The process of selling a private company involves many variables — too many to consider in just one article — but there are frequent culprits that tend to elongate the process unnecessarily. No matter the size or industry of a business, every exiting executive will need to assemble a deal team, gather documentation, assess the timing of the transaction, build a buyer list, and, of course, execute the sale.
Below is a look at major pitfalls that might arise at each of these steps, how those pitfalls add time, and how smart executives plan years in advance to avoid them.
Assembling a deal team
Taking the right first step when selling a business will go a long way in determining the final valuation and sale price of the business. Almost always, that first step is hiring a business intermediary and an Accountant.
A deal team can provide enormous support before, during, and after the sale. For executives looking to maximize that value, a business intermediary can help sellers obtain a better price for their business than the seller would get on his own. If the sale price isn’t the main priority for the business owner, a business intermediary can also help them choose the right buyer or partner..
If a business owner waits until he is ready to retire to find a business intermediary, it could easily add 6-8 months to the sale process. A business owner needs to find the right partner, educate them about their business, and develop mutual trust.
CEOs that wait to find a business intermediary until they’re ready to sell risk missing out on the right opportunity due to timing or settling for subpar representation. Beginning a sale process without a business intermediary is an easy way to add 6-8 months to the process.
Already having important documents and information in place is critical to a successful exit — but it takes time to create. Business owners that overlook the process will see it reflected in the final offer.
Business owner should be prepared to bare all, referring to the moment when a they decide to sell the company. This includes customer lists, supplier lists, competitor lists, organizational charts, strengths and weaknesses assessments, intellectual property, trade secrets, and other items are all likely to be required documents, on top of three year’s worth of monthly financials.
For most business intermediaries, all of this information is required before entering into an official sell-side engagement. As a result, the CEO who lacks the proper documentation must factor in the time necessary to build and verify each file. This can very quickly add months to a sale process. If you have not been organized to date it can be extremely costly — in both time and manpower — to resurface all of the old documentation.
The arrival of an offer, circumstances surrounding owners, the financial health of the business, and market cyclicality all combine to impact each company executive’s definition of “the right time to sell.” Unfortunately, maximizing profitability while simultaneously catching the market at a valuation-peak is a nearly impossible feat.
Jeremy Hovater, at Sunset Business Advisors, helps his clients extract maximum monetary and nonmonetary value through transactions by optimizing the timing of the deal. Hovater always evaluates a business before taking it on as a client, and oftentimes that evaluation leads him to the conclusion that the timing for a deal is not right. This can be for multiple reasons such as the following:
1. Declining profits
2. Too much dependence on the business owner
3. Growing too fast
4. Current market conditions
5. Not enough years in business
Taking the time to allow the market to mature or to implement operational changes can ultimately lead to a higher sale price. According to Hovater, this period of adjustments and maturation can last up to 2 years.
Building a buyer list
After his evaluation period, Hovater typically tells his clients, “Here is where you are today. If we do these things, and put them in front of these guys, we’ll maximize returns.”
As Hovater illustrates, the effort to optimize timing often coincides with the effort to optimize the buyer list. Executives want to negotiate with buyers who will deliver the outcome they want for their business post-transaction, both financially and operationally. In addition, incorporating potential buyers in industries with generous valuations, like technology, can create a more competitive bidding environment later on.
Covering every potential buyer adds time, as does eliminating them slowly. Getting into substantial discussions with a buyer who turns out to be the wrong fit is even worse. To expedite the building of a buyer list, both CEO and business intermediary need a clear sense of what factors will drive the deal’s value for the sellers and their stakeholders.
Executing the sale
By the time a company is actually being marketed for sale, dozens of hurdles have already been cleared. But, of course, nothing is finalized until final agreements have been signed. There are a number of factors that will affect how long it takes to sign a deal with a buyer.
Perhaps the most important factor throughout the marketing process is the performance of the company. During the due diligence process, buyers will be given financial projections for the business and will monitor those closely throughout their subsequent evaluations. For a CEO who wants to expedite negotiations with a buyer, Hovater notes, one of the best ways for him to do so is to drive his business to exceed the provided projections. Buyers will then move quickly to get a deal done, rather than pay a premium for better performance. Conversely, CEOs who take their eye off the ball and allow a company to falter as it’s being sold incentivize buyers to move slowly. Buyers will wait to drive the price down, if not kill the deal outright.
Negotiations of final terms are often also liable to drag on. This is especially true in cases where multiple shareholders participate in the exit. When evaluating buyers, terms, and conditions, building consensus among all stakeholders is necessary to ensuring efficient negotiations.
Naturally, getting cold feet at this stage in the game is detrimental. Backing out of a deal once it is set in motion will not only irreparably damage the relationship with that buyer, but it will also send negative market signals likely to affect an executive’s ability to sell later. Be certain that the time is right to sell your business before deciding to do so.
The process of selling a company is analogous to running a marathon. Every marathon is 26.2 miles long. The runners who have spent time training for it can expect to complete the race in a matter of hours, while those who begin unprepared are going to take far longer to cross the finish line, assuming they ever do.
Prepared CEOs keep their companies in good shape by building relationships with business intermediaries well in advance of an expected sale. This ensures that they have proper documentation in hand, that their company’s performance is peaking with the market, that they know which buyers to target, and that the execution of the deal flows smoothly.
To the contrary, those who avoid preparing the company for an expected sale oftentimes cause the deal process to delay for months if not causing the deal to never happen.