Before selling a business, sellers should prepare their company for the transaction as early and thoroughly as possible before engaging with potential buyers. The following tips can help to ensure that the process happens smoothly and efficiently.
Preparing your company to become “transaction-ready”
• Right time to sell. Sellers should consider both company performance and their reasons and desire for selling. Generally, the best time to maximize value is when a company has experienced strong recent growth and prospects for future growth are significant. Personal considerations, such as financial security, retirement and family issues, also play an important role.
• Align incentives of management and owners. Sellers should ensure that management has sufficient skin in the game, whether through equity grants or change of control bonuses. Sellers should also discuss what role, if any, management would like to play in the company post-closing.
• Assemble deal team. Given the complexity and pace of most sales processes, selecting the right deal team, which can consist of investment bankers, legal counsel, accountants, estate planers, wealth managers and others, will help to maximize value and minimize the likelihood of process-related issues, especially for inexperienced sellers. For example, investment banks can introduce a wide variety of buyers, help with the valuation process, negotiate with potential buyers, and provide other advice. Sellers should work to ensure everyone is on the same page, including delivering the same messages, to maximize credibility and effectiveness by minimizing confusion and doubt.
• Sell-side due diligence. To make the sales process more manageable and efficient, sellers should consider an internal due diligence investigation of the company to identify potential issues that can be corrected or flagged for a potential buyer. Correcting issues prior to engaging buyers can increase valuation, while explaining issues early shows transparency and desire to act in good faith, which will strengthen the buyer’s trust in the sellers and the sales process.
Selecting the best acquisition partner
• Create a competitive sales process by negotiating with a preemptive bidder or conducting an auction process. An auction process can drive the price up and force buyers to bid more aggressively. However, a buyer may try to preempt the auction process with an early aggressive bid. Given that sellers are unable to fully test the market in a preemptive bid scenario, such bids need to come with a premium. Having a target price in mind is particularly important when evaluating a preemptive bid.
• Negotiate key deal points early before exclusivity is granted. In addition to taking advantage of the leverage for sellers early in the process, this helps to reduce the costs of negotiating the definitive documents. Sellers running a particularly competitive auction process should consider requiring a markup of a purchase agreement before selecting a buyer.
• Strategic vs. financial buyers. Strategic and financial buyers view targets differently and sellers should understand advantages and considerations of each before starting the sale process.
Some of the advantages for selecting a strategic buyer include:
- Full value realization
- Ability to pay a premium on valuation (often due to synergies)
- Current management may be able to obtain roles in a larger acquiring organization
- Sellers may have ability to participate in upside if stock is received as part of the consideration
However, some of the potential issues with strategic buyers include:
- Social considerations (location and culture of the business)
- Limited direct participation in upside
Reduced likelihood of influencing the business post-closing
Some of the advantages for selecting a financial buyer include
- Most shareholders typically receive full liquidity (management may have rollover equity)
- Buyer may be a source of capital (for growth, add on acquisitions, etc.)
- Buyer may provide credibility with capital providers
- Buyer may be able to provide professional data reporting and management
- Buyer may be able to provide enhanced governance
- Buyers often have expertise in working capital management and operating
- A chance for a second bite at the apple (rollover equity)
However, some of the potential issues with financial buyers include
- Buyer may want to install new management team
- Buyer may be more focused on return of investment for limited partners than running the business
- There may be a shift in culture
- If leverage is used to purchase company, that may impact operational decisions
Common deal issues
• Managing the transaction and day-to-day business. Given the length and complexity of the sales process, sellers need to balance their time and efforts participating in and managing the sales process and continuing to run the business. If the business continues to do well, sellers keep their leverage and help incentivize a buyer to move quickly. To stay properly focused, sellers should avoid mentally “spending the money” until the transaction closes. Sellers should also rely, where appropriate, on that dream team of advisors to help manage the sale process and keep the business on track.
• Deal fatigue. To maintain deal momentum and avoid deal fatigue, sellers should push aggressively towards closing as soon as the letter of intent is signed.