Selling a company is a complex process that requires careful planning, strategic execution, and professional guidance. In The Intelligent Exit, author Mark Carmichael cites a PriceWaterhouse Coopers study, “Whose Business is it Anyway? Smart Strategies for Ownership Succession, in which Carmichael shares ”most business owners don’t do the work to create a plan. And lack of planning on the seller’s part is the number one reason that private business sales fail or only partially succeed.”
Partial success can be defined as undervaluing your company or accepting an offer that is less than an optimal value; being reactive throughout the process, rather than proactive; paying too much in taxes; being forced to sell rather than planning a sale. Mark Carmichael, author of The Intelligent Exit, refers to the four D’s that could force a sale: death, disability, divorce, or distress. Having no exit plan could also result in the creation of unnecessary stress or anxiety throughout the process.
An exit plan, as suggested by Mark Carmichael, author of The Intelligent Exit, suggests the following:
- Your goals and objectives are defined
- Information that might be requested by acquirers or end up in the “data room” is readily available
- Valuation expectations are set.
- Your value drivers are clearly defined
- You understand how to describe value enhancement opportunities
- Your exit options are researched and determined
- You have a clear and realistic understanding of timing
- Your tax consequences and net proceeds expectations have been assessed
Below are some of the key steps to ensure a successful sale:
Understanding the diligence process and reverse engineering
After you have actually decided to sell, or to take on outside investors, you should embark on two fairly significant tasks. Each of these two endeavors will take substantial amounts of time, so you should expect to spend anywhere from several months to as long as several years working on these. One is focused on upside, adding value to the business. The other is focused on downside risk, and preparing for buyers’ due diligence.
For the upside, the value creation aspects, you will want to review all 12 levers of value creation. Assess your business with an eye toward identifying areas for improvement. Remember, any levers you are not pulling today, but are pulling successfully in the future, will lead to growth, enhanced profitability, and possibly an expansion of the valuation multiple that buyers consider in their bid. In other words, it is worth the effort.
On the downside risk front, your objective is to reduce the degree of risk that a buyer might assume when conducting due diligence. Due diligence, loosely defined, is simply conducting the responsible research necessary to evaluate a major decision, such as an acquisition. Buyers will be looking not only for red flags, but also warning signs that there might be a risk or a potential threat to the busiuness, or that you might have been less than completely honest about how you portrayed the company’s current health and future prospects.
Diligence generally includes financial, legal, commercial (market, customer and competitive analysis), and, depending on the industry, might include operations, environmental, or other types of due diligence investigations. You can reduce friction, speed the process, and potentially eliminate detractors to your enterprise value by being prepared for due diligence.
Thinking about the business from the potential acquirer’s perspective will be useful in helping you develop a list of steps to help prepare yourself and the business. Said another way, there is a long list of reasons that potential acquisitions did not occur. These may include:
- Report on key performance indicator metrics on a regular basis so you can show a trail of progress.
- Work toward organizing financial reports in collaboration with an M&A advisor or accountant.
- Developing or refining a long-term strategic plan.
- Ensure that you are taking steps to resolve outstanding issues or concerns with customers, suppliers or litigants, for example.
- Develop your key management team and starting the process of preparing them for the due diligence process.
Gain advice from business owners who have successfully sold
A key, and yet often overlooked step in preparing yourself and your company for sale, is to solicit input, advice, feedback, and lessons learned from other business owners – some of whom will be one or two steps ahead of you (and others will be ten or twenty steps ahead). What might they say? Who knows! But ask a community of peer business owners who are in the process of selling or who have already sold, and you are guaranteed to learn something. I know this because I have heard so many of them say how much they wish they had a community like ours of peer business owners to weigh in. All of them have nuggets of advice they would like to share (in some cases, “I was so fortunate to have____” and in other cases, “I really wish I had known that ___ would cost me so much money unnecessarily.”)