You can increase your “exit intelligence” and sell your business on the best terms with an understanding of these 3 key factors
As an entrepreneur and business owner, you’ve likely been honing your sales skills for a long time. From pitching investors to crafting sales strategies for your products or services, you’re undoubtedly well versed in the art of the sale.
But how confident do you feel in applying those skills when it comes to selling your business?
I’ve lost track of the number of business owners I’ve met over the years who have recounted tales of failure, regret and downright catastrophe when it came to selling and exiting their business. And these were successful, bright and experienced entrepreneurs.
The one common denominator amongst them was that they all shared the same all-too-common mistake
They didn’t know the rules (of selling their business) before they got into the game.
Selling your business is a vast and complex undertaking. The majority of business owners misjudge the importance of this – and the need to develop an in-depth understanding of the exit process before they embark upon their selling journey.
Being an expert in all matters related to your business does not translate into how to sell that same business.
Understanding the unique process of optimally selling a business is essential to your exit success. Getting it wrong can create serious negative consequences that will not only affect yourself, but also your company, your employees, your customers and suppliers.
Case in point: I once worked with a business owner whose previous investment banker (M&A advisor) had created an information memorandum (the principle marketing document) that contained FAR too much proprietary and sensitive data about his company, its clients, margins, growth strategy and so on. The advisor then seemingly sent it out to any competitor of the business who was interested to receive the document (spoiler alert: most of them expressed an interest in receiving their competitor’s playbook). One particular party engaged further in the process and was provided additional sensitive information yet again. The seller, having never sold a business before, thought this was standard practice, and as such, conceded to disclosing such information.
Turns out, the potential buyer wasn’t particularly interested in acquiring his business, but he was very interested in the competitor intel that the information memorandum revealed, and ended up using it to advance his own position in the market.
The matter ended up in court, with the seller suing the other party for damages.
Key takeaway: Getting the sales process wrong can hurt you and your business in the long run.
In order to ensure the highest probability of a successful business sale, you must first know the rules of the game so that you can confidently perform to the best of your ability — and make informed and high-quality decisions throughout — when it comes to selling your business.
There are many “rules” of the game, but getting a handle on these three will give you a solid start.
1. Understand that there are different types of buyers
Just as there are many reasons for selling your business, buyers, too, have many reasons for making an acquisition. You can divide buyers into two broad categories based on their motivations:
- Financial buyers, who are interested in the return they can generate from your business; and
- Strategic buyers, who are interested in how your company can help to advance their own, larger plans.
Financial buyers tend to look for reliable and established cash flows, high growth, low capital expenditure requirements, an established market position, and products or services in markets and industries that are growing. They’re essentially investors who may or may not know much about your industry, but who see opportunity in the short to medium term to generate cash flow and increase the value of the business before then selling on again; usually within a 5- to 7-year period. They often look to acquire undervalued companies or companies that are poised for growth.
Note that financial buyers are likely intending to profit by making changes to your company’s operations such as cutting costs, applying increased debt on the business, and leveraging their investment with an eye to selling in the future.
In contrast, strategic buyers typically already operate in your sector (or adjacent industry) and are looking to enhance their market share or capabilities by adding to their portfolio. They may be looking to enter your geographic market, acquire new customers, eliminate the competition or add new capabilities such as distribution or intellectual property. Rather than developing their existing businesses to achieve these goals, they look to strategic acquisitions.
Each type of buyer comes with advantages and disadvantages. Financial buyers, for example, will typically seek to transact at a valuation lower than what a strategic buyer would pay, but will provide the needed investment for future growth. Strategic buyers, on the other hand, are often willing to pay more upfront and may provide operating synergies that will improve your business.
Knowing the types of buyers and what motivates each, and understanding the approach they will take throughout the purchase process, is crucial for effectively positioning your company for an optimal exit.
2. Know how businesses are most effectively marketed to potential buyers
Selling a business isn’t like selling a house. There’s no central listings database or simple way to locate buyers. There’s no easy access to comparable listings or recent sales. And there’s no one playbook for your marketing plan.
But there’s no question that the way you market your business can make or break your sale’s success.
In spite of what you may have heard, selling your business is not a numbers game. Sure, the numbers are important, but more important still is your approach to marketing. A lot of the techniques used by M&A advisors around the world haven’t changed much over the last few decades – despite the fact that our lifestyles have. Our lives have become increasingly distracted in today’s ever-increasing technology-enabled world. The approaches to gain another’s attention that worked even 5 to 10 years ago are not as effective in today’s world. Everyone is communicating, but we’re not engaging. To market effectively (typically) means to engage more qualified buyers. Engaging more qualified buyers equates to inviting more interested parties to take a seat at the proverbial negotiation table.
And the surest way to ensure you receive the maximum price, best deal terms and highest probability of a successful transaction is by having multiple bidders competing for your company.
It stands to reason then, that to attract multiple competitive bidders, you need a multi-touch, multi-mode marketing strategy that includes:
- A well-researched pool of domestic and international potential buyers (many advisors have an underwhelming approach/strategy to developing investor target lists, yet without this, all other aspects of your exit strategy are largely useless)
- A customized outreach strategy in which communications are carried out via video calls, WhatsApp, mobile, email, direct messaging via social media (think: LinkedIn) and so forth;
- Marketing collateral that is not limited to pdf documents; think: multi-media documents, video interviews of founders and senior management, perhaps drone footage of your facilities, etc.;
- Professionally designed collateral to set the right first impression;
- A thoughtfully prepared and well-scripted information memorandum and presentation documents that tell a compelling story about your business and why it’s an attractive acquisition target;
- Supplemental marketing materials to be used to continually enrich discussions with investors
3. Set and manage expectations: what’s the appropriate timing for your exit?
Far too many business owners jump into the exit process without truly considering the significance of this simple question: Should I sell my business now?
Ask yourself this simple question: Could you sell your business today? Would you be in a position to respond to a potential buyer if they were to make an unsolicited bid to acquire your business tomorrow? Could you engage in the rigorous due diligence process that a buyer is certain to undertake as part of their process to acquire your company?
For most entrepreneurs, the answer is “no” — for many reasons.
Understanding the various aspects that buyers and their external due diligence specialists will examine and scrutinize within your business often comes as a surprise to many sellers. This data request list can be extensive as buyers examine the seller’s company financial, commercial, legal, regulatory, HR, IT and other due diligence workstreams to develop a thorough understanding of exactly what they will be buying in this transaction.
But you need to be aware of this requirement and to take any reasonable measures you can to ensure that by time your M&A advisor begins engaging with investors, your company is ready. Don’t assume that your M&A advisor is going to prepare your business on all fronts for it eventual sale. They won’t. Much of the initial work needs to be carried out by you. But you need to understand the scope of these requirements and get started early on in the process to ensure a well-prepared starting point is arrived at.
First impressions count—not only toward establishing credibility that your business is an attractive acquisition target – but also in setting the favorable first impression that it is a valuable company.
For some, preparing the business for an exit might only take a month. For others, it could take years. What are some of the areas required to be addressed when preparing your business for an exit? The following abbreviated list will give you a sense of what to expect:
- A business plan that articulates your growth strategy
- Audited financials for last 3 years
- A succession plan
- A list of specific concerns and plans to resolve them
- An understanding of your strengths and weaknesses
- Additional value drivers that will make your company desirable
The better you understand how the exit process works, the greater your overall exit intelligence (and confidence) will become. This translates into your ability to make quality decisions throughout the process of selling your business—higher quality decision-making leads to enhanced probability of an overall successful exit. As the saying goes, fortune favors those who are prepared.