The End of the Road: Selling Your Small Business

26-September-2012
26-September-2012 20:43
in Mission, Vision and Goals
by Colin Smith

Almost every small business owner dreams of the day when he can cash in his chips, buy that swanky town house in Chelsea and enjoy the good life.  Ok, the town house in Chelsea might not be to everyones tastes (or budget, even after selling your business), but the reality is that however successful your business might be, you will not unlock the full financial benefits of business ownership until you sell.  Despite the fact that unlocking the capital inside their business through a sale is an almost universal goal for small business owners, precious few start ups ever make it all the way to a sale.  Of those that do, many small business owners end up tied to what is now a job in somebody else's business.  The dream of bags of money and the freedom to enjoy it has turned into the nightmare of working for someone else in your own business.  

There's a reason why so few business owners sell their businesses at all and why even fewer sell their businesses successfully.  It's because it's hard to do a deal at the best possible price and to remain free to do what you want to do at the end of the process.  These objectives often come into conflict.  And don't rely purely on your adviser or broker to help you out.  Their prime interest is to generate fees and commissions, so it is not a good idea to abdicate responsibility for what is, for many small business owners, the most important deal of your life.  The question then becomes what does the small business owner need to do to achieve the best possible price for his business whilst retaining their personal freedom?  The following considerations are crucial in successfully reaching the end of the journey from start up to sale.

1. Sell Your Business on the Way Up, Not on the Way Down

Even on the way down, there might be someone, probably a competitor that will want to asset strip your business at fire sale prices.  If you expect to realise fair value for your business, never mind the premium you should be seeking, make sure you are selling on the way up.  Most buyers are looking for a "sustainable business".  That means that your business needs to have most or all of the following characteristics:

    • A sustainable business does not depend on any one thing for it's success.  It will have a team that are capable of the running the day to day operations of the business independently of you and it will not be beholden to one all-powerful customer or supplier.
    • The core business of a sustainable business operates like a well oiled machine, reliably generating cash and profits month after month without the need for anything other than marginal or minor improvements.
    • A sustainable business has a substantial existing client base that are consistently generating repeat sales and a proven, repeatable system for economically acquiring new clients.  Generally speaking, the business will be well into the success or take off stages in it's developmental progress.
    • A sustainable business is poised to exploit other opportunities outside of it's core business which are a natural extension of the existing business.
  • If you are seen as integral to the business you have got very little chance of getting a sale at all, much less of extricating yourself from the business.  As Brad Rosser says, "if you want to sell your business, shoot the entrepreneur!".  You either need a partner that is planning on staying on after the sale or an effective management team.

2. Understand The Buyers Point of View 

Naturally, you think that your business is fantastic but it is crucial that you have realistic expectations if you wish to take this forward to an actual real rather than hypothetical sale.  Buyers naturally wonder why you want to sell.  If this business is really as fantastic as you say, then why are you selling it?  You need to be realistic.  Your small business is probably relatively young without a long record of attractive profitability.  The core business should be fairly robust but opportunities for further growth are just that: opportunities.  Your buyer will be concerned that these opportunities will never come to fruition and will thus be reluctant to pay a premium for potential.  They will expect your young business to experience a few ups and downs in the coming years.  They will expect a discount for any potential downs but will expect the ups for free as an upside of the deal for them.  They will also be reluctant to allow you to fully extricate yourself from the deal and will never fully trust you if you even suggest that this is what you want.  These facts and the beliefs of your potential buyers will have implications for the deal which you will need to consider throughout the negotiations.

The adviser that you work with will inject a dose of realism into the the process and this is useful.  If small business owners push for terms that are unrealistic or too greedy they will destroy the chance of a successful deal.  Sometimes, the business owner can be their own worst enemy.

3. Choose The Right Adviser

A good adviser will be your right hand man (or woman) throughout this whole process.  However, you need to tread carefully as the smaller the business for sale, the smaller the pool of good advisers.that aren't entirely focused on their own self interest. What you will often get instead is high fees with as much as possible paid upfront on the promise of imminent riches with no effort at all on your part. 

You will want to to meet as many advisers as possible in your industry and price range.  You will want to know:

  • What specific trade buyers are likely to be interested?
  • What specific private-equity companies are likely to be interested?
  • How many of these do you know personally? 

These personal relationships are what will be the greatest asset that an adviser can bring to the table.  It's probably not reasonable for them to know everybody but they should have established relationships and respect in their industry.

4.  Close The Deal

So, you've chosen your adviser.  What next?  Follow the following process to the end of your business journey.

  • Select Legal Adviser - Choose the best and most suitably experienced firm that you can afford. 
  • Prepare Information Memorandum (IM) - The IM is the principal sales document for your business.  You need to be intimately involved in its preparation and get it absolutely right.
  • Conduct Vendor Due Diligence - This a report produced by an external expert such as a consultant or an accounting firm that reflects the current financial and commercial status of the business.  Read the report for inaccuracies and to ensure that all salient details have been included.
  • Brainstorm Potential Buyers - Don't leave this completely up to the adviser.  You will want to have some input.
  • Finalise List of Potential Buyers & Distribute IM - Ideally the IM should go to a small handpicked group of serious potential purchasers who have all indicated interest in your business.
  • Receive Indicative Offers - You need to consider not only the indicative price but also the terms and conditions of the offer.
  • Prepare Buyer Shortlist - This is where you narrow things down if you have been successful in attracted several indicative offers.  Ideally you will have enough interest to create some competitive tension.
  • Conduct Management Presentations - This gives the potential buyers the opportunity to assess the strength of your management team.  Make sure they are well drilled and give the best possible impression.
  • Open Data Room - This is where you will you will gather together all the legal, financial and commercial information that is relevant to the sale.  You will need to provide enough information to allow your prospective buyers to reach a firm and final offer.
  • Receive Final Offers & Choose Your Preferred Buyer - You must choose the one which balances the best price with the highest likelihood of success.
  • Conduct Confirmatory Due Diligence - The preferred bidder will conduct their final due diligence checks
  • Negotiate Sale and Purchase Agreement (SPA) - At this final stage, the purchaser will seek warranties about the current state of the business.  This is acceptable and should be offered if you have negotiated in good faith.  You should not however give them a warranty on future performance.
  • Sign Final Agreement - And start thinking about your new Townhouse in Chelsea.    

So remember the goal: a sale and a fair deal for all.  Be practical and honest to get the deal done and let the competitive tension you create reveal the fair price.  Selling your business will be one of the most difficult things that you ever do.  Creating a business that is truly valuable is even more difficult.  Continuous Business Planning exist to help you from wherever you are all the way to the end of the road: the sale of your start up business.  Call us today to ensure you are on track to realise the full fruits of your labour as a small business owner.   

 

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