Eight Things to Know and Do Before You Market Your Company
A well thought-out sale process will pay handsome dividends. Our goal is to help owners make the most of the financial opportunity for their company!
By Trip Holmes
At Sabre Capital, we’ve been helping family business owner’s transition to retirement for nearly 35 years. During that time, we’ve collaborated with our clients to develop a winning process for maximizing what for many is the final transaction that sets their families’ finances for the long term.
The key to a sale transaction that exceeds your expectations involves proper planning and preparation well in advance of marketing your company. Let’s take a look at eight things to know and do before you put the company up for sale.
1. Understand the reason for the sale
While this may sound obvious, owners sometimes need help in recognizing their true motivation for selling their business and how much they want to stay involved with the business after the transaction closes. After all, there are different types of sales, such as recapitalizations, transitions to family or employees, and a sale to a third party. Each type of transaction requires a different way of preparing and positioning the company.
Which direction to pursue may depend on such factors as:
- the role the owner wants to play in the company going forward;
- how much the owner wants to participate in the ongoing growth of the business;
- how much money he/she needs, and when;
- what the company’s future looks like; and
- the landscape for the industry the company inhabits.
It’s is also important to understand the time involved. A complete sales process can take six months to a year.
2. Build a Great Advisor Team
The seller should have experienced and trusted advisors to help navigate the sales process. These advisors should include an experienced business intermediary, an accountant, and an attorney who specializes in mergers and acquisitions. Selling your business can be overwhelming process, especially if it’s your first time doing so. The best advisors can make the process much easier.
They are seasoned professionals with significant experience representing sellers in M&A transactions. They understand strategic buyers and private equity terms, and they’re highly knowledgeable about how the corporate sales process works. In addition to being sounding boards, good advisors offer a range of skills that clarify and speed the process.
For example, your advisors can help you set realistic expectations, explain important issues and steps along the way, remain focused on the right points, advocate for you, assist with due diligence, and close the transaction. What’s more, in a market with many potential buyers, the experienced intermediary can help identify the “best fit” for the seller and his or her vision for the company.
3. Analyze financials
Buyers typically review a company’s books for at least the preceding three years. If the company does not have a chief financial officer or has never had an audit, owners should consider hiring a reputable accountant to review the company financials. That‘s because analyzing financials in advance can uncover issues a buyer will find during due diligence.
Investing in an audit or a review can lead to a smoother sales process, because it puts the owner in the driver’s seat, giving him the ability to decide – before putting the company up for sale – whether any business adjustments need to be made and, if so, how to manage them. Too many times, we have seen owners scramble to respond to a big issue – like customer concentration or changes in profitability – that came up during due diligence and could easily have been caught and addressed had the company engaged in the front-end work. Newly-discovered issues can be costly, adding time to the process or affecting our view of the company’s worth.
4. Get your story and key documentation in order
Buyers will ask sellers many questions as they get to know the business. Owners who can present the company well, who articulate compelling reasons why the management team should be successful going forward and its vision for the future, will greatly raise the comfort level for the buyers.
The seller should address the following aspects of the company:
The company, industry, and market opportunity: To what extent is the business for growth?
The competition: Who are the main competitors? How does the company stack up against them? Why do customers choose the company over its competitors?
Team roles and responsibilities: Is this the right team to lead and execute on the growths strategy? Are there management gaps?
Company’s financial picture: Cash flows, capital expenditure needs, and working capital trends.
Customers and suppliers: Any customer concentration? Do demands spike and ebb or do they recur? What are market dynamics – for example, are customers being acquired? “Develop an understanding about what drives customers, what they are buying each year, and their profitability.
Information technology: What systems are in place? Are they scalable? Are capital investments needed?
Employment and labor practices: What is the employee base? Are there any one-time or ongoing issues that affect the cost structure of the business?
Legal disclosures: Does any potential litigation lurk?
5. Involve the management team
Clarifying the “why” for the sale is important for another reason: it makes clear whom to involve. Proactive communication and incentive-building help get company leaders on board and ready for the sale process and their future roles. Whether due to fear of the unknown or nervousness about starting a rumor mill, owners sometimes keep a sale decision close to their vest for too long. If handled properly, making sure top executives are in the loop will provide an opportunity for the owner to display the team’s strength, and this also signals the company takes the potential sale seriously. We recommend a patient approach for the conversations with leadership, having these conversations in phases. Normally, these conversations are conducted during the “due diligence” period and after certain contingencies have been waived.
6. Develop a strategic business plan
Owners with well-articulated business plans signal they have carefully considered their business opportunity. The growth plans and opportunities need to be reasonable and genuine. Owners should pinpoint inherent growth engines, identify initiatives to jumpstart them, and be able to describe what the company is doing – or what it wants to do, with the right buyer’s help.
7. Feed the business
As selling time nears, some owners stop investing in the company because they don’t want to affect short-term profitability. Owners may worry that big recent expenditures will hurt valuation, or think they can save money by waiting to let the new owner step in and make the needed investments. Actually, the opposite can hold true.
Addressing immediate business needs – like adding capacity or key employees and demonstrating their positive impact - can actually result in a higher valuation. Higher valuation multiples must be supported by growth, which typically requires continued investment back into the business. To that end, buyers also like to see that companies are working to improve their systems, processes, and infrastructure.
8. Maintain solid support
Selling a business is a time-consuming process, especially during the due diligence stage. Owners who plan ahead by working with a good advisor, by anticipating buyer needs, by shoring up management support, and by making sure company fundamentals remain strong, can help ensure the business runs smoothly during this important time, thus setting the stage for a timely and successful sale.
If you’re thinking about selling your business, let us help you plan and prepare for a sale transaction that exceeds your expectations. Contact Sabre Capital today to get started.