If you want to sell your company, maybe we can offer some advice on how to give you more upside and limit the downside. We’ve put together this guide for you as a preliminary step on this journey to crafting an exit strategy. This how-to guide on your business sale will assist you by forcing you to ask yourself some critical questions. We can help you with the work of maximising the business valuation of your firm too.

The process of selling your business is both thrilling and challenging. It is typically considered the culmination of many years of hard work. Let us help you learn the principles for creating strategic value in a sale. Income follows business assets. What is your unique intellectual property? Possibly, what is your hidden business asset that you can use to create a higher than industry multiple for your company, netting you the best price?

A plan to exit the business is often why a CEO or business owner calls us. We are a business coaching firm focused on tech, and at any time, one or more of our clients will be in or near a sale process.

9 Questions to ask yourself before you start selling your business

 

Apart from the obvious ‘what would happen if I sell my company?’ There are some other important questions that you must consider before embarking on a journey to sell your business to potential buyers.

 

1. Why sell your business?

 

Selling your business starts with identifying why this is the right course of action. What are your circumstances? Greg Crabtree, the author of ‘Simple Numbers’, told me he believes any owner of a privately held company will be getting 50% to 100% return on their invested capital. In many cases, owners sell with little thought for what they will do next to continue to create future cash flows. Nigel Bennett, the author of ‘Take That Leap’, told me he was delighted the sale of his company fell through, and he didn’t have to sell t-shirts on the beach to fill his days. What do you plan to do with your time? Chris Budd explained to me the tax implications of selling your business to your employees as a way to create personal value and leave a legacy.

Clients who have exited in the past few years have had many reasons. One owner enjoys building more than scaling, so he sold to allow him to build again. One team wished to take money off the table, de-risk, and continue to grow as part of something larger. One believed that the time was right, and the amount was life-changing for him and his family. Lastly, a team had created a services business by accident, and selling allowed them to invest in the software firm that was their real passion.

 

2. When will be the best time to sell?

 

Preparing for the sale at least a year, possibly two years in advance, is critical, as it gives you time to show rising profits and a proven track record behind your investment thesis.

Ask any business brokers or a firm of professional advisors, and they will advise clients NOW is the best time to sell your business. They are selling businesses and only earn fees from an asset sale. So they would, wouldn’t they?

If you have created a great or even a good business with a clear track record and strategic value, then any time will be an excellent time to attract buyers. Often preparing thoroughly and taking your time will have the most significant impact on the eventual sale price.

 

3. How much is my business worth?

 

Determine the value of your business to you and potential buyers to set the asking price appropriately. Will prospective buyers value your business based upon tangible assets or future earnings? Consider hiring a corporate finance advisory firm or a business broker. They can tell you, amongst other things, the impact of the management team on valuation and the KPIs you should be looking at before selling your company

On Mind Your F**king Business podcast I host, I have sort advice from two tech firm advisors. Daniel Havercroft is a partner at Oakley Advisory, one of Europe’s leading independent corporate finance firms. He and I spoke about how best to achieve maximum value from your life’s work.

When it comes to selling your business, you want to drive your business valuation and be able to look at your business from the eyes of the prospective buyer rather than through your own eyes. To extract maximum value from the sale, you will probably need to change some aspects of your business. Daniel shares with us what those changes should be. We discuss scale, growth rate, recurring revenue and profitability.

 

4. Do I need a business broker?

 

Decide whether you would use an advisor or negotiate the sale to a potential buyer yourself. I chatted with John Ratliff, CEO of Scaling Up Coaches and founder of Appletree Answers, a telephone answering service he built from his apartment in 1995. He grew to $30 million before exiting in 2012 to well over market value. He believes anyone selling a business should get professional advice. However, they should ensure that the due diligence process will not reduce the sales price if they don’t.

I also spoke with Arrowpoint Advisory MD Daniel Domberger. Much of the work that Daniel and his team at Arrowpoint Advisory – a division of the investment bank Rothschild and Co. – do is to help entrepreneurs, owners, and managers sell companies or raise investment for them.

Entrepreneurs love exploring new avenues and conquering new challenges, and for a lot of them, they look at M&A as the next thing they want to learn how to do. But, says Daniel, do you think learning a variety of rarefied semi financial terms, i.e. M&A jargon so that you can be proficient in the art of discussion and negotiation, is this the best use of your time and energy? Daniel believes there is value in leaving the deal structure to the experts.

 

5. How will my business look to prospective buyers during the buyer due diligence process?

 

Organise your financial records dating back a few years and go through mock due diligence with a firm of accountants to identify red flags early enough that you have time to fix them.

Daniel Domberger says, “If you commissioned the due diligence on your own business before you go to market, that enables you to close a deal much, much faster than if you are waiting for the buyer or the investor to do the due diligence at their own pace, and at their own expense during the period of exclusivity.” This is important as time kills deals.

Where it’s good to get a head start on due diligence, advises Daniel, if you’re in the tech space and you need to look at your licensing terms, particularly your use of open source components. If you’re doing anything consumer-facing, ensure your data handling T&Cs are right.

 

6. How do I find a potential buyer?

 

 

Finding the right buyer is a huge undertaking that could stretch out several years. Identifying a shortlist of interested parties is the first step. Once a prospective buyer is located, a series of buyer due diligence steps must be taken to keep the selling process moving.

A business broker or corporate finance advisory firm can help locate potential buyers. They typically fall into trade or private equity (PE) camps. You have likely sold more houses than companies. Remember, the firm ‘promising’ to get you the highest price is not always the right option. Time and again, I have seen selections based only on business sale price not leading to the best outcome for the entrepreneur or business owner.

If your business broker can create demand from potential buyers, then an auction process may significantly drive up the sales price.

 

7. How do I stop my business performance from taking a dip during the sales process?

 

Prepare for this process to be all-consuming, and the negative impact it can have on your business as you go through the process can potentially be enormous.

Don’t tell anyone you are selling or thinking of selling your business. This will help keep the distractions contained. I know it’s potentially exhilarating, but employees, suppliers and customers can all find news of an impending sale process unnerving. Often the process doesn’t complete, and you can’t untell people.

Once you get to the due diligence stage, you will need to include some of your team, but fewer in the know are better for as long as you can manage.

 

8. Are you selling your business to trade or private equity (PE)?

 

Trade or private equity; these two types of potential buyers will value your business differently.

For PE firms the rule of 40 could apply. This is a measure from the tech sector to identify small high growth firms showing elite performance and attaining high valuations. The metric handily captures the core trade-off between investing in longer-term growth and short term profitability. It is calculated by simply determining if the annual revenue growth rate plus profit margin are equal to 40 or greater. Typically the measure of profit used is earnings before interest, taxes, depreciation and amortisation (EBITDA). In some circumstances, free cash flow or net profit will be a more useful measure than EBITDA. This explains why firms with little profit but rapid growth still command high multiples.

 

9. Do you intend to stay with your firm after the business sale?

 

Did you intend to stay with your firm after the business sale? This will impact the role you play in the company and the management team you will need to build. This is often why the process can take two years or more. The owner needs to have no day to day involvement in running the business, or the new owner will want you to be part of the transaction seeing you as a business asset.

When the owner is part of the deal, about 30% of them make it to the final earn-out payment. The rest are frustrated, demoralised or disenfranchised and leave.