I am in the middle of a sale process for one of our portfolio companies, and I wanted to share some useful tips to ensure your sale process goes as smoothly as possible. This article will focus on the actual “process” of selling, so you can better understand what levers you can pull to your advantage in getting the quickest sale at the highest price.
When Should You Sell Your Business?
The first part of answering when to sell your business is related to your business condition. If you cannot clearly show growth in revenues and profits over the last couple years, it will be really hard to sell your business at an attractive price. And, if there is anything negative going on in your industry (e.g., COVID impacting restaurant demand), it would be best to wait until those external factors are no longer an issue.
The second part of answering when to sell is related to the business prospects. Are you bullish or bearish on the future? If bullish, why sell now, wait to capture additional revenues and profits first, before selling. But, if bearish, and you see the company ready to run into a wall, you may want to time your exit at the peak before the revenues collapse. But in a typical scenario, a buyer will be doing due diligence on your industry and business, and they need to see a reasonable path forward to revenues continuing to grow under their ownership. So, in all cases, make sure you can easily answer the question on how revenues will grow for them in the coming years. Because if you cannot credibly sell that story of future growth, they will most likely not be interested.
The third part of answering when to sell is your personal psyche. Are you tired, bored or burned out? Maybe it is time to move on. Are you no longer enjoying working with your team and you need a change? Maybe it is time to sell. Do you want to spend more time with your family, or need cash for another project? Time to think about selling. So, assess where you are personally, and that will help point you in one direction or the other.
Who Should Manage the Sale Process?
How you sell your business is really a function of how large your business is. I would say selling a business under $500K in profits is typically more “do it yourself”, as it will not be large enough to get the attention of the normal business brokers. There are plenty of websites you can list your business for sale to help get your business discovered by potential buyers (e.g., BizQuest, BizBuySell, BusinessesForSale.com) for a minimal listing fee. If you go that route, look at examples of other business listings to figure out the best content and information to share in your listing. Make sure you have a good lawyer lined up to help you with the negotiations and documentation of the sale agreement.
But, if you are a bigger in size, it is always best to engage a licensed and trusted business broker to assist you with the sale process and do all the “heavy lifting” for you, including drafting the sale brochure, creating target buyer lists, doing outreach to such buyers, negotiating the deal and helping you get to the finish line. Business brokers come in all shapes and sizes, typically with a focus on certain geographical regions, certain industries or certain company sizes. So do some research with your professional network or online for the best business broker for your exact situation. Business brokers do typically come with a monthly retainer (e.g., $10,000 per month) plus a success fee from the sale (e.g, 3%-8%) depending on how large the expected sale proceeds will be.
Who Should Buy My Business?
There are typically three types of buyers: (i) strategic buyers already operating in your industry; (ii) financial buyers that are simply looking for investment opportunities; or (iii) other entrepreneurs looking for new companies to operate. The valuations typically are ranked in that same order of categories listed, where a strategic buyer can typically see more ways for “one plus one to equal three”, getting synergies out of the business. And financial buyers and entrepreneurs are typically looking for the “best deals” they can get. So, start with strategics and go from there. Also think about things like: (i) do I trust this buyer to run the company (especially if any earn-out payments to you are involved); (ii) will they keep my team in place or treat them fairly if severed; and (iii) do they have the purchase proceeds, for both their equity and any needed loans, in hand. As you will learn, not all buyers are created equal, so do your due diligence on them, the same time they are doing their due diligence on you.
How Quickly Should the Process Go
A normal sale process is typically around a 6 month process. The first month you are preparing your marketing materials and target buyer lists, the second month you are doing outreach to those buyers, the third month you are fielding questions and calls with the interested parties, the fourth month you are negotiating best terms, the fifth month the buyer is completing their due diligence and the sixth month you are getting the sale documents drafted and signed. Depending on market conditions, it could take much longer than that. If buyers are worried about the economy or interest rates, that will decrease the pool of investors that will be interested in moving forward until those issues are resolved.
How Should You Approach Negotiating
At the end of the day, “the market is the market”. You may think you are worth one thing, but buyers could be telling you something completely different. So, be flexible here. And if there are 10 key points you are trying to negotiate through, pick the most important ones that you are going to “dig in on”, and be flexible on the others. Negotiation is a two-way street and both parties have to be happy to get to the finish line. But, in all cases, there are a couple rules of thumb that I live by: (i) your first offers are typically your most interested buyers and highest odds of getting to the finish line; and (ii) time kills all deals—the longer the negotiating process takes, the higher odds the buyer gets frustrated or disinterested and moves on. Don’t sabotage your own odds of success by being inflexible, unreasonable or moving too slowly.
How Much Should I Expect for Valuation
Valuation is directly proportional to your: (i) 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 $50MM revenue business or a $5MM revenue business? Are you growing at 50% per year or 5% a year? All these questions matter and dictate valuation. So be realistic on what you can reasonably expect to receive by learning what similar businesses have sold for in the past. As a ballpark, expect your EBITDA sale multiplier, which dictates valuation, to be in the 3x to 10x EBITDA range for revenues between $1MM to $50MM, depending on your answers to these types of questions.
Closing Thoughts
Selling your business can be an exciting time, but it can also be a daunting process. So be sure to surround yourself with experts that have “been there and done that” to help you through the process. That includes hiring a good business broker, an experienced M&A lawyer and seeking mentorship from others that successfully sold their businesses. If you need any help here, don’t hesitate to reach out. Good luck!
Also, don’t forget to check out these
other articles I wrote on How
to Find Buyers for Your Business and How
to Structure the Sale of Your Business for additional details.
For future posts, please follow me on Twitter at: @georgedeeb.