Mergers & Acquisitions

What to expect when selling your business

For many entrepreneurs, the prospect of selling their business can be a daunting proposition. Building a business takes years of dedication, determination, and energy. While deciding to sell your business is never a simple process, the rewards of a successful exit can be life-changing and prosperous.

Understanding the process and having good relationships in place prior to setting an exit strategy will ultimately lead to a smoother transaction — and a higher sale price.

Many of the qualities that make an entrepreneur successful in building a company will benefit them in the sale of their business. In this article, we take a closer look at which are the most important to consider.

Preparing to sell your business

An acquisition is a process that can take many months from the minute you decide to sell until the funds are actually wired. It’s critical to put together a plan to prioritize goals and outline the ideal outcomes of the liquidity event.

Two crucial questions you should ask yourself before selling your business are:

  • whether to sell to a strategic buyer or a financial buyer, and
  • whether or not you would want to stay with the company once it’s under new ownership.

Make sure to surround yourself with a team of trusted experts and advisors that have experience completing transactions in your industry. You’ll want to put together a deal team comprised of a lawyer, an accountant, and an M&A advisor or investment banker. These professionals are critical in gathering the data required to place a proper value on your business, and in organizing financial statements requested by the buyer during the due diligence phase of negotiations.

The sale

It’s imperative that you operate your business efficiently during the exit process. The ultimate sale price of a business can decrease if revenues decline during due diligence. An M&A transaction tends to occupy large chunks of time and attention so it’s crucial to maintain your businesses current performance (or improve it) during negotiations.

Carefully consider who within the company needs to know about the sale, and only disclose it to a limited number of parties as to avoid anxiety or concern amongst your employees and/or customers.

Once your deal team or advisor has identified a prospective buyer, non-disclosure agreements (NDAs) will be exchanged. If the buyer is interested, they will issue a letter of intent (LOI), which is a non binding offer that outlines the major terms of the agreement. As a general rule of thumb, the more thorough and and specific you can be in the early stages of the deal, the better.

A crucial decision at this point is whether to structure the deal as a stock sale or an asset sale. Sellers tend to favor a cash or stock sales as they obtain clear, long-term capital gains treatments. The pros and cons of each structure varies based on the type and size of business, which is yet another reason why it is important to hire an experienced M&A advisor to help run the process.

Finally, it is essential to address in advance how the business will be transitioned to its new owners.

After the sale

Usually, involvement in a business does not conclude when the sale is complete. More often than not the buyer will offer lucrative contracts to the owners as well as key executives to help stay on and transition the business. Depending on the terms of the agreement, incentive payments known as earnouts may be included, which are contingent on the performance of the business.

Upon fully exiting the company, entrepreneurs can expect to have the mixed emotions of excitement and achievement, coupled with sadness and loss. The emotional fallout associated with the sale of a company is real. Similarly to raising children, entrepreneurs pour their heart, soul, and energy into growing a business that can succeed on its own. Once the business is fully under new ownership, the most important thing left of its former owner is his or her legacy. At that point take a few months off to rest and relax — at which point you’ll probably be ready to hit the ground running on your next venture.

Category: Mergers & Acquisitions

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About the Author: Jordan Spivack

Jordan Spivack is a manager at Axial, the online network that connects CEOs to capital and acquisition opportunities. His group is dedicated solely to the owners and operators of private middle-market companies. On a daily basis, Jordan work…

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