Questions business owners always ask about the sale of their business
Selling a business is a once-in-a-lifetime endeavor for many business owners. It is critical, therefore, that you are fully informed prior to moving forward with the business sale process. Having specialized in managing the sale of privately held companies for the past 30 years, I have received many questions about the business sale process. The following are four of the more commonly asked questions that business owners have:
1. How long will it take to sell my business?
A variety of factors, including market conditions, desired transaction structure, availability of financing, sales trends, available competing opportunities, business size and cooperation of professionals supporting the transaction greatly influence how long it will take. The time required to market and sell a business varies significantly. In general, it takes from 6 to 18 months to complete a business sale, with the most common timeframe between 6 and 12 months. The following is a more detailed breakdown of the specific activities.
• It generally takes 30 to 60 days to prepare the business for sale, which includes the preparation of a valuation analysis to understand the likely market value of the company.
• Develop the Confidential Information Memorandum, i.e. the book or writeup that tells your company’s story in a way that maximizes presentation and value.
• Recasting financial information so that buyers can “read between the lines” of the financials, since they are typically prepared for tax or financing purposes, not business sale purposes.
• Researching and targeting the highest premium acquirers that would recognize the most value in your company.
• The process of pro-actively targeting premium acquirers and negotiating a Letter of intent will generally range between two and five months. During this time, you should be engaging in discussions with multiple parties creating options and negotiating leverage by not being reliant on one party. It culminates with a signed Letter of Intent with the selected acquirer.
Letter of Intent to Closing
• It generally takes approximately three to four months from the time a Letter of Intent is agreed to through the closing of a transaction. This period is primarily comprised of due diligence, purchase contract negotiations and potential third-party financing.
2. Should we negotiate with more than one buyer at a time?
There is an adage in the M&A world that when there is one potential acquirer the buyer is in control, but when there are multiple potential buyers the seller is in control.
Having multiple available options will maximize the chance of negotiating a sale that meets your objectives, while making you less dependent on any one potential acquirer. Working with an intermediary better enables a seller to attract and negotiate with numerous buyers independently and confidentially. Ongoing discussions with multiple parties creates multiple options for our clients. This avoids being dependent on any particular party and provides significantly more negotiating leverage.
The biggest mistake we see business owners make is to be approached directly by one party and focus solely on that one party without developing other options. The buyer will often use this as leverage and chip away at the value knowing that they are the only party at the table.
3. How long will a buyer expect that I remain with the company?
This question is very difficult to answer without knowing the qualifications and background of the acquirer. In general, the more familiar the buyer is with the industry or the required skills sets, the less dependent he or she is on the former owner.
There are two key areas that must be considered in a transition period. The first involves the time required for a new owner to absorb most of the operational aspects of the business. The second involves the time and effort required to transition key relationships with customers, vendors and employees. Most transition periods range from six months to one year. It is common for the former owner to start the transition period on a full-time basis and phase into a part-time role; however, there are many situations in which the seller opts to stay with the new owner on a long-term basis.
Business owners are selling their companies at younger ages than ever before. Many owners would prefer to stay involved with the company following the transition, as it enables them to work in the area of the business that they enjoy most and are most effective in, ridding themselves of the financial, human resource and other areas that previously bogged them down. It can be fun to remain with the company in areas you most enjoy, freeing yourself from unwanted activities while knowing that your financial future has been secured.
4. Can Sun provide business valuation guidance?
Our continuous activity in the marketplace provides us with a clear understanding of transaction values and deal structures that are realistic and achievable. At the outset of the engagement, we would conduct a business valuation analysis as this enables our clients to approach the pending M&A discussions on a more informed basis. We would review the financial information together, so we can identify applicable add-backs and recasting adjustments, as well as gain a clear understanding of the non-financial intangibles, risk factors and value drivers in order to more specifically discuss valuation.
Our philosophy is that fair market value is the minimum that should be targeted in a sale. By identifying multiple strategic buyers that can realize synergistic and other intangible gains, we often achieve a transaction that far exceeds this value.
The questions and answers summarized above are four of many questions that we have received from our clients and prospects over the years of managing the sale of privately held companies. I cannot stress how important it is to be fully informed when contemplating the decision to pursue the sale of your company. Please do not hesitate to reach out with any other questions that you may have, and we will be happy to provide insight based upon our experience with the sale and valuation of privately owned companies.