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Steps to Selling a Business

Selling a business requires a very carefully thought out process that must be extremely well organized, and as such, this process contains a vital three-phase sequence: the preparation of the company’s documentation, the marketing of the company and ultimately, the negotiation with the buyers.

The process will usually last between 9 and 12 months, although there are frequent examples of when complications are experienced and this timeframe can expand significantly. With this in mind, there have been operations that have lasted several years, however if the process is genuinely respected and well organised, then one can go about ensuring that the timeframe will not go beyond the 9 to 12 length.

1. The Preparation of the Documentation for selling a business

In the process of preparation, there must be the creation of three significant documents:

1. A sales notebook, otherwise considered a memorandum of information, in which it presents the competitive advantages of the company, its capital structure, as well as the relevant financial projections and figures.

2. The company valuation. This document will outline the company’s value drivers, as well as additional elements that will assist negotiations in the final phase of the process.

3. An extended blind teaser of the company is also necessary in order to address and inform potential buyers about the general concepts of the company. This document, as is hinted in the name, ensures the anonymity of the company being sold until the potential buyers sign a confidentiality document called a non-disclosure agreement.

2. The marketing of the company

For this phase of the process, one must first create a mapping document of all possible worldwide buyers. As such, it is very common that the best buyer for your company is not the one that you have in mind. With this in mind, you have to consider that the buyer might not always be located domestically, or be a direct competitor of yours; taking this a step further, the buyer might not even come from the affiliated sector of your company.

For example, we once had a case of a logistics company in the pharmaceutical sector, which we did not sell to a fellow pharmaceutical company. Rather, we sold it to a company that focused on hospitals. We were able to do so because we had analyzed the corporate operations that had recently taken place in the world, and in turn, we found that there had been an instance where a transaction between a hospital and a logistics company for pharmacies had occured. This information gave us a valuable insight into the trends and thought processes that were taking place in other international markets. As a result, as we have suggested is possible, the buyer ended up being a company from a different sector.

Once the best potential buyers are found, it is time to contact the CEOs or top management of the selected company. These companise have been selected largely because they have been perceived to be the best fit for your company, and the ones that will be able to offer the highest price.

This process, which is often conducted by professional advisors, is one that can be considered to be long and laborious. However, in taking this additional time, it can be ensured that the buyer and seller are transparent with each other, share the information necessary, along with their updated perceptions and feelings toward the potential operation.

The negotiation with the buyers

Once you receive your indicative offers, this is when you begin the process of negotiation with respect to what has been offered, and how you wish to potentially adapt them. It is important to not only try find the company’s that is going to pay you the highest price, but also focus on who will be the best managerial fit for your company, as well as who will present the optimal payment method according to your needs.

As such, there are many differing elements that come together during a negotiation. Once there is an agreement with your selected buyer, this is when the official letter of intent is signed. At this point in time, the strength and significance of the negotiations get taken to a new level, as there is now a mindset that an agreement regarding a deal will arrive.

After this letter of intent, there is the necessary process of due diligence; a sometimes tedious but extremely important process that everyone should conduct before buying a company. This process sees the holistic analysis of the target company’s legal, fiscal, labor, legal, environmental and financial situation. As such, a complete analysis of the company is necessary because once acquired, any contingencies that this company may have will become the responsibility and problem of the buyer and therefore, the acquirer should try to prevent or adequately prepare for them as best as possible.

After finalising the due diligence, this leads to another negotiation process. This particular negotiation covers the likes of how to deal with contingencies, ascertaining various guarantees and finally, the revered sale and purchase agreement. However, there one cannot take the sale and purchase agreement for granted. As such, it is a process that can last up to a year and is extremely technical. Therefore, it is essential that you use experienced advisors for this phase, ones that have gone through the process many times and know exactly how to anticipate problems that are likely to arise.

Remember that the buyer will also be accompanied by very experienced advisors. As a result, especially if you are a first time seller, you should not face these experienced advisors and buyers without an experienced team that you can have absolute confidence in. With these trusty advisors on your team, you will be assured that interests will be defended and that you will be guided effectively through the process.

As is detailed, the process of selling a process is a long and extensive one. In trying to complete it alone, you risk becoming lost in the process or simply losing the motivation to get through it all. Unless you truly feel that you know how to maximise the price of your company, it is recommended that you seek out professional advisors with experience in this process. If you feel that you fall into this bracket, do not hesitate to get in touch with our team of trusty advisors.

Add Value by Finding the Right Buyer

Many business owners will sell to the first buyer without taking into account other potential options. As such, when selling your business it is important to ask specific questions. Is this really the right buyer? Will this entity pay more for the business than anyone else?

Business owners often rely on a lawyer or an auditor to look for potential buyers and investors without considering that 70% of the deal value lies in finding a suitable buyer. Hence, it is essential to find a buyer that is the best strategic fit and will pay the most for your business. To maximize the value of your company, you or the advisors must engage in a rigorous search process to find buyers or investors who can deliver the highest synergies for your business and those with the strongest financial profile.

Moreover, the best buyer is not always the closest or most obvious. The best counterpart for your company could be for example, from a different sector located on the other side of the world.

ONEtoONE insight – how we added value

Once, in ONEtoONE Corporate Finance, we advised a company that generated ten million euros each year. The company had two million euros in operating income (EBITDA) and six million in financial debt. We found a buyer in the same country (Spain) whose company earned double of what this other company earned, but had accumulated a lot of debt. This entity was interested in buying the company, offering to buy it for six times the operative income, which meant that discounting the company’s debt; the potential buyer was willing to pay six million euros for the selling company. As the potential buyer did not have enough capital up front to pay for the company, they offered to pay two million at the time of the sale and the rest of the four million over the upcoming years.

We also found a German buyer with a turnover double that of the sellings company’s, but contrary to the Spanish buyer, they did have financial capability. Given that it was an international operation and the German company did not have a presence in Spain, it offered to pay a higher price for the company. They offered to pay seven times the operating income, (that after subtracting debt, it valued the company at eight million euros) and also planned to pay for the company in deferred payments, paying six million at the start and the rest of the two million over a two year period.

We then attracted a third buyer, a Canadian company with a turnover of more than a billion euros, from which they earned a total of 100 million with no debt. The company saw many synergies with our client and at the time, they did not have any presence in Europe. They had a lot of interest in the company and offered to pay ten times the operating income of the company after subtracting the debt, which left the buying price set at fourteen million.

If we were to have sold it to the Spanish firm, the firm could have come up with excuses not to repay the remaining four million euros and could have ended up paying just two million for the company. The Canadian company paid seven times more.

Identifying the right buyer

For your company, you should look for a buyer that gives you synergies and has a lot of cash in hand, without minding so much about its location. If the buyer can perceive the true added value of your company, they will be willing to pay more for your business.

So, how can you find the best buyer who will pay the most for your company?

Around the world there are more than 120 million companies, with more than 600 risk capitals and more than 50000 Family Offices.

To start you must follow a few steps:

1. You must know what you want: In order to find the best buyer you need to know what you are looking for. You should also know the buyer and how they operate their corporations. Start with a generic search and then narrow it down into a specific search to find more concrete information.

2. Analyze and filter the results. There are many companies that can buy your company but you need to narrow it down to a single one. This can take a very long time. Start by filtering and if needed, find a company to help you with this process of analysis.

3. Get in touch with the companies. You may have to contact 200 firms or more, and it unfortunately, it will take a long time. So how do you become more efficient? If there is a search for an appropriate mediator, then the target must be analyzed. When the target is contacted there is then more speed to the process. Lastly, analyze the information being monitored by the client.

Finding not just any buyer, but rather the buyer that will create the most value for your company; one that gives off the best image, adequately manages communication, classifies business by what will bring the most value and enjoys good alternatives with other possible buyers. It is crucial so that the operation has widespread and ongoing success. If you are ready to sell your business, don’t hesitate to contact us!

PREPARING YOUR COMPANY FOR ITS SALE

Creating a to-do list for preparing your company before selling it can help you create an action plan before putting it on the market. When the time comes to sell your company, you have two options. You can begin the process immediately, putting it up for sale in its current state, which may mean lowering its value to potential buyers in the negotiation stage. Or, you can delay its sale until you have invested enough time to improve the way in which potential buyers see your company. This choice depends on personal motivations as well as the other objectives of the business owner.

If you choose the second option, here are the four basic steps to follow before the sale:

1.Obtain a valuation.

Surely you have an approximate value for your company in your head, but is it reliable? Getting help from professionals who are experts in this area can provide you with a figure that is objective and realistic for your company in the current market. A value analyst can also aid you in determining what the strengths and weaknesses of your company are and, thus, come up with strategies to increase its value.

2.Reduce dependency on the owner.

You believe that your business cannot function without you and your employees. By reducing this dependency, you increase its value for the buyer. In order to achieve this, it is important to plan the sale with time and patience to find the right people to put your trust in and delegate your responsibilities.

YOU MIGHT ALSO BE INTERESTED IN, “BEFORE ACCEPTING AN OFFER, STUDY THE BUYER.”

3.While strengthening your company to present it to buyers, keep your sale plans as private as possible.

Share your intentions to sell with only key personnel and external consultants only when necessary or when information is accompanied by a confidentiality agreement. Always emphasize the importance of maintaining the privacy of your sale intentions. If news that you are planning to sell your company arises, you run the risk of creating uncertainly among your employees, clients, and suppliers. This could decrease the company’s value, just when you need it to increase.

4.Develop a memorandum of sale.

Your company should be described in an easy and concise manner. When you have a memorandum of sale (also known as information memorandum) for your company, you increase the trust of the buyer and reduce diligence problems, making the way for a simpler and faster sale. This memorandum of sale should include the history of the company, industry information, a description of the company’s operations, its strengths, market strategy, and prediction for the future. The financial position and financial and operating tendencies could also be included.

At ONEtoONE, we understand that, in respect to a corporate operation, the valuation is a negotiation tool. The creation of a value report is a fundamental part of a successful negotiation to be able to maximize the price with arguments backed with concrete and accurate numbers.

This article was written by Enrique Quemada, President of ONEtoONE Corporate Finance.