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October 26, 2022
You’ve spent years building your business into a valuable enterprise. Others may regard you as “lucky”, but you know better than anyone that you’ve made your own luck through hard work. You also know all about the responsibilities of providing employment for people and the pressure of having many families rely on you to put food on the table.
You’ve succeeded against all odds and may now be thinking of the next step: what’s the best thing to do for the business, your employees, for yourself and for your family?
Selling your business and finally having the time to enjoy the fruits of your hard labor may seem like a simple solution. However, from Woodbridge’ International’s 29 years of experience facilitating the mergers and acquisitions of mid-sized businesses, we know it’s not as straightforward as that.
Here are six crucial factors you need to consider before taking The Big Step of selling a business:
If you’re considering selling due to waning enthusiasm, partnership disputes, too much work/stress or any other negative reason; take a step back.
The best time to sell your company is when it’s doing well and you don’t have to sell. The wind is at your back, the outlook is robust, and somebody would ask, “Why the heck are you selling now?!”
The biggest mistake we’ve seen business owners make is waiting too long to sell because they’re waiting for “the peak”. Based on our experience, no one ever knows when the peak is until six months after the fact.
Crucially, if you have the majority of your net worth in your company and you are past the 7th inning of your earning years, timing the sale is crucial to your financial well-being.
Regardless of your situation, the best time to sell your business is when these four conditions have been met:
EBITDA means the company’s annual Earnings Before Interest, Taxes (income taxes), Depreciation and Amortization. The EBITDA calculation is the gold standard used by buyers to establish what your company is worth. If your EBITDA is trending at a level that will realistically provide you with the price you desire, it’s a good time to sell.
If your 6-12 month outlook for the business is strong and you can prove this during due diligence, you’re in a great position.
If you are mentally prepared to pull the trigger if offered the right price, you’re good to go.
If the macro environment is favorable to your business’ industry, take advantage of the good times to attract buyers.
You need to be realistic about what business buyers will pay for your company, and to do that you need to know your business’ market value.
It really is a waste of everyone’s time to take a company to market with unrealistic value expectations. Therefore any Merger & Acquisition (M&A) specialist worth their salt will advise against putting a business on sale if the gap between what you want and what they can get you is above the M&A advisor’s range of value.
A realistic range of value depends on the company’s EBITDA – see examples of businesses that sold with solid EBITDAs here. It’s also determined by the business’ growth trend and the industry it’s in. Importantly, the business’ value will depend on the new owner’s vision of what they can do with the business going forward.
We base our range of value on these tried-and-tested factors:
The bottom line: the most important value is the one you agree to for your business. Just make sure the market has spoken by getting a lot of bids. This will let you contrast and compare the best business buyers.
Every good M&A advisor knows that time kills deals! That’s why Woodbridge International has a very strict, timeline-driven, 150-day process.
If you feel you don’t have your ducks in a row from a legal, regulatory or taxation point of view, then perhaps you should take a step back for now. Because the longer it takes you to get those ducks lined up the more time there is for the process to be derailed, and the more likely it is that the deal will fall through.
Since time kills deals, you need to be ready for all stages of placing your business in sale. Your top five priorities before and during the sale process should be to:
Don’t take your foot off the gas pedal. If you do the operation or its pipeline will decline, and your deal could get renegotiated, or the buyer may get spooked and walk away.
Don’t start cost cutting either, as eliminating investments that have kept your company growing and vibrant will decrease its value.
Remember: the number one reason deals die or get delayed is declining financial performance, so keep the pedal to the metal!
Having accurate and timely financial statements is crucial to getting a deal done for maximum value.
Aside from the standard financials, you will need to learn how EBITDA is calculated and have this important gold standard measurement at the ready.
Importantly, always disclose everything during the due diligence process, because nothing will shut a deal down faster than a buyer finding a skeleton hidden in a dusty closet!
A prudent pre-market task is to populate a comprehensive electronic data room. The data room will house all organizational documents, key customer/vendor contracts and agreements, as well as other documentation covering legal, financial, human resources, regulatory and operational aspects of the company.
The data room serves as a central housing for these primary source documents. Once given access, potential buyers may use this information to educate themselves about your business and to substantiate its performance and accomplishments.
After a potential buyer has signed a non-disclosure agreement (NDA), the next step is to provide them with your confidential information memorandum. This document should convey factual information in a way that sells your company’s story. A great memorandum will do this in an objective tone while at the same time accentuating the business’s uniqueness and value.
It’s difficult to delegate and let go of your “baby” but proper succession planning is crucial during the sales stage. At a minimum, you should evolve out of being directly responsible for incoming or new business – the less, the better.
Unless you’re seasoned in mergers and acquisitions strategy and know how to sell the business, it’s highly advisable you choose the right professional.
Business brokers generally offer services for smaller businesses that are relatively simple to evaluate. M&A advisors offer services around more complex business transactions that require in-depth evaluations. Most mid-sized businesses will require the services of an M&A advisor, so going to a business broker probably won’t be your best option.
A good M&A will have merger and acquisition lawyers, experts on special purpose acquisition companies, accountants, marketers and other pros on the team. You need to conduct due diligence to find the right M&A advisory team for the sale of your business.
Two major requirements to consider are:
It’s irrelevant how “highly recommended” an M&A advisor is if they don’t respond timeously or proactively engage with you. If they’re not responsive while you are still evaluating their suitability, how responsive will they be once you’ve engaged them and it’s up to them to meet a series of critical deadlines?
We’ve put together a full list of due diligence questions to submit to potential M&A advisors in this free-to-download e-book. If you find advisors who are amenable to providing you with written responses to these questions, and you like the responses, they should rise to the top of your list.
When it comes to M&A specialists, size really does matter! You want advisors who service deals in your size range and understand the ins and outs.
Some business owners become enthralled with M&A firms doing larger deals and feel “honored” that those firms would accept them as clients. Perhaps you feel they are doing you a favor, but will you really receive the same level of service they deliver to their clients with over $250 million in sales? Will you really receive the full attention of the firm?
Preparing for life after closing the deal can be the toughest, and often the most unexpected challenge for business owners.
The thought of selling a business and leaving all responsibilities behind as you head into the sunset on your new yacht may be appealing right now. But being a successful business owner is all consuming, and it’s difficult to fully detach. Plus, how long can you be a man/woman of leisure until you start getting antsy – or until you drive your spouse crazy?
Business owners who do not have a game plan for the next chapter of their lives often land up having a serious case of seller’s remorse. This is why we always advise clients to carefully think the next steps through and to discuss with family, friends or even a therapist!
If you’ve considered all these factors and you’re still serious about selling your business, then it’s time to go deeper…
We’ve covered all of the above and more in-depth in our free-to-download e-book More Buyers, More Bids, Higher Price, Better Fit.
And when you’re ready to take The Big Step, feel free to send your due diligence questions to any or our M&A experts.