To sell a company, business owners have to take many steps and consider several factors before launching the process. Not sure where to begin? Here are several starting points for making the big sell.
As the business world changes at an increasingly rapid rate, company owners may often ask themselves if they want to continue operating their business (and face all the stress it entails) or begin the process of finding a buyer and reaping the rewards of all their hard work.
From my own experience selling a company in the mobile programmatic advertising space, I’ve crafted several steps that can help you during the process of negotiating a sale. How owners approach these steps can vary based on company performance, the market and personal network.
Where to Begin When Selling Your Business
- Talk to bankers
- Communicate with investors
- Understand metrics
- Stay realistic
- Organize your accounting process
- Know your product
- Be comfortable with your time
- Review agreements
- Hire a lawyer
- Plan for Integration
Step #1: Talk to Bankers
At almost every revenue level and company sector, there are people who specialize in this process. Keep in mind that talking to bankers, doesn’t mean that you need to use them. They can provide insightful information and also signal that you are open to selling your company without you needing to stand on the corner with a big “FOR SALE” sign.
Step #2: Communicate With Investors
You never know if you will be successful in attracting suitors. Even if you have some traction, you’ll want to retain some leverage.
If you have a term sheet for investment or potential interest from investors that can be a vehicle to provide some leverage (maybe not as good as multiple interested buyers, but better than nothing). You may also end up deciding that you’d prefer to take the investment and try to grow.
Step #3: Understand Metrics
In AdTech, for example, companies we’re valued off top-line revenue during the time period my company was acquired. In other industries, it can be EBITDA or a different metric. Be aware of the valuation drivers in your industry so you can set expectations and negotiating ranges correctly.
Like in the image above, you can get a general sense of these numbers by looking at the financial statements of publicly-traded companies in your industry, observing what their valuation is and then reading analyst reports rationalizing how they arrived at that conclusion.
It would also be extremely valuable to read about the DCF method of valuing a company. In the technology world, many buyers and investors have veered away from this framework to different methods based on growth projections but DCF will give you a strong understanding of a fundamental way to calculate your business value.
A very clear example of divergent valuation techniques at work would be looking at WeWork vs IWG. They have very similar core businesses, but WeWork (until its notorious meltdown) was able to convince investors to value it based on revenue growth and also as a technology company (meaning a higher revenue multiple) whereas IWG has been valued by the markets as a real estate company (with a lower revenue multiple) and a greater focus on profitability.
Depending on your company and how you are able to position it, it should give you some sense of what is a “realistic” expectation.
Step #4: Stay Realistic
If your company is exceeding in every avenue, this should give you some optimism that you’ll be able to bid up buyer offers. But if your company is doing OK or poorly. you’ll want to set expectations in line with industry metrics and be more open-minded.
Step #5: Organize Your Accounting Process
Make sure that all of your accounting and financial statements are in order. Ideally, use a GAAP accounting method. It is a great foundation to start when looking into your past financial statements and accounts. Having everything in order will be another selling point for potential buyers.
Step #6: Know Your Product
No matter what type of business you are, be prepared to answer a lot of specific questions about how your product works.
Usually, the acquirer will create a “data room” on Dropbox or Google Drive and have a very large list of questions in an excel document categorized into different groups. You’ll need to write answers, build diagrams, make videos and provide clarity and comfort around all of these questions.
Step #7: Be Comfortable With Time
This process can take a very long time even after you sign an LOI with a prospective buyer. I had no idea how long a Purchase Agreement could be until I went through this process. The time it takes varies. Sometimes there will be months of back and forth.
Step #8: Review Agreements
If you are fortunate enough to receive a purchase agreement from a prospective buyer, read it thoroughly with your lawyer and make a note of all the various possible levers for negotiation. Even if you think some elements are trivial, make sure you’re aware of all the points during the negotiation. Here is an example of a basic business agreement.
The business agreement contains all of the crucial and personal information of the buyers and sellers. Like with any other contract, all participants should be clear on what they’re reading and signing.
Step #9: Hire a Lawyer
Get a lawyer with experience negotiating deals in your space. They will have an understanding of what “market” for each element of the agreement. Your agreement will likely be 20+ pages of legal jargon (in my experience, it was 70 pages).
There are so many terms and elements that can be industry-specific that you’ll benefit greatly from a lawyer who has done transactions in your industry. The best way to find this type of person is through a referral.
By that, I mean asking people you trust if they’ve had experiences with any attorney’s in the space. Then get a direct introduction.
Step # 10: Plan for Integration
Remember that after you are acquired, in most cases, you will end up working with the company that bought you. This is where a lot of unhappiness and failure takes place. It's very important to plan for the integration between the two companies.
This means answers to questions like specific roles for everyone (there should be no ambiguity even if it requires tough conversations), a timeline for the company product or services to become a part of the larger company offering, any sales, and marketing changes.
If you are a very large company, I am sure the process is a bit different but has similar principles.
Begin Your Company Selling Journey Today
If you’ve built your company to the point where you can consider selling it, big kudos to you. That’s an awesome achievement that not many people ever get the satisfaction of experiencing.
It’s easy to get caught up in the stress associated with the process and thinking about your selling strategy, but take a quick moment to reflect and pat yourself on the back for how far you’ve come.
Each transaction is different but fundamentally your goal is to convince a buyer that your company will be a great addition and value add to their own.