Selling a Business? 5 Basic Requirements

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Selling a Business: 5 Basic Requirements

Selling a business?

If you’re a business owner, even if you’re not selling now, you will eventually.

RetiredI’ve written previously about the Silver Tsunami, a term coined about 10 years ago to describe the number of baby boomers that are retiring every day in the United States alone. This is significant for business brokers as well as business owners.

Those retirees collectively own and operate approximately 3.5 million businesses. If projections are even remotely accurate, there will be more than three million businesses sold, closed, or transitioned to family members in the next two decades by these retiring Baby Boomers.

The significance for business brokers should be obvious; a “tsunami” of business is headed our way. The significance to business owners should be equally apparent; with so many businesses projected to come to market, owners have to properly prepare theirs to look attractive to buyers.

The sale of a business is most likely to be the most significant financial event in the business owner’s life. It can also be the most challenging and stressful.

Selling a business is a complex balancing act. It requires preparing the business for sale, managing the transaction process and assembling and managing advisors all while keeping the business running smoothly and growing. The effort can be overwhelming. But it doesn’t have to be.

Here are five things business owners and their brokers should consider as they plan for the sale. Paying attention to these individual aspects will go a long way to making the process less stressful and the outcome more satisfying.

1. Assemble a team of qualified advisers. The process of selling a business can be stress inducing, and both the process usually takes longer than the seller would have anticipated. But if the business owner assembles the right talent to assist in the process, the experience will be immeasurably less painful. The talent that makes up a given team is likely different from one business to the next, from person to person and from industry to industry but the general categories of talent include the seller’s accountant, a financial planner or wealth manager, a transaction attorney (not your divorce lawyer!) and a professional business broker and M&A specialist.

The size of the business being sold will dictate the types and specialties required. Indeed, many Main Street and lower Middle Market business transfers can be done with local advisors but as the business transaction gets larger and more complex, specialists – including investment bankers – may be more appropriate. The key is that the seller is comfortable with the people handling all aspects of the deal and is able to trust that they have the seller’s best interest at heart.

The right team of experienced talent, trusted by the business owners, can guide the owner through the process of thinking about what’s to come and what the best outcome of the transition would be. Sellers may find – through a thoughtful approach to the largest transaction in their life – that price may not be the only way to maximize value for their situation.

3. Prepare for buyer requirements. And speaking of buyer grilling, a buyer will want to know everything about a business that it plans to acquire. If there are skeletons in the closet, a seller can bet that the buyer will open that closet eventually. It’s a MUCH better strategy to get those skeletons out in the open voluntarily rather than have the buyer discover them.

The inquisition that I mentioned above is the time to get all the bad news on the table as well as the good. This allows your advisors to get that bad news out before a buyer discovers it. The idea is to get ahead of the bad news. The sooner it’s out in the open, the sooner the parties can move on to the positive stuff.

The information you can count on being requested – by buyers AND advisors – include three to five years of financial statements and tax returns; customer and supplier histories and contracts; industry trends and growth outlook; legal exposure and more. Having all of this stuff ready will help eliminate delays and reduce the number of red flags for buyers. If something unpleasant pops up at the 11th hour, a deal can be derailed in an instant after many months of hard work.

We suggest to many of our clients that a virtual data room be set up, the use of which will make the process significantly more efficient. Besides, we find that a seller having set up such a process, gives a buyer faith that the seller is both ready and committed to completing a deal.

4. Learn what kind of M&A activity is happening in the industry. A seller’s knowledge about the state of the industry they’re in is generally deeper and more precise than that of any of the seller’s advisors. Professional business brokers and M&A specialists understand how both valuations are trending and, more generally, what types of businesses or what industries are in greater or lesser demand from time to time but it would not be reasonable to expect professionals in other lines of work to have a deep understanding of any specific industry other than their own. The seller’s “insider” industry knowledge – and their ability to communicate that knowledge to their advisors – is extremely important to achieving a successful result.

It’s hard to overstate the importance of the right team of advisors. Professional business brokers and M&A specialists are in the marketplace, working on deals every day. Because their work usually involves other such professionals, they understand what buyers are looking for as market conditions and political climates change. Understanding the overall “market” allows professional intermediaries to advise sellers with the seller’s objectives in mind to maximize valuation.

But to do so successfully, the value and importance of the seller’s “inside the industry” knowledge cannot be overstated.

5. Be patient – and stay focused on building your business. Selling a business takes time – which, in turn, requires patience. It also requires specialists; professionals that have experience with the process; who know the ins and outs of deal flow and structure.

Without the help of a professional business broker to manage the process and eventually close the deal, a seller will quickly become overwhelmed.

Sellers should look at their calendar for the last six months or a year and them ask themselves ’s if they would have been able to schedule the time to handle dozens of buyer inquiries, phone calls and meetings. What about the guaranteed tidal wave of incoming emails requesting countless documents and asking dozens of follow-up questions? And what are the chances that the seller will be able to keep all this new traffic from sparking rumors throughout the company that something’s afoot?

Selling a business while still working in the business is disruptive to operations. Failing to minimize disruption will almost always hurt the business which has the potential of damaging both the business and any potential sale – to say nothing of impacting the business’ valuation.

Rely on a team of qualified, professional advisers for the preparation and execution of the deal. Doing so allows owners to stay focused on growing the company.

The Bottom Line

I’ve waxed long and often about the importance of professional advisors in the sale of a business. Yes, an owner with a small coffee shop doing $125,000 in annual revenue would rightly believe that the above advice is a bit of overkill and that a simple ad in the paper or a conversation with a long-time customer who has occasionally mentioned how envious they are about the “freedom” a small business owner has would be a reasonable way to sell that shop. No argument there.

But for any business that has been built over years – or decades – and is even marginally more complex than that coffee shop, professional advisors are a must if the seller wants a successful sale. If you’re a business broker, you should be explaining this to pretty much every person you come into contact with.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week!

Joe

#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com

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