As a former private equity investor, and on behalf of my investors and myself, I have been involved in the purchase and sale of more than a dozen companies over the course of my career. While acquiring a company often comes with a certain set of challenges, I’ve found that preparing your company for sale is often the more difficult task.
Through my experience, I learned a host of lessons (the hard way) about what to, and what not to do, when it comes to preparing your business for sale. I have distilled down my experiences into five primary lessons.
1. Ask These Ten Questions First
Asking yourself the following set of questions can go a long way surfacing any potential issue in the decision to move forward with the sale of a business. Being honest when answering these questions first is the only sure-fire way to save yourself from heartache and expense down the road.
- Is my business ready to sell? Am I really ready to sell?
- Can the business thrive without a key customer, supplier, or employee?
- Is it the right time in my industry to sell?
- Do I have real management in place or am I the heart of the business?
- What are the deal breakers for me to consider not selling?
- Can the business adapt to foreseeable technology changes on the horizon?
- What are my valuation expectations?
- Who should be on my deal team—do I have a trusted advisor, accountant, lawyer?
- Would I be willing to stay on or keep equity in the business if the buyer wanted me to?
- Are there competitors that would likely be interested and would I entertain them?
Not fully preparing to address these answers upfront, before making a final decision to sell, will almost guarantee a rough sale process at best and a failed sale process at worst.
2. Accept That There’s Never a Right Time to Sell – Personally, I Like Selling Sooner
Across industries, spanning thousands of transactions, I recall reading less than a handful of stories about truly immaculate transactions such as “we closed the deal on Sept 10, 2001” or “we cleared escrow on February 1, 2000.” In fact, in my experience, there is never a perfect time to sell and trying to market-time your exit from your business is never wise. The reason is that most of what is around the corner is unknown. For every industry and specific business there are as many reasons to wait to exit as there are to sell. Personally, I have always sold “too soon,” leaving some possible upside-money on the table, but I’ve never regretted it. Nevertheless, here are a few factors to consider in the timing of your sale decision:
- Strategic players in your industry, perhaps currently on the prowl, could turn cold to your deal later if they subsequently gorge themselves and you come to market late.
- Stock market/IPO windows open and close quite often and quite quickly. While this may not affect your business directly, these conditions can radically affect the appetite of public buyers for your business, debt lenders to your deal, private equity funds, and even the advisors that may otherwise want to represent you in a sale process.
- Economic windows open and close quickly too. In mid-2008, I remember thinking that we should wait another six months before selling a particular business of ours. Low and behold, that six-month decision ended up costing us two more years of hold time.
- Political/Geopolitical considerations. Ten years ago this would never have entered my thinking as a consideration for a standalone business in its exit decision process. However, today, our hyper-connected world and hyper-connected consumer base make virtually all business much more sensitive to both domestic and international events that now can ripple through our populace and its legion of iPhones in a matter of minutes.
- Technology Advancements are accelerating at a pace that has become more parabolic than the growth trajectory previously relied upon under Moore’s Law. The venerable Yellow Taxi of San Francisco, considered an unassailable business with a dominant market share, filed for bankruptcy within two years of Uber entering their market. Artificial intelligence, self-driving cars, and the acceptance of distributed workforces globally are all dramatically changing how we do and will do business going forward. These are powerful catalysts for change that will impact countless industries, perhaps your as well.
3. Bring in Outside (Independent) Experts to Assess the Company and Provide Unbiased Improvement Recommendations Before Making the Decision to Sell
You need an outsider’s eye to find and assess your company’s blind spots. Every business has them. Independent outside experts (those not invested in representing you for sale) are better suited to identifying pre-sale problem areas that should be shored up or otherwise addressed before a sale process is undertaken. Most owners are too close to their businesses to see what needs to be fixed. Sacred cow business lines, nepotism, antiquated systems, and misaligned growth strategies are just a few examples of the types of issues often ignored by companies and which can materially affect the future prospects of a business.
A company that rushes too quickly to market before making sure their blind spots are identified and addressed can risk the following setbacks:
- Lower Valuations–More problems = lower value.
- Failed Sale Process–A failed sale process can taint the market to your company for some time. In my own experience, I’ve always looked with a jaundiced eye at companies that had previously failed to sell and generally steered clear.
- Burn-Out of Management—Sale processes will take up a fair amount of your management team’s time and energy. Running them through a process twice can be really tough on them and the business.
4. Be Honest With Yourself About the Markets in Which You Play and Be Ready to Act
More than once, I found myself owning companies with pristine operations, clean financials, and sterling management teams. However, they were colored by the markets in which they played. These are the circumstances where owners must practice “radical acceptance.” They must recognize the industry that they are in, as such the universe of buyers may be limited, valuations may be somewhat lower, and they have to adjust their thinking accordingly. While the choices may be few, they are certainly clear. Have your independent outside advisor help you prepare strategic plans to either change your lines of business, diversify your end-markets, acquire your way to diversification, or accept your fate. A few examples of these market-type situations are:
- Saturated Markets—too many players with too few customers
- 800 Lb Gorilla Markets—90% of the market controlled by a handful of players
- Commodity Markets—low margin, ubiquitous products offered without differentiation
- Government Controlled Markets—defense contractors
5. If You Decide to Go to Market, Be Flexible.
It never ceases to amaze me how often owners change their personalities once they make the decision to sell. It’s as though they have already spent the money from the sale before the deal is even done. Humility often morphs to hubris, negotiations change from friendly to hostile, and deals get bogged down in minor disputes. Believe me when I tell you that a transaction that gets you 70%-90% of what you want is often better than holding out for 100% down the line. The stubbornness that often makes entrepreneurs successful is often their undoing in a sale process. Going to market a second time is often a big killer of value. The key lessons here are:
- Acquiesce Deal Leadership–Let your advisors take the lead once a deal gets underway.
- Know the “Three Death” Rule–Know that most sale transactions face at least three seemingly insurmountable hurdles before they ultimately get consummated. I don’t know why this is true but it continues to hold up as a golden rule over time.
- Compromise—A deal where no one is happy is likely a really good (and durable) transaction.
In conclusion, selling your company is a major decision. An owner should not let him or herself be talked into it before having an outside assessment completed, assuring their holes are patched, and having the team well prepared for the sale process. Being open-minded about the type of business you actually have (vs. what you think you have), the valuation it will realistically command, and the time and conditions required to close a deal will go a long way to getting most (if not all) of what you want. As I said previously, a transaction that gets you 70%-90% of what you want is often a better outcome than holding out for 100%.
What Investors Really Want
Business valuation is a complex process, but that doesn’t mean you can’t influence the outcome. From the team at TCRH comes a behind-the-scenes guide to valuation.