The Art of the Deal:
How to Sell Your Business
By Mark W. Sheffert and Kenneth W. Hager
April 1999
If you are like most business owners, you’ve put a lot of sweat equity into building a
successful business with the goal of eventually selling your company to achieve personal
liquidity for retirement or the pursuit of another dream. As the time to sell approaches,
an understanding of the sale process could reduce anxiety and allow you to maximize
shareholder value. Generally the sale process includes valuing your business, identifying
and marketing to potential buyers, negotiating and preparing documentation, conducting
due diligence, and closing.
Selling a business, however, is not an easy task, emotionally or mechanically.
Before you put your business up for sale, do some serious soul-searching. Assess your
future personal and financial needs and goals. Also, consider the effects of a sale on
your company and its employees.
Contemplate whether you have the time and skills to sell your business yourself,
or if you should hire an investment banker. If your days are consumed with managing
your business or you don’t have strong legal and financial skills, you probably don’t
want to go it alone. Although an investment banker will charge fees, their experience,
contacts and negotiating skills should result in a higher price for your company than
you would get if you tried to sell it yourself. At the very least, be sure to have an
experienced attorney and accountant involved early on.
The decision to sell your company should be made well in advance of the time
you actually put your company up for sale. This will give you adequate time to position
your company for a successful sale. At a minimum, make sure your business plan has
clearly defined strategies, measurable goals and a detailed organizational structure. In
addition, make sure your financial statements are in order and you have realistic budgets
and forecasts of future revenues and profits.
Determining the value of your business is one of the first steps in the sale process.
It is important to establish a price at which you would be willing to sell your business.
A great deal of time and money can be wasted if the sale process is undertaken with an
unrealistic price expectation. To set a realistic price, it is a good idea to have an outside
party – your investment banker or other valuation advisor – conduct a valuation of your
business.
As much as people would like one universal formula for valuing a business, various
methods are used. "Value" means different things to different people, and valuing a
business, to a great extent, is a subjective process. The three most commonly used
methods for valuing a company for sale include the following:
Discounted Cash Flow: This method establishes a valuation of a business
based on the value of its future earnings potential. The four primary components
of this valuation technique, which can effect the result, include the projected cash
flow forecast, reinvestment rate, terminal value and discount rate. Obviously, the
usefulness of this technique depends on the extent to which the underlying
assumptions are appropriate.
Comparable Transaction Analysis: Often the valuation of a business can be
based on other sale transactions consummated within your industry. The overall
objective of this approach is to identify some pricing relationships: ideally,
price/earnings ratios, revenue multiplies, cash flow multiples or market/book
value premiums for completed transactions and apply them to determine a
company’s value.
Comparable Companies Analysis: This valuation method assesses the value
of a business based on the market price of publicly traded companies subject to
similar economic trends and risks. Like the comparable transaction analysis, this
method identifies certain pricing relationships and then applies them to determine
a company’s value.
These methods quantify the extrinsic value of your company, but don’t always
account for the intangibles that can add to its intrinsic value. Intrinsic value is often
difficult to capture and tough to price. As you or your investment banker approach
potential buyers, be sure to communicate effectively about the unique characteristics of
your business that add to its overall value, such as a dynamic corporate culture, a strong
management team, or a unique market niche.
Thinking through the implications of a sale and establishing a realistic price
expectation will help you determine the type of buyer you should pursue to best meet
your objectives. Buyers basically fall into two categories: strategic and financial. Strategic buyers are typically looking for businesses with synergies that will accelerate
their own growth. For example, a strategic buyer may be a business in your industry that
needs your direct sales force or engineering capabilities. Strategic buyers will probably
offer a premium price for your company, and will most likely change your company’s
operations to maximize the synergies between the businesses.
Financial buyers are investment groups that are primarily motivated by
investment return. Since their investment return expectations are normally high, they
tend to look at many potential transactions before investing and generally don’t pay
premium prices. Typically, financial buyers will leave the company’s operations intact
after a purchase, with plans to sell the business in the future to realize their investment
return.
Regardless of the type of buyer sought, after identification it is important to
evaluate and qualify each potential buyer. Valuable time and opportunities can be lost if
potential buyers are not qualified early on.
Once qualified buyers have been identified, the next step in the sale process is to
market your company to them. A comprehensive marketing plan and thorough buyer
solicitation will typically result in the highest price for your company.
Companies are typically marketed by use of a Confidential Information
Memorandum. This memorandum should place the company in its best possible light
and provide prospective buyers with comprehensive information about the company. A well-prepared Confidential Information Memorandum allows a potential buyer to
more timely assess its level of interest and streamlines the due diligence review process.
Orchestrating the marketing process according to an established schedule and
qualifying potential buyers are important to a timely and successful sale. Your chances
of receiving the maximum price possible for your company are greatly enhanced if you
can create an atmosphere of competition among qualified potential buyers through an"auction" process.
Negotiations will culminate in the selection of a buyer, and the transaction terms
should be detailed in a formal Letter of Intent. This is where experience and negotiating
skills will pay off. Typically at this phase, the seller is expected to discontinue discussions
with other prospective buyers even though the selected buyer is not contractually
committed to buy your company. Therefore, it is important to examine all the difficult
issues up front before you dismiss the other potential buyers.
The selected buyer, in cooperation with the seller and the respective teams of
professionals (investment bankers, attorneys and accountants), then proceeds with the
due diligence review process. During this same time, the parties will negotiate and enter
into definitive transaction documentation. This process is time consuming and
distracting for business owners and their employees, and can take more than six weeks
to complete. Thorough preparation early on and a well-crafted Confidential
Information Memorandum can greatly facilitate this process.
All that is left now is to close the transaction and enjoy your well-deserved
rewards. From beginning to end, a well-orchestrated sale process can take
approximately six to eight months. As with anything, adequate planning and
preparation up front is the key to consummating a successful transaction in a
timely manner.
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