Selling a Business? 7 Steps for Midmarket Companies to Ensure a Smooth Sale
You've worked for years to create a successful business, navigating through early growing pains to become a mature, successful middle market firm today. Now your company has become an attractive target for buyers, and if the price is right, you're willing to sell and move on to other things in your private and professional life. While it may sound simple, selling a business is anything but.
Here are seven steps to help make the sales process go smoothly:
- Prep your business for sale. Once you consider selling, you should spend a couple of years getting ready. Make sure all business records, especially financial documents, are accurate and up to date. Any potential buyer will begin with a rigorous due-diligence process to properly value your business, so having all relevant documents ready will reduce the potential for wasted time and buyer frustration. In addition, put the business on a good footing by eliminating dependencies on sole suppliers or key people who have no available successor. Develop multiple suppliers as a way to reduce risk, and implement succession planning for key positions. Diversification is good for your middle market business anyway, whether in your supply chain or customer base. Dependencies reduce the value of your business — and the sales price.
- Research your valuation. You want to sell at the best price, which is a price that attracts buyers but isn't so high that it puts them off. Do some research into the valuation of middle market competitors. Better understand the value of your own company by doing a thorough assessment of your company and your market. Of course, selling a business goes better when the market is growing or when the timing is right, such as when the cost of financing a deal is low for potential buyers. Valuations for middle market companies can be especially tough to assess because of a lack of publicly available information, a drawback larger or publicly-listed companies don't have.
- Hire experienced professionals to make the valuation and negotiate the deal. Your first priority should be to continue running your successful business, so don't get completely sidetracked by a negotiating process that can be both extensive and emotionally taxing. This is especially true of middle market companies where the founder or founding family wear many (or all) hats. Be sure to hire advisors (intermediaries) who have experience doing these kind of deals. An advisor may take a percentage of the sale as a fee (ten percent is standard) but will more than earn their fee with their expertise and keeping things off your crowded agenda. It's important to not take things too personally or put your ego on the line. Negotiating the sale of your business can involve a lot of posturing, bluffing, and even door-slamming episodes between the parties. Understand that this is all normal, and lean on your advisors when things are getting heated. They know how the game is played and will be able to keep the sale moving forward even when it appears dead to you.
- Disclose all handshake deals or side deals to the potential buyer. If you've made a verbal promise to give a key executive a ten-percent raise next year, put this in a memo to the potential buyer so that all liabilities are on the table. Middle market companies need to formalize and document all business arrangements for the due diligence process, whereas your larger competitors may already have structures in place to document and formalize all business dealings. Transparency is important, and a lack of transparency could come back to bite you after the sale as a breach of warranty. Cooperate fully with the buyer's due-diligence team, as this will enhance trust and allow for a more accurate valuation of the business.
- Consider your own role after the sale. As the owner of your middle market business, you know your employees and customers far better than any CEO in some Fortune 500 multinational. You may think that the value of the business would be higher if you remained with the post-sale business in some capacity. You might be right, but the buyer may have the opposite view and want to bring in their own leadership team. Moreover, the seller may end up getting rid of some of your most trusted people. Once the sale is done, you'll need to understand that you have lost control over these decisions. Accept it.
- Maintain confidentiality during the sales process. Any news of a potential sale might create problems for the ongoing business. Employees and suppliers may put pressure on you not to sell, feeling that a sale may be adverse to their interests, and they may be right. It won't be easy, especially since middle market companies develop such close relationships with employees and suppliers, but do your best not to disclose the negotiations to others.
- Try to avoid contract terms that keep the risk with you after the sale. Warranties about the condition or prospects of the business must be carefully scrutinized by the seller, as the goal of the sale is to transfer the risk to the buyer, not keep them with the seller. Any conditions that force the seller to indemnify losses that the buyer may incur after the sale should be handled with care. Look out for non-compete clauses that might limit your ability to work in the field, sometimes long into the future. In order to fully protect your interests, you'll need the help of a good, trusted lawyer who's also a tough negotiator.
The most important steps are in the preparatory phase of the sale. Getting everything ready before the sale for the due-diligence process and hiring experienced professionals (lawyers, advisors, and accountants) to protect your interests are hugely important steps. They may take a percentage of the deal, but it's worth the cost in added value and reduced headaches to you. Make sure to keep realistic expectations about your company's valuation and the negotiating process. It can take six months to a year to finalize a deal, and you should expect lots of ups and downs along the way. That's just the way it is when you decide to sell your middle market business. The biggest positive of all is when the deal is complete and you get a monetary return for all the hard work that you've put into your business over the years.
What are key factors that help determine when the time is right to sell your business? Let us know what you think by commenting below.
Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.