The process of selling a business can be drawn out and involved. Once a buyer is located, the sale procedure can take anywhere between three and six months after the company has been ready for sale for up to twelve months. Have a team of advisors in place who are knowledgeable about mergers and acquisitions, such as an attorney and accountant (M&A). You can get assistance from your advisory team as you navigate these 10 steps to selling your business. The steps are discussed in full below.
Determine the owner’s objectives and potential departure plans
A business owner has a wide range of transaction options when thinking about selling their company. The owners and board of directors should be aware of these possibilities as they may have an impact on the purchase price. However, in the lower middle market, the company’s preferred buyer is frequently determined by the owner’s objectives. Employee buyers, financial buyers, and strategic buyers are the three main categories of purchasers.
Establish a value range
A crucial step in the selling process is determining a reasonable valuation range. In order for the buyer and seller to have equal expectations regarding the business’s worth, owners should have a reasonable valuation. The M&A counsel’s role is to assist the parties in reaching an agreement, but even the most skilled advisor might not be able to close a wide gap. The worth of a firm can be determined using various methods. Before putting their business on the market for sale, sellers may hire valuation specialists to assist them in valuing the company. A robust buyer pool will also assist a seller in knowing how the market values the firm, even though the valuation gives the seller a platform for understanding the company’s worth. Finally, a seller can use common multiples of earnings to determine the company’s market worth. In the end, the market’s potential consumers decide the price based on the product’s quality and business presentation and negotiation of buyers.
Increasing value before the sale
A company’s strategic strategy, growth prospects, and financial state are frequently reviewed by M&A advisors, who then offer advice to the shareholders and board of directors on how to enhance the company’s performance over the next 6 to 12 months. The consultant might advise things like narrowing the consumer focus, concentrating on key competencies, streamlining procedures, and cutting costs. Working with an experienced M&A advisor who is aware of the business and has appropriate transactional knowledge can be highly beneficial during the sale process.
Compile financial data and present financial information
An important part of the sale process is taking the time to accurately assess and explain a company’s financial and economic history and future prospects. The M&A advisor frequently helps sellers to recast financials because business owners typically produce their financial statements for tax purposes rather than for business sale purposes. This gives potential purchasers a clear picture of the company’s earning potential. The way that a firm presents its earnings power can have a significant impact on how prospective customers view and assess the organization.
Pick your buyers
Companies in the lower and intermediate markets frequently have a sizable pool of prospective customers. Typically, businesses don’t seek out potential customers on their own. In order to find the biggest and most suitable purchasers, the company’s advisers and the business owner must have the necessary resources and tools. Your M&A counsel should investigate potential partners and investors as well as strategic purchasers, private equity firms with relevant experience, and rivals. Even though it takes the most time, this step is necessary for a successful deal. How can you receive the greatest price and terms for your business if you don’t seek the top buyers?
Letter of intent transaction documents and expressions of interest
The IOI (“Indication of Interest”), LOI (“Letter of Intent”), and Purchase Agreement are typically the three agreements used by purchasers to convey interest in a firm at different stages. The IOI offers the proposed terms, valuation, and structure for a transaction and is not legally enforceable. Based on the IOI, the owner will decide whether or not to proceed with a buyer. Letters of intent are more significant indications of the buyer’s interest. The LOI outlines the conditions of the transaction and often grants the buyer an exclusive window of time to assess the business. The buyer needs to decide fast during the exclusivity period if they want to proceed with the transaction. The acquisition agreement and other transactional documents (employment agreements, non-compete agreements, etc.) must also be created at the same time to clarify all the specifics of the transaction, including its legal, financial, representational, and warranty aspects. The definitive document stating the details of the sale is the purchase agreement.
Business transition phase
The collaboration phase of the transition period often involves the seller helping the buyer transition to the firm. The transition of the financial and accounting functions, a deeper understanding of the operations, and the transition of other proprietary information and trade secrets necessary to run the business optimally are typical examples of this.
