After many years of hard work building a solid business, you’ve started thinking about what the future could look like if you sold it. You are aware that it could be a daunting task without the right plan in place and you begin to do some research into what it takes to successfully exit a business. After all, this sale could likely be the most important transaction of your life, and you stand to gain tremendously if you play your cards right.
At NorthStar, we have led many entrepreneurs across different industries to successful sales of their businesses and from the many transactions we have advised on, we can say that no two acquisitions are truly alike; however, there are many key components sellers should consider when preparing themselves for a successful exit.
Lay Out a Vision for the Future
Start to think ahead and start to think of creating a compelling story for the future of your company that will interest buyers. Consider the future of your employees and management, and what an acquisition would mean for them. Create a timeline outlining the steps necessary to bring your company to market and note when they can be realistically completed. Think about what your business has done right in the past few years and what areas you could improve upon and use this to create a strategy moving forward.
Consider Strategic Fit
When thinking about the future of your business and who the potential buyers might be, keep one thing in mind above all else: your business will succeed in the long term and will likely fetch the most attractive valuation by going to the buyer that needs your business the most. This may seem obvious, but we’ve seen the most success for sellers in situations where the buyer simply needs a particular offering, knows it needs it, and is willing to pay the price.
Think of your company as a puzzle piece and every buyer as an incomplete puzzle. What is your company’s real competitive advantage? Who are the potential strategic buyers that have identifiable weaknesses where your company has strengths? Considering this and identifying the potential buyers that stand to gain the most from an acquisition lends strength to your position when entering a sale process.
Another piece to consider is what kind of buyer you ideally want to sell to – strategic or financial. Naturally, there will be advantages and disadvantages of each, but the main thing to note here is that different buyers will value your business through different lenses. If a financial buyer is more likely for your sale path, be sure to prioritize profits as many financial buyers will value your business based on its EBITDA and profit margins. However, if you’re dead set on selling to a strategic, you’d do well to focus on sales and growth, though you shouldn’t completely neglect profit either.
In recent years, many larger strategics (especially public companies) have started paying more attention to financials as it’s becoming increasingly harder for them to differentiate between equally attractive sell-side targets, and a business with good financials will most often win out over another target without solid financials. That being said, don’t forget that growth is still a primary concern for strategics, so do your best to introduce promising and exciting new technologies, as these will improve your positioning and bring you higher multiples in a sale process.
Pay Attention to Timing
Timing is everything when it comes to selling your company and we often recommend that companies begin the M&A process anywhere from 6-12 months in advance of a sale. There are many things that contribute to this timeline such as:
- Financial preparedness
- Sales growth
- Industry trends and market position within industry
- Key employees
Taking the time to prepare your company for sale can lead to a higher valuation and will allow for a cleaner, faster transaction when you do finally bring your company to market. Also, although it’s tough to imagine something that you may have never been through, try to mentally prepare for the timing of the sale process itself, which can easily take over 6 months, if not longer. As we’ve already mentioned (and we can’t stress this enough), being prepared ahead of time will do wonders to expedite the due diligence process, which will lead to a faster close of the transaction AKA money in your pocket sooner!
Get Your House In Order
Take the time to organize every aspect of your company and think about what, if any, existing conditions may make it unattractive to a buyer. It is important to put yourself in the buyer’s shoes and think about what key due diligence items will be examined in the event of a sale.
Be sure to familiarize yourself with GAAP financials and to hire accountants and lawyers as necessary to make sure your books and financials are accurate, organized, and accessible. Make sure that anything that might make your business look unsavory is either corrected before the sale process begins or be prepared to be forward and transparent about any potential issues during the process. As a cautionary note, it is never worth hiding anything, as these items will be discovered during due diligence, which can then derail the deal or, even worse, result in costly litigation if discovered post-sale.
Implement Standard Operating Procedures
If you haven’t already, you should begin thinking about how the business can run successfully without you in the future. If this seems like a difficult thought to entertain, that’s because it is. Particularly if you founded the company, it will be natural for you to feel a strong sense of attachment to it, as if it were your own child.
As you start thinking of a sale and life after the sale, it would be helpful to slowly start thinking of that ‘child’ as a teenager turning into an adult with its own identity and responsibilities. To that end, you should start preparing procedural documents and outlining a formal organizational structure with clear policies, so that the buyer can run the business as if you were not available after the acquisition. Keep your management team on the same page so that they can navigate the turnover of the business as a team without major disruptions to the business.
Create Financial Projections
When preparing financials for your internal operating model, opt to create 3-year financial projections relatively conservatively. The old adage of under-promising and over-delivering holds especially true in M&A, and the main reason for being on the more realistic side here has to do with earn-out considerations.
Earn-outs can be a seller’s worst nightmare when it comes to negotiating your business’ valuation with a buyer, so making sure that you have realistic projections will go a long way in helping you set more favorable earn-out terms if a valuation gap exists.
Make Some Noise
As a precursor to the sales process and as a way to drum up some inbound M&A interest, you’d do well to increase your business’ visibility through whatever means possible.
This can be achieved by attending industry-specific events, ramping up advertising, consistently publishing content related to your business in blogs or news outlets, or expanding your social media presence. The more visible your company is, the more potential buyers it will attract—leading to a much more competitive process.
Hire an Investment Bank
After you have prepared as best as you can for a sale, it is critical to hire the right banker to guide you through the M&A process. The banker will review what prep you’ve done thus far and point out and plug any immediate holes before embarking on a sale process.
Additionally, and most crucially, your banking team will work with you to ensure that your business has the most attractive and defensible valuation, and will help you to navigate the entire process, while negotiating with buyers on your behalf. Further, by creating a competitive process, a banker will be able to deliver a much higher closing price with much more favorable terms for the seller.
By choosing the right banking partner to lead you through the sale process, you will be able to alleviate much of the stress involved with the process, which will then enable you to focus solely on efficiently running the business while minimizing any disruptions the process may have have otherwise caused.
Written by Julien Meyer
At NorthStar, we work with sell-side businesses every day, helping them to arrive at a proper business valuation, attract qualified buyers, and structure deals to their advantage.
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