The Basics of Sell-Side M&A

Selling a business is an extremely significant event in a business owner’s life. 

The decision to sell is life-changing for entrepreneurs, and not just financially. Owners need to be prepared and educated before putting their company up for sale.

In this article, Adam Coffey, Founding Partner of CEO Advisory Guru LLC, discusses the basics of sell-side M&A.

"Selling your business doesn't just mean a high price. There are a lot of different paths that you could take that will help you navigate to your desired outcome." - Adam Coffey

Expertise in business does not translate to expertise in selling a business. This assumption gives entrepreneurs a false sense of security that sets them up for failure when selling a business. Here are a few things to know in order to be an effective seller:

Know your Why

Before putting a business up in the market, owners need to determine the primary objective of why they want to exit the business because it will give them an idea of the type of buyer to pursue. There are two types of buyers:

1. Financial buyers - Often a private equity firm, if you are looking to retire, this may not be the right buyer since they will need guidance from you and/or your leadership team. But if you are looking to simply grow your business exponentially, PE firms can transform the business into a platform investment.

2. Strategic buyers - These are companies who buy companies. Typically their goal is to absorb the business to be a part of something bigger. If you are looking to retire, the business will be in safe hands. However, if you are looking to keep working and grow the company, you will be a part of a larger organization, and no longer the boss.

There is more to selling than just price. Consider the legacy of the business, what happens to the employees post-sale, and the type of partner you want to work with.

How to prepare your business for sale 

According to Adam, ideal planning should start two to three years before selling the business. Buyers typically look for three years of financials, and it will help maximize the value of the business if there is clean paperwork. In that period, prepare or hire the following:

1. Tax lawyers - Tax lawyers help make sure that everything is in order, and minimize the tax of the future sale. 
2. A good accountant - Accounts assist with preparing three years of clean and error-free financials.
3. Growth plan - If you have a stagnant business, you will have difficulty charging a premium for it.
4. Leadership succession - If you plan to retire, you need to have a successor inside the business. Start training people and stop micromanaging.
5. Real estate structure - Separate the real estate from the business and put it in a different legal entity. Most acquirers will not want the real estate.
6. Quality of earnings - Before selling a company, perform a quality of earnings report and determine the recurring revenue. This report will provide a good estimate of the expected selling price.

Managing the Sales Process

After extensive preparation, if you have decided to sell your company, you need to call an investment banker to help with the sales process. They are proficient in finding buyers while driving prices up. 

However, even with professional help, sales processes can take up more than six months. During this time, the buyer will perform extensive due diligence on the company that might cause distraction from the day-to-day operations.

You can assign executives in your company to run the day-to-day operations and assign a diligence team that will accommodate the buyer in the pursuit of closing the deal.

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