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Preparing And Pricing A Business For Sale – 13 Talking Points For Sellers
ENLIGN DEAL TEAM | 01/19/2023
No business is perfect, meaning that when selling your business, you will want to take inventory of the good, the bad and (if there is any) ugly as well for your and the buyer’s ultimate benefit.
Where to Start? Since “good” is more difficult to improve than the “bad” or “ugly” seasoned advisors recommend starting with the lower hanging fruit and first addressing the challenges the business may have. For example, if you have a disorganized warehouse with dated inventory, you should plan time to organize it and dispose of the unsellable inventory before going to market. This is also a good opportunity to record the assets with current fair market values for the FF&E and inventory reports that essentially all buyers will want to see. This takes relatively little time and can turn a negative in a buyer’s eyes into a neutral if not positive attribute.
What Comes Next? Highlighting the positive is something you and your intermediary will also want to focus on and feature with prospective buyers.
After all, it is your and your intermediary’s job to prove and create value in the eyes of potential buyers. Some business owners and intermediaries fall short of convincing potential buyers of the business’ positive attributes assuming they will recognize them on their own. Pay special attention to any unique features that are difficult, costly or time consuming to create or replicate for the business. Always emphasize proprietary and protected processes and intellectual property as these cannot legally be replicated at any price and can have significant incremental value.
The Key to Maximizing Total Transaction Value is Preparation To avoid being rushed to provide or produce requested information ensure that you have gathered, produced and reviewed for completeness and accuracy all of the financial and narrative information that buyers are likely to request. First impressions are critical, so having a fully populated Virtual Deal Room (VDR) for their due diligence is well worth the time and effort required. Prospective buyers will see that you are prepared for the due diligence process being organized and detail oriented which also creates trust and confidence. When it comes to receiving an offer, all aspects of the business will have been reviewed and examined to determine not only the offer price, but associated terms and conditions. Make sure you have put your best foot forward.
Be Timely in your Responses Don’t make a buyer or their advisors chase you for answers to reasonable document requests or additional questions. Being prompt in your communications shows that you are respectful of their time and organized in such a way that reasonable due diligence inquires can be responded to in a timeframe that doesn’t cause unnecessary delays that can lead to deal fatigue putting your transaction at risk.
Document Everything Most business buyers are not intimately familiar with the inner workings of the target business. Having documentation that they can reference post transaction gives buyers additional confidence that they can expect to be successful. Some examples are as simple as an organization chart with individuals’ names (or initials pre-transaction), roles, and compensation, policy and procedures manuals and detailed customer notes. Any material fact required to successfully operate the business should be documented and will aid in the buyer’s understanding of the business and its benefits resulting in improved buyer confidence.
Maintain Consistency Referred to in legal terms, this means operating the business during due diligence period leading up to the closing “in due course” defined as the same way you have historically run the business and the same as you would if you were not planning on selling. As an example, a seller can’t stop advertising to save money after signing a “due course” clause in their IOI or LOI. You'll want to be sure to continue with regular business operations during the sales process. While an increase in sales and profitability rarely causes problems, a drop in sales or profitability inevitably will. Buyers will look to retrade (re-open negotiations) to seek a transaction more financially favorable to them if the business encounters decreasing sales or profitability during due diligence. When a material adverse event is encountered this is not inappropriate, but retrading for the sake of simply improving one’s transaction position after an agreement in principal has been reached is not appropriate and can also lead to failed transactions.
Maintain Confidentiality All parties should ensure that confidentiality is maintained. Most confidentiality clauses survive after the closing date. A confidentiality breach is scary to buyers and causes legitimate concerns. Extreme situations can kill a transaction and worse lead to litigation for damages.
Consider Business Attributes Through the Eyes of a Buyer It’s easy to overlook challenges a business may have when you are working in it full-time. Put on a pair of “buyer glasses” and contemplate what aspects may be appealing or unappealing to buyers. A seasoned intermediary will be able to assist you greatly in the effort and should be called upon for their input and advise as how to address them.
Disclose Adverse Material Facts - Go Negative Early Do not go into the sale process thinking that you can hide or obfuscate “skeletons in the closet”. In all likelihood, these issues will be discovered in due diligence and create unnecessary friction and distrust between the parties. Even if it’s not discovered pre-transaction, all closing documents professionally prepared include representations and warranties on behalf of the seller that if untrue allow a buyer to withhold contingent payments, litigate for damages and/or potentially unwind the transaction (cancel after the fact).
Market and Industry Appropriate Asking Price Obviously, pricing a business too low is most likely going to result in the seller “leaving money on the table”. Another potential adverse effect of pricing below market is that savvy buyers might assume there are undisclosed defects or something wrong with the business or industry. One of the most cringe worthy requests sellers make to their intermediary is to take their business to market at an unrealistically high price or multiple to “see what happens”. Take this free advice that an experienced broker shares on a regular basis… You don’t have to do it to know what will happen. Qualified buyers are not going to inquire at all because they understand pricing metrics and multiples of the industries for which they are pursuing. They realize that if the seller and intermediary can’t get the asking price right, they probably don’t have their act together in other areas either making it not worth their time to pursue. This is especially true of PEG's and Home Offices. The result is that only inexperienced buyers will engage, consuming significant amounts of your and your intermediary’s time. Most will never make an offer because they discover during the process that the business is overpriced.
Those that do make an offer will not be able to close because the lenders underwriting department and the SBA will not approve loans for transactions with unreasonably high prices for one simple reason: they won’t be able to service the debt based on historical cash flow and will result in default. Experienced business brokers or M&A experts especially those with the CBI and/or M&AMI certifications can assist you in selecting an appropriate asking price and avoiding these pitfalls. Find one in your local market here: www.ibba.org
Mitigate Keyman Concentration If any roles in the company can only be performed by a single individual (in the worst case by the departing owner) seek ways in which the responsibilities can be cross trained with other employees or hire additional employees with duplicative skill sets.
Reduce Customer Concentration This can be difficult to accomplish as a business owner never wants to turn down business from one of their largest customers (and we would not recommend this). If the exit is not imminent, focus on attracting additional clients that will dilute the larger client’s percent of gross revenue. Your experienced business intermediary should be able to assuage buyer concerns especially if you have been able to execute long term agreements with these larger clients.
Enter into Transferable Long-Term Agreements Buyers view long term agreements with clients as risk mitigation as it essentially guarantees that the new owner will have a longer period of time to build a relationship with key customers after the acquisition. These agreements can also serve to reduce risk by establishing “cost plus” pricing such that changes in material or labor costs do not come out of the owners net profits. You may also want to consider requesting similar agreements with your vendors to minimize the impact of price fluctuations on the products and service you provide to clients. Note however that it is crucial to a business owner wishing to sell that these agreements are fully transferable. If not, it will require new agreements to be executed which provides the client negotiating leverage and a potential “out” from the agreement. Government contracts are usually non-transferable. If you have a GSA or similar contract speak with your intermediary about alternative structuring options.
Conclusion Keeping these and other transaction talking points in mind before and during the sale process will significantly reduce the time and stress incurred by all parties. Treat the buyer as you would want to be treated as if you were in their position and disclose all material facts as early as appropriate. Work with an experienced deal team and be reasonable in your expectations as it relates to purchase price and related terms and conditions. Remember that when both buyer and seller are equally unhappy - it's probably a fair transaction.