Selling or growing your business requires careful preparation, the right advisory team, and strategic foresight. Business owners often don’t know where to start with these steps when considering a sale or investment deal. Below I answer this question along with other common questions I am asked about navigating the process.

1. What are the differences between a strategic buyer and a financial buyer?

There are generally two types of buyers in the market: financial and strategic.

• Financial Buyers: These are typically investment companies, such as private equity firms, with no prior investment in your industry. They aim to use their acquisition as a platform for further growth within the market.
• Strategic Buyers: These are companies already operating within or adjacent to your industry, often larger and well-known. Sometimes strategic buyers are backed by private equity, focusing on both organic growth and acquisitions. There’s also the possibility for sellers to reinvest a portion (10-30%) of their proceeds into the acquiring entity for potential future gains.

Engaging both types of buyers maximizes exposure and helps determine the true market value of your business through competitive bidding.

2. What are the key terms I should negotiate in a sale or investment deal?

Negotiation goes beyond just the price. Key terms include:

• Deal Structure: Cash at close, seller notes, stock or asset sale.
• Working Capital: Net working capital (NWC) directly impacts the purchase price. To ensure fairness, buyers and sellers agree on a working capital “peg” during negotiations. The peg is essentially a benchmark or average level of NWC the business typically maintains. Sellers want a lower peg so they can deliver less working capital without reducing the price while buyers want a higher peg to ensure the business has enough working capital for smooth operations post-sale.
• Legal Clauses: Representations, warranties, non-compete clauses, and escrows.

An experienced advisor can benchmark these terms against industry standards and guide you through the process.

3. How do I handle confidentiality?

Confidentiality is paramount during the sale process. To protect your sensitive information, confidentiality agreements should be signed by all potential buyers before accessing any company information. All buyers are approved in advance by the company before any conversation is started.

Coordinating a communication strategy with buyers on timing and messaging to employees to is also important to maintain stability and morale. Your advisors will help manage this delicate balance.

4. What due diligence should I expect from potential buyers or investors?

Due diligence is comprehensive and can be time consuming. Potential buyers or investors will want to review information about:

• Financial: Profit and loss statements, balance sheets, tax returns to assess financial health and growth potential.
• Legal: Corporate documents, legal issues, compliance with regulations.
• Operational: Daily operations, staffing, KPIs, and efficiency metrics.
• Market: Analysis of market position, competition, and potential for expansion.

Transparency here prevents deal derailment due to unexpected findings. Being upfront about anything that may come up during due diligence creates trust and allows time to formulate strategies to overcome any hurdles.

7. How long does the sale or investment process typically take?

The timeline for completing a sale or investment transaction is typically 6-to-9-months, but it can extend based on complexity or unforeseen events.

Preparation Phase (3-6 months): This involves cleaning up financials, gathering necessary documents, preparing confidential materials, and marketing to potential buyers.

Marketing and Initial Offers (1-2 months): Once the business is marketed, potential buyers will express interest, and initial offers or Letters of Intent (LOI) might be received. This phase includes organizing meetings or site visits for serious buyers.

Due Diligence, Negotiation & Documentation (2-3 months): After an LOI is signed, the buyer will conduct thorough due diligence. Simultaneously, negotiations on the final terms of the deal take place, culminating in drafting and reviewing the purchase agreement.

Closing (1-2 weeks): Once all parties agree to the terms, documents are signed, conditions are met, and funds are transferred.

6. How do I choose between multiple offers from buyers or investors?

Selecting the right offer involves evaluating several dimensions:

• Price and Payment Terms: While the headline price is attractive, consider how much is cash at closing versus contingent payments like earn-outs or seller notes.
• Deal Structure: Working with CPA’s and advisors will structure the best possible deal, whether that is a stock or asset sale or contingent on earn-outs.
• Buyer’s Reputation and Fit: Research the buyer’s track record with similar acquisitions. How do they treat acquired companies and their staff? Cultural fit, especially if you’re staying on, is crucial.
• Post-Sale Role: If you’re considering staying involved, how compatible are you with the new management? Will you have influence or merely a nominal role?
• Future Growth Prospects: How does the buyer plan to grow or integrate the business? Do their plans align with your vision for the company’s future?

7. What are the signs that my business might not be ready for an exit or investment?

Before deciding to proceed with a sale, consider three readiness indicators:

• Financial Health: If your financial records are not up-to-date or if there are irregularities, it signals unpreparedness. A stable or growing profit margin and strong cash flow are also attractive. Erratic financial performance or discrepancies can scare off buyers.
• Operational Efficiency: Buyers look for business metrics that compare favorably with industry benchmarks, as well as a business’s dependency on key personnel, which signals risk, and its growth potential.
• Legal Cleanliness: Any ongoing or potential legal issues should be resolved or at least transparently managed before going to market.

If these areas show significant weaknesses, it might make sense to delay the sale process, focusing instead on enhancing these areas to make your business more appealing and valuable when you decide to sell.

Successful Dealmaking Hinges on Clear M&A Strategy

Navigating a sale or investment in your business involves understanding the nuances of buyer types, deal structures, and the intricacies of due diligence and confidentiality. Choosing the right buyer is not just about the highest offer but also the long-term fit and future of the business you’ve built. Each step should be taken with a clear strategy in mind to achieve the best outcome for all stakeholders involved.