12 keys for preparing to exit your company through a sale

The process typically takes at least 1 year – The first, and possibly most important key is that the process will, most probably, take longer than what you had initially expected. More often than not, it takes at least 12 months to sell a business. So, plan at least 1 year in advance.

Don’t start selling at the peak -The best time to sell a company is when it is growing.  Acquirers buy future cash flows and will pay high multiples for high growth. If the growth has ended, they will radically discount the future cash flows. Everyone wants to sell their company at the peak, at the moment of maximum value. But selling a company at the maximum level of historic sales and/or EBITDA do not necessarily mean it is at the peak of its value. Buyers buy into expectations, so make sure you plan to start the process of selling your company at least 2 years before you expect it to peak, considering it will take at least a year to sell it.

Be ready emotionally– When you sell a business, it will be a very intense process. If you are the founder, you are selling your “baby” and that is never an easy task for both your heart and psyche. You will need to deal with the intensity and scrutiny of a due diligence process, the “poker game” that is inherent to all negotiations, and you might even have to experience the frustration and humiliation of a transaction falling through the day of the signature. All this while making sure you are not disregarding your responsibilities in your day-to-day tasks as a manager.

Incentivize the key people– Take care that your key people are aligned in wanting to make the deal happen. You want to make sure the have some sort of incentive that makes them crave for the transaction to go through. The founders and shareholders might be “making a killing” in the deal, but what is in it for your key people that don’t own equity? You might want to set up a transaction bonus scheme, agree a raise and a new responsibility after the transaction with the buyer, a profit sharing in the earn-out scheme…there are many different options to align key personnel.
Think about when it is the right moment to let the key people know what is going on. There will be a moment when the potential buyers will want to get to interview the key members of the team. When that happens, you don’t want the team to “freak out” and start sending out CVs.
Make sure you also prepare the team for the possibility of the sale not gowning through. They need to be aligned if the deal goes through, but also confident there is a “stand alone plan”.

The Value of your business in not just a multiple – Understand that what a buyer is looking for in your business may be different than what you believe you’re selling. Research the market and try to understand who has been acquiring companies like yours in the past couple of years. In your research, you will find trends of motives. For example, build ups, vertical integrations, or buyers that are internationalizing and need to establish local presence in the markets you do business in. If you cater your company, and the sales deck to these needs, you will have a lot higher chance of selling your company.

Prepare the company for the sale before you start the process – Think about what are the KPIs the buyer will be looking at. For example, if the buyers’ obsession is on EBITDA make sure you maximize it by moderating expenditures in non-performing or non-contributing areas, employees or investments that are focused on long term. But make sure you don’t overdo it (there is a reason I chose the word “moderating” rather than the term “minimizing” in the previous sentence). You never know beforehand if you will be successful at selling your company, so make sure you don’t mortgage your future by being over-zealous with cost cutting measures. 

Prepare the team that will take your role – If your intention is leaving the company in a relatively short term make sure you establish a management team that can operate without the founders. In companies where founders are key, buyers will try to tie-up the founders for at least 3 to 5 years. Founders often want to leave the day after the transaction is signed. If you intend to leave early you will need to convince the buyers that you are not as important as they believe, but simply changing the organizational chart, calling yourself Non- Executive President rather than CEO will not be sufficient. In the due diligence phase the buyer will meet people from your team, and probably inquire about your reputation in the market, and if you are still the “main contact” for key clients, and the top decision maker for anything relevant, the potential buyer will discover that very fast. Thus, start delegating and reorganizing internally with enough lead time to make sure that when you are in a due diligence process you are truly a non-executive President that play golf all day and leaves the office at 1PM.

Careful with customer concentration – Try to reduce the company’s reliance on the largest customers. No one likes to buy companies that are too concentrated in two or three clients. If it is not possible in the short run, make sure you show positive tendency, a pipeline of new clients, and a strategy for broadening the client base.

Clean up your balance sheet – In the due diligence the buyer will look very carefully at you outstanding receivables and will try to have you write off anything that look suspiciously uncollectable. Put a collection agency on the task, if necessary, and offer a strong incentive to nonpayers to settle. Write off all invoices that you know cannot be collected, if you haven’t already done that. Figure out with your CFO how your present the write-offs as an extraordinary item beforehand, rather than having to fight it with the buyer post due-diligence.

Audit your accounts (if you haven’t yet) – If you are not audited you will want to audit your accounts with a reputative firm, that will make the buyer will feel a lot more comfortable. The audit will help you identify issues that would probably come up as surprises otherwise, in the due diligence. Always best to know your weak spots beforehand, and have the opportunity to clean up, rather than having the valuation reduced by the buyer post due diligence.

Separate personal from professional – If you are a family-owned business make sure you separate personal from business. Is the company paying some personal or family expenses? Is a large part of your family hired by the company? Work on cleaning up and clarifying what happens to family matters post transaction before you start having the advisor send those “teasers” out to potential buyers.

Prepare for defeat and/or for success – Most companies, unfortunately, are actually unsuccessful in their plan to be sold. Many are sold at conditions that do not meet the initial expectations of the founders, shareholders, or stakeholders. And when the deal goes through, it is quite common that the post transaction is not what the seller expected. But then again, if you are an entrepreneur you are probably a very optimistic guy, so probably your deal will be one of the good ones, no? J

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