One of the truisms of selling your business is that once you have made the decision, it is always in your best interest to move quickly. You have generally put together information to get the transaction structured and are now working on due diligence. What is important to note is that the information you prepared on your business is immediately stale. You can, of course, get yourself into a situation where you are constantly updating financial and operating information, or you can move quickly with the party you have selected and spend your energy on getting the transaction done.
Please note that moving quickly does not mean being careless. It is of the utmost importance that the information you put in front of buyers is accurate, complete, and always truthful.
So now that we have decided that it is best to move quickly, let’s talk about ways that you can speed things up once you have made the decision to sell your business.
1. Go Back to Boy Scout Training: Be Prepared
This may seem obvious, but for a sale to go quickly and smoothly, you will need to have all your information up to date, available, and in a format where it can be shared easily.
By “up to date” we mean your financial statements will need to be current. If you normally close a month in 45 days, you might need to speed that up. If you haven’t looked at your employee manual since 1986, you might want to re-write some parts. You are going to need to be the smartest person in the room and the only way that is possible is if you are aware of what’s happening in the business every day.
By “available” we mean you should be keeping, or spending time thinking about, information that will be of great importance to buyers. You will not be able to answer every question a buyer gives you or provide them with the information in the exact layout in which they request it. You should however, have a file of documents that will allow someone to answer those questions with a little additional work.
By “shared easily” we mean please have important documents available electronically. It seems silly that we need to say this in the current day and age, but many clients still have critical documents in a desk drawer and in paper format.
TRUE STORY: We once had a client who consistently moved slowly in gathering information or responding to questions. When we told him that it is always in his best interest to move quickly, he said “Why? What could happen?” and we said “What if your plant blows up?” He laughed, but he moved more quickly.
A week after the transaction closed, his plant blew up. Thankfully, no one was hurt, but it is an important lesson. Even if things are going well, something strange can happen to derail a transaction. Once you are on your way, do your best to get it closed as quickly as possible.
The preparation phase can seem overwhelming. Your investment banker can help you with the list of documents that buyers will want to see so that you are not wasting your time.
2. Stay in Town
For the sale to proceed normally, the seller needs to be available. If you are an absentee owner, you will need to be available to answer questions that arise. If you are an owner/operator, you will need to be there to continue to run the business. The WORST time to have a down month is during the sale process. It can take a long time to recover from a bad financial month in the eyes of the buyer.
TRUE STORY: We were once in the middle of due diligence and the buyers wanted to spend some time talking with the CEO about the sales force and how best to use sales representatives going forward. We spent a month trying to get the meeting to happen because the CEO’s wife had “gotten a great deal on a condo in Hilton Head.”
At the end of four weeks without being able to schedule the meeting, our buyer walked away. They didn’t believe that the business was important to the owner and didn’t feel like he was committed to the completion of the sale process. I don’t know how good the deal was on that condo, but I do know that the week’s stay in the middle of the transaction cost that seller about $70 million.
3. Be Mentally Prepared for Criticism
This can be a tough one for many of our business owners who have grown their company from the beginning. When a buyer begins to perform due diligence, they will find something that is wrong. Alternatively, they may mention that they do something differently. None of these comments should be taken as a personal affront.
If something is found to be incorrect, offer to fix it without ceremony. If a buyer mentions that he or she does something differently, take it as an opportunity to learn. You can explain why you do something in this manner, but only if you can have the conversation without getting emotionally involved. If you are going to be argumentative, have your investment banker answer the question for you.
Many times, deals run off course, not because of falling financial performance or a customer leaving, but because a buyer casually mentions that they stack inventory differently and the seller thinks that he’s criticizing his inventory control system.
4. Make Sure Your Key Employees are Cognizant of the Plan
For the same reasons that the owner needs to be available during the process, key employees will generally also need to be available. This can be a tough conversation to have because in one breath you are telling your management team that you are contemplating the sale of the company, and in the second breath you are telling them that they will have a lot of work to do over the next couple of months. There are ways that your investment banker can help you with this communication and make employees more at ease with the process. It will be imperative however, that the CFO not be on vacation during the financial due diligence process and that there is someone competent to run the plant tour.
5. Get the Easy Fix Ups Done and Don’t Fix What Doesn’t Need to Be Fixed
Chances are, you know where some things need to be fixed in your company. Some of them might be plant related (a leaking roof) and some of them might be financial (understanding your margin by customer). If there are areas where you can fix the low hanging fruit before you engage in a sale process, do that. Spend the time and energy before you hit the market cleaning up the obvious blemishes. Doing so after someone points them out usually leads to a detraction of value or trust. It’s the “if he didn’t fix the leaking roof, what else is wrong that I didn’t see?” syndrome.
TRUE STORY: Many of our sellers want their business to be seen in the best possible light. We want that too. We want you to fix the things that will detract from value.
One of our sellers however, thought that the plant would look better if the property were surrounded by a new cedar fence. The fence took a lot of time to complete and worse, it cost over $80,000.
That time was not well spent by the business owner and the $80,000 was not recoverable. The fence looked nice, but it was certainly not important to running the business and therefore was not something for which a buyer would reimburse our seller.
If you have any doubt, check with your investment banker before making any large capital expenditures. Some items will be difficult to recover in purchase price. For example, if you buy all new office furniture. Yours may have been dated, but a buyer generally will not pay you back for that expenditure. On the other hand, if you have an item that impacts the profitability of the company, take care of those first and your investment banker can usually add those back to the purchase price. If you have an item that may jeopardize employee safety, take care of that immediately. Always ask your investment banker before you engage on large cosmetic or systems upgrades before a sale.
Remember, once you begin the sale process, you will want to move expeditiously to the end. Time is generally not on your side. Be prepared, be present, and don’t sweat the small stuff.