Will you be able to sell your small business? The answer depends on whether a buyer can envision operating it without your own personal role in customer relationships and delivering the product or service. The less it depends on you, the more likely it can be sold.
Selling your business is the end result of a thoughtful process, beginning when you started or bought into the business. It takes time. You must assess your business and its value drivers like a buyer would, “fix” any issues that would concern a buyer, and protect and improve those value drivers in the months and years leading up to the sale.
When is a good time to sell? The best time is when you don’t need to — when the business is growing, results are good, and no personal or other deadline could force you to settle for less than the best offer. Buyers are looking for a business with three consecutive years of growing revenue and profits.
The best time to decide to sell your business is two to three years before you expect the sale to be completed. This gives you
- one to two years to get the business ready for sale, and
- one to two years for the sales process itself.
Getting the business ready for sale has major and minor components. The major ones involve minimizing the effect of valuation “discounts” that could make your business worth less. Examples are dependence on only a few customers, and dependence on the owner’s unique role in sustaining business operations. Minor get-ready activities include improving the website, documenting processes and governance, and improving the appearance of the facilities.
The Sales Process itself may take six to nine months if the first deal does not fall through, or longer if it does. The process has five stages: preparation; solicit and qualify buyers; negotiating the offer; due diligence; and closing.
Should You Use a Business Broker?
Business brokers offer to be your guide and act as your middleman/spokesperson with the buyer or his broker. They handle the sales process while you manage the business. The result is a higher selling price and a faster sales process compared to doing it yourself. Brokers will advise you on getting the business ready for sale, develop the Offering Memorandum including a valuation of the business, distribute it to their own network and various websites to attract buyers, qualify and assess potential buyers, and negotiate with the buyers on your behalf.
Brokers charge approximately 10% to 12% of the purchase price, with a minimum payment of $7000 to $9000. You may negotiate for fewer functions and a lower fee, if you believe you can perform some of these functions yourself or find a consultant to do them for less.
Stage One: Preparation
The sales process depends on an Offering Memorandum (OM). This document describes the business: its product, market, competition, operations, performance for the last three years, and financial situation. Typical length may be 12 to 20 pages. This Memorandum will include a selling price for the business, which means a valuation of the business (see next article) must have been done before the Memorandum is complete. The OM presents the business honestly and attractively.
After getting the business ready for sale and performing the valuation to find an asking price, the next step is gathering data to write the Offering Memorandum. As part of this process, you assess the business strengths and weaknesses, opportunities and threats (SWOT). These factors affect the valuation.
Before sending the Offering Memorandum to any potential buyer, you develop other short documents.
- The Teaser is a one-page summary of the business, its highlights, the asking price, and who to contact. It cites the industry and operating area, but may not name the business.
- A summary of the Offering Memorandum may be used, to provide more information than the Teaser while excluding key customer and financial data. Its purpose is to keep buyers interested as you ask them to provide information showing they are qualified to buy.
- The Non-Disclosure Agreement (NDA) is a contract stating that the person asking for the full Offering Memorandum will not disclose its information or use it in his own business.
- The buyer qualification questionnaire is a set of questions that enable you to reject buyers that do not appear to be seriously interested in or capable of buying the business.
Finally, you will need to create the “Corporate Book,” containing the OM and some of the key documents backing up its assertions.
Stage 2: Solicit and Qualify Buyers
To solicit buyers, you or your agent/broker distributes the Teaser, promising to send the summary (if used) or the full Offering Memorandum to those who are interested. Responders must sign the NDA and submit answers to the buyer qualification questionnaire. Those who do, and who are accepted, receive the Memorandum. The broker’s network of contacts and websites can be useful in this stage, though you may choose to solicit your own set of contacts first. If a few potential buyers emerge from your own list, you may pay a lower fee to the broker.
While this solicitation process is running its course, you should be gathering documents for the buyer to review in Due Diligence. You’ll also make a list of information about the buyer that you wish to review during the Due Diligence stage.
Stage 3: Negotiating the Offer
A buyer’s request to negotiate (Expression of Interest) triggers Stage 3. You should obtain guidance for this stage, using an experienced deal lawyer or a broker or both. Interested potential buyers usually request a meeting to discuss the material provided, some of their due diligence concerns, and some potential deal terms. After the meeting, they will submit a non-binding Letter of Intent (LOI), with a price and deal terms contingent on full due diligence findings. After Due Diligence (Stage 4), serious negotiations on deal terms take place.
Although deal term negotiations happen both before and after Due Diligence, we discuss deal terms first because the seller may reject the LOI based on preliminary discussions, and refuse to allow further due diligence.
The buyer who sends a letter of intent committing to a price and offering earnest money (deposit) may also request exclusive rights to negotiate on the sale for a certain time period. Do not grant exclusivity to anyone who does not offer earnest money and a committed price in writing.
The offered price is a beginning point for negotiations. Usually the points negotiated fall into three categories: price, terms, and deal structure. “Terms” can include concerns like environmental assurances, transition assistance, staffing plans, or assumption of existing obligations. “Deal structure” means purchase of only assets vs. the entire business; the amount paid; timing and form of payment (e.g. cash or stock or goods); and any contingencies that could affect the amount or timing.
After the two parties agree to general parameters on the price, terms, and deal structure, each of them provides a “disclosure statement” to the other. This is a list of pertinent facts about the business and the buyer, which the party guarantees are true. There will be some negotiations over these disclosure statements, with the buyer demanding stronger assurances of business health and growth prospects than the seller is willing to guarantee.
Stage 4: Due Diligence
In Stage 4 each party examines documents provided by the other party to validate “Disclosure Statement” assurances. This examination is called “Due Diligence.” The process may also include interviews with employees, unions, accountants, suppliers, or even key customers. It may involve site visits or other ways to gather information. When the two parties are finished, they either accept the Disclosure Statements as given or agree on revisions. Then they finalize price and deal terms, and then sign a Purchase Agreement. This completes the “signing” of the deal, but does not complete the transaction. The documents signed will contain Closing Conditions, as noted below.
Stage 5: Closing
Usually the two parties agree on some actions that must be taken before the transaction is actually completed. These are called “Closing Conditions.” Examples include regulatory or lender approvals, obtaining financing, some transition assistance by the seller, provision of certain missing documents, and assignment of leases. Once the Closing Conditions are satisfied, which may take 30 to 90 days, the two parties sign a Purchase Agreement that includes the entire deal and notes the completion of the Closing Conditions.
The next few articles will explain more details about each stage of the process.
Thanks to Bob Fader for his comments to improve this article! Bob is a Senior Consultant at MidCap Advisors, a nationwide boutique investment banking firm.
Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or firstname.lastname@example.org. See www.tom-gray.com. For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/