell your business?
The first part of the answer to when to sell your business has to do with the condition of your business. If you can't tell clearly increase in revenue and profits during the last two years, it will be difficult to sell your business at an attractive price. And, if there's anything negative going on in your industry (eg, COVID-19 affecting restaurant demand), it's best to wait until those external factors are no longer an issue.
The second part of the answer to when to sell has to do with business prospects. Are you bullish or bearish on the future? If bullish, why sell now? Wait to capture additional income and profits first before selling. But if it's down and you see the company about to hit a wall, you might want to time your exit at the peak before earnings collapse. However, in a typical scenario, a buyer will do their due diligence on your industry and business, and they should see a reasonable path forward to revenue that continues to grow under their ownership. So, in all cases, be sure to easily answer the question of how the income will grow for them in the coming years. Because if you can't credibly sell that story of future growth, they probably won't be interested.
The third part of the answer to when to sell is your personal psyche. Are you tired, bored or BURNED? Maybe it's time to move on. Don't like working with your team anymore and need a change? Maybe it's time to sell. Do you want to spend more time with your family, or do you need money for another project? Time to think about selling. So assess where you are personally and that will help steer you in one direction or the other.
Who should manage the sales process?
How you market your business is really a function of the size of your business. I would say that selling a business under $500k in revenue is usually more of a do-it-yourself business as it won't be big enough to get the attention of normal business intermediaries. There are many websites you can list for sale on to help get your business discovered by potential buyers (eg, BizQuest, BizBuySell, BusinessesForSale.com) for a minimal listing fee. If you go that route, look at examples of other business listings to find the best content and information to share on your listing. Make sure you have a good attorney lined up to help you negotiate and document the sale agreement.
But if you are larger in size, it is always best to engage a licensed and trusted business broker to help you with the sales process and do all the “heavy lifting” for you, including drafting of the sales brochure, creating lists of target buyers, contacting such buyers, negotiating the deal and helping you get to the finish line. Business agents come in all shapes and sizes, typically focusing on specific geographic regions, industries, or companies. So search with your professional network or online for the best business broker for your exact situation. Business agents usually come with a monthly retainer (eg, $10,000 per month) plus a success fee from the sale (eg, 3%-8%), depending on how big they get. expected sales revenue.
Who should buy my business?
There are typically three types of buyers: (i) strategic buyers who already operate in your industry, (ii) financial buyers who are simply looking for investment opportunityor (iii) other entrepreneurs looking for new companies to operate. Valuations are usually listed in the same order of categories listed, where a strategic buyer can see more ways to “one plus one in three”, getting synergies from the business. And financial buyers and entrepreneurs are usually looking for the “best deals” they can get.
Also, think about things like: (i) Do I trust this buyer to run the company (especially if any profit payments to you are involved); (ii) will they keep my team in place or treat them fairly if they break away; and (iii) do they have the proceeds of the purchase in hand, both for their capital and for any necessary loans. As you will learn, not all buyers are created equal, so do your due diligence on them while they are doing their due diligence on you.
Related: How to find buyers for your business
How fast should the process go?
A normal sales process usually takes about six months. In the first month, you prepare your marketing materials and lists of target buyers. In the second month, you are contacting those buyers; in the third month you are asking questions and making phone calls to those interested; in the fourth month, you are negotiating better terms; in the fifth month, the buyer is performing due diligence and in the sixth month, you are drafting and signing the sales documents.
Depending on market conditions, it could take much longer than that. If buyers are concerned about the economy or interest rates, that will reduce the pool of interested investors moving forward until those issues are resolved.
How you should approach negotiations
After all, “the market is the market”. You may think you're worth one thing, but buyers may be telling you something completely different. So be flexible here. If there are ten key points you are trying negotiate through, choose the most important ones to dig into and be flexible about the others.
Negotiation is a two-way street and both parties must be happy to reach the finish line. But, in all cases, there are a few general rules I live by: (i) your first offers are usually your most interested buyers and the highest chance of making it to the finish line, and (ii) time it kills all deals – the longer the negotiation process takes, the higher the chances that the buyer will become frustrated or disinterested and move on. Don't sabotage your chances of success by being inflexible, unreasonable, or moving too slowly.
Related: 5 key traits of successful entrepreneurs
How long should I wait for the assessment?
Valuation is directly proportional to (i) your industry, (ii) revenue/profit size and (iii) growth rate. Are you in a hot industry, like artificial intelligence, or a boring industry, like car washes? Are you selling a business with $50 million or $5 million in revenue? Are you growing at 50% per year or 5% per year? All these questions are important and dictate the assessment. So be realistic about what you can reasonably expect to get by learning what similar businesses have sold for in the past. As a downside, expect your sales EBITDA multiple, which dictates valuation, to be in the 3x to 10x EBITDA range for revenues of 1MM to 50MM, depending on your answers to these types of questions.
Shutting down thoughts
Selling your business can be an exciting time, but it can also be a scary process. So surround yourself with experts who have “been there and done that” to help you through the process. This includes hiring a good business broker and an experienced M&A attorney and seeking mentorship from others who have successfully sold their businesses. If you need any help here, don't hesitate to get in touch. good luck!