Making the choice to sell some or all of the business you or your family worked hard to build is a big decision, and is often preceded by deep introspection and ruminating. To help with this decision-making process, below are nine things you should considering before selling your business:
1. What do you hope to achieve from the transaction?
A transaction can be undertaken for many reasons. “Selling” your business does not necessarily mean giving up 100% ownership and walking away from it entirely, even though that is certainly an option. One of the first things a business owner should consider when contemplating a sale is what they hope to achieve. Do you want to retire to a warm climate and never have to think about the business again? Or are you seeking a financial partner who will allow you to retain some ownership and will work alongside you to grow the business? Do you have a talented manager who has expressed interest in buying the business? Or do you want to aim to maximize your proceeds by selling to the strategic buyer with the best synergies? It is important to carefully consider what is truly driving your desire for a transaction, and to frame your decision process around your desired outcome.
2. What are your priorities in a transaction?
Once you have determined what you hope to achieve in a transaction, it is important to consider what your priorities are in a sale process and after the close. A sale process can vary significantly depending on what is most important to the seller. Do you want to reach out to as many potential buyers possible, or is confidentiality the most important consideration? Do you want to receive the absolute highest possible value for the business, or is it worth a lower purchase price to know that your facility will remain in place and your employees will be retained? Transactions can be full of trade-offs like these, and which side you lean towards depends primarily on what you view as priorities in the sale.
3. What do you want to do after the sale?
Similar to what you hope to achieve, it is also important to take a close look at what you want to do after the transaction. Many business owners look to sell their business with the hope of retiring, but many others want to continue running and growing the company after selling some ownership. Maybe you want to retain some minority ownership but not be involved in the operations of the company, or maybe you would like to sell 100% ownership but remain involved with the business by sitting on its board of directors. In all cases, what you want to do following a transaction will have a dramatic impact on how your sale process is structured.
4. Can the business continue to succeed if you are less involved?
As a business owner considering a transition, this is a critical question to ask yourself, because, let’s face it, buyers certainly will. Depending on how you answered question number 3, it could be very important to look closely at whether or not your business is capable of performing well if you are less involved. This means looking at your business’s next level of management. Is there an employee who could step up into a leadership role? If so, how can you incentivize them to stick around if the business is sold. If not, can you develop or hire a manager who can be the company’s next CEO? Considering how well your business can run without you can be difficult and uncomfortable, but it is absolutely critical in determining what buyers would be the best fit for your company.
5. Do you have a next level of management in place?
Whether you intend to remain active in the business or not, it is important to take a close look at the bench strength of your non-owner management team. Many family businesses have a senior management team made up primarily of shareholders and family members. While these are often the people who know the business the best, a management structure made up mostly of shareholders can also cause concerns for buyers since management may be less enthusiastic when they are no longer owners.
6. How will the current state of the broader market affect a sale of your business?
It’s usually understood that the performance of a business has a very significant effect on its value, but business owners sometimes don’t realize how much of an impact broader economic factors can have on the sale of their company. Everything from the demand for acquisitions, to the debt market, to raw material pricing can have a larger impact than you may think on your company’s value. It is often difficult for a business to “outgrow” an economic downturn. For example, a business that might trade at 7.0x EBITDA in a strong M&A market may only trade for 5.5x in a down market. This gap in valuation is very difficult to bridge even if the company’s performance is significantly better by the time the down market occurs. It is important for a business owner to consider which economic factors may affect their business, and to take the state of the broader market into account when planning when to sell your business.
7. Do you have access to the best possible buyers for your business?
Business owners often think they know exactly who will buy their company, since they likely know all the players in their marketplace very well. “Marketplace” and “Buyer Universe” can be very different groups. While a close competitor may be one potential buyer, limiting the buyer universe to only competitors, suppliers, or customers would likely miss 80-90% of the potential buyers for a business. Maximizing the value that a business trades for is best achieved by reaching the broadest universe of possible buyers, which should include both strategic (customers, competitors, suppliers, etc.) and financial (private equity, family offices, holding companies) buyers. Before you or an advisor sell your business, you should ask yourself if you/they have the resources and relationships needed to reach all of the best possible buyers for your business.
8. What needs to happen for you to consider a transaction “successful”?
This one will probably require a fair bit of thought and maybe more than a little personal exploration. At the end of the day, what will it take for you to consider the sale of your transaction successful? Do you have a certain number in mind that could trump all other considerations? Or is the likelihood that your business and its employees will continue to flourish in the future most important. Answering this question will likely require you to evaluate all of the considerations discussed above. In any case, defining early on what it would take to deem a transaction “successful” is a critical aspect of developing the transaction strategy that is most likely to get you there.
9. What professional assistance do you need to help you get to a successful transaction?
Like most of life’s large projects, reaching a truly successful conclusion to the sale of your business usually requires some assistance. Assembling the right team of transaction professionals goes a long way towards ensuring that your objectives - whether it be price, legal terms, timing, or future of the business - are achieved. This team should include professionals in a variety of specialties: a transaction attorney to ensure legal protection, an accountant to provide financial guidance and assist in diligence, and an investment banker to maximize value and guide the transaction to closure.
In all cases, deciding how and when to sell your business should be your choice, and should come after careful consideration of the points above. It is always shocking to see business owners, who had historically scrutinized every business decision they made in minute detail, decide to sell their company after receiving an unsolicited offer from a single buyer. If an offer or some other life event has triggered an interest in exploring a sale of your business, TKO Miller can help you walk through the critical details that should be considered before moving forward with a transaction.
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