Don't miss out
Sign up for our free newsletter to get weekly insights from the industry's leading practitioners!
January 24, 2024

When times are good, big companies tend to ignore their smaller business units, as they operate smoothly on their own. It is only when the economy gets tough that these little businesses get more attention, and often seen as off-strategy or a distraction. That's when the company's leaders decide it's time to sell them, which is not ideal, as the business is no longer in their prime, making it harder to sell. But despite all these, Michael Frankel, Founder and Managing Partner of Trajectory Capital, joins us to share his best practices of selling a small business unit. 

“The goal is to get this done (sell the business) cleanly, easily, and address a whole bunch of other variables that’s more important than the purchase price.” - Michael Frankel

Reasons to selling a small business unit

Selling a small business unit is never about the money, as it's usually relatively small for the organization, and the money from the sale will be insignificant. More often than not, the business is losing money in a weak market, and the GM is looking for ways to improve their performance.

Also, the business unit may no longer be part of the core strategy of the company, and could be seen as a distraction. As small as it is, leaders will still have to attend and report to quarterly financial reviews for that particular business. Because of this, leaders decide to sell the business, rather than shutting it down. 

Steps in selling a small business unit

When it comes to selling a small business unit, allocating substantial resources is not viable because of its lack of significance for the company. Therefore, hiring a banker is not an option and the seller will have to manage the sale internally. The process must be streamlined to limit distractions and resources for the company. 

  1. Prepare a confidential information memorandum (CIM) - It's not going to be as pretty and detailed, but creating a teaser is still a requirement to provide information to potential buyers.
  2. Create a data room - provide all the necessary documents in one place in preparation for buyer’s due diligence
  3. Prepare transitions service agreement - A formal document is not necessary early on, but knowing the services that the seller is willing and is not willing to provide is crucial. 

Finding buyers

Finding buyers can be a challenge without bankers. Sellers can begin by consulting the business team and identify the natural buyers of the business unit, considering product and customer fit. 

The perfect buyer is either a financial buyer who loves small businesses and growing them, or a strategic buyer who is not a competition. The worst thing a seller can do is sell the business to a competitor unless it’s a space the company doesn't want to play in anymore. 

Avoid non-serious buyers who just want to learn the market. While there is nothing wrong with this, it will provide a big distraction and selling a small business unit requires speed and efficiency. 

Important factors other than price

It is important to remember that the corporate development team has more significant acquisitions to focus on, which are more important and strategic to the company. So the goal of selling a small business unit isn't to maximize purchase price, but to conclude the transaction efficiently. There are far more important factors to consider other than the purchase price:

  1. Employee protection: Ensuring new owners retain staff and maintain current benefits. Sellers wouldn’t want the acquired employees bad mouthing the deal and ruining their reputation.
  2. Customer satisfaction: Some customers may have continuous relationships with the seller’s main business post-close. Commitment from the buyer to uphold service and product quality is essential to protect the parent company.  
  3. Transition Service Agreements (TSA): Minimizing the operational support required from the seller post-sale. Limit distractions as much as possible. 
  4. Legal liabilities: Seller would want minimal legal risks associated with the sale, especially for a business they no longer want.  
  5. Ongoing commercial relationships: Structuring deals for continued benefits such as technology licenses, non-competes, or revenue shares can be more valuable than the purchase price. 
  6. Positive PR and messaging: Work with the buyer and manage how the sale is presented to the public to avoid signaling failure or loss of capability.

Selling a small business unit may be insignificant to the company, but can create a lot of value if done right. Even though there are limited resources to promote the sale, there are ways to find the right buyer for a win-win situation.

Related eBook

Just a second
Oops! Something went wrong while submitting the form.