If you’re thinking of selling your business be prepared for an onslaught of questions from potential business buyers. If you know what they want in advance you’ll have an excellent chance of preparing.
Here are some of main areas of inquiry business buyers will scrutinize before you can sell your business.
Due Diligence Process
When the Buyer and Seller execute a Letter of Intent re: a possible transaction and terms, the business is taken off the market and due diligence then begins in earnest.
The buyer or its agents will conduct due diligence of the books, records and operations of the Seller to its complete satisfaction.
Ninety percent (90%) of the business buyer’s emphasis will be on the Profit and Loss Statement (P/L) to help them understand how the P/L provides cash flow.
The business buyer will normalize Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). They are looking for non-recurring items of revenue and expenses such as legal fees, insurance settlements, professional fees, excessive owner compensation, above or below market rate rent expense, personal expenses, etc.
The business buyer will analyze profitability by product, customer and geography. They will look carefully for any operating expenses being charged to depreciation or interest expense which has the effect of fraudulently increasing EBITDA.
On the balance sheet, the business buyer scrutinizes changes in reserves which might reflect out-of-period costs that have an adverse effect on the P/L period under review.
Due diligence also has a perspective for the Seller. Sellers typically rely on a Trusted Advisor to coach them through this process—getting things cleaned up and controlling the process. The Seller must come to understand the true value of the business. This requires diligence. Fix what you can fix in advance of entertaining potential buyers. Set and manage expectations along the way.
The primary objective here is to arrive at an amount the Seller “needs” for the business—not what the Seller “wants”.
Are your books in order? Are your systems in place and above all are they easy to read and understand?
What is the status of your receivables and do you have deadbeat customers and late payers? The confidential nature of your customers dictates that your customers be named A, B, C, etc. until the final stage of due diligence. Then the Buyer will meet the important customers.
Are you under investigation or is there litigation pending?
Do you have signed and current contracts with your customers, employees and vendors?
When does your lease expire and what are the terms?
Are your business license and operating agreements up to date?
Are your ideas, proprietary products and processes protected by patents or trademarks?
What are the terms of your credit agreements?
Potential business buyers are going to want to understand you and your team as well as your company. They are going to dig deep into your vision and understanding of the industry. Don’t be surprised if they ask the following questions:
Why do you want to sell your company?
What do you see is the future of your industry?
What is your vision for the future of this company?
Unasked but most certainly ascertained – Will you be replaceable or is your company too dependent on your involvement?
Do you have an excellent leadership team in place and will they be prepared for the transition?
In addition to the above due diligence a prospective business buyer will delve into, you can expect more questions about:
Your Products or Services
Your Customers & Market Share
Your Operations, Distribution & Back Office
If you need a trusted advisor to help you through the process of selling your business or have questions about the process you are already involved in, please feel free to get in touch.
Few small business owners think about building a company to sell it. They think about building a company to support their family or hand it down to their children. But building a company to run and grow, and building a company to sell can actually be the same thing with different planning.
Without the guidepost of selling a business, a company closes its doors when the owner tires of running it. Whatever the owner has invested and saved is the extent of his financial security. On the flip side, a company strategically designed to be sold has a value in the marketplace and offers a financial reward to the owner upon the completion of the company sale.
Both companies require the same blood, sweat and tears to build and grow, but only one yields a reward in the end.
I’m going to challenge you to recalibrate your priorities. No matter what goals you’ve set for your company, whether they are profit targets or growth objectives – put ability to sell your company on the top of your list and begin structuring your business with this new strategy in mind.
Becoming the Best CEO You Can Be – take this job and love it
When you build a business to sell it you are consciously structuring your company to operate without you. This by definition is leadership – the ability to lead and inspire others to carry out your plans. As a CEO, this is where your energy is best focused. Your job is to create a dynamic and well run company. Your company’s job is to execute on your vision and perform at their highest levels of efficiency. Done right, your company becomes an operation that can be transferred to the next owner.
To accomplish this you’ll spend your time on big picture planning and strategy while your team handles the daily minutia.
Creating Financial Freedom – your future is up to you
With an exit strategy in mind you are designing your financial future. You will have a specific plan and timeline to calibrate how your financial life and the life of your company will unfold. As you lead your business through its growth and development phases, you’ll make decisions based on your ultimate goal – to sell the company. This creates a new reference point on which to base your thinking. Creating value rises to the top of the priority list and actions and decisions become aligned with this goal.
The Shoemaker’s Children – what’s good enough for you isn’t good enough for a buyer
As in selling a home, it is not uncommon for a homeowner to live with and tolerate imperfections. A loose railing or outdated kitchen may become an invisible annoyance. When it comes to selling the house, just like selling a business, everything has to be fixed to make it desirable to the next purchaser. Ask yourself, “What have I been tolerating in my company that needs improvement?” Is it faulty systems, outdated processes or inefficient accounting? What has been good enough for me but will not be good enough to attract a prospective or future buyer?”
With a plan in place to sell your company you’ll be inspired to take an unvarnished inventory of the people, processes, costs and efficiencies to finally fix what’s faulty. Had you planned to sell your company from the beginning, you may have attended to these things more expediently as they arose.
The good news – it’s not too late to start
Whether you’re considering selling in five years or in the next generation, make it a priority to put the right planning into place for how to sell your business.
Week 4: Leaving? Check In Later
The big day has arrived. All of your financial documents have been reviewed, your successor has been announced and you are finally able to step back from the rigors of your business. Whether you are serving as the Chairman of the Board or simply the Chairman of Your Recliner at Home, you will want to stay engaged in your company in some form or fashion.
Your executives, investors and staff share an interest in guaranteeing that leadership changes hands smoothly. And you as an outgoing executive will also have much to gain: The value of stock options and holdings in your retirement plan will depend on the company’s future performance and will directly reflect on the value of your legacy.
Leaving the CEO or President position can be difficult, but there are options for you to check in later and monitor the future progress and financial health of your business. Here are the options:
First 30 days: Stick around. Attend a few meetings with the new executive and endorse his or her knowledge, savvy and amazing ideas for the future of the company. Your in-person recommendation at client meetings may quell any fears that your existing clients have about keeping on with your company.
First 90 days: Review the company client lists. Are your 20-, 30- and 40-year relationships still being maintained since the transition? You will also want to determine how much new business has been generated since your departure.
First 180 days: Meet with the CEO 1:1. How have they found adjusting to your role to be? Do they have any additional questions for you? Your input is invaluable and may help the new CEO make any needed corrections quickly, or inspire new creativity among leadership.
After the first year: Review the annual report. Which goals were achieved and which ones were missed? What trajectory has your company taken? Will you give this CEO or President one more year or will you join the Advisory Board in a search for a new superstar?
When was the last time you had to coach an individual or team through a new situation? Tell us your story!
Week 3: Locate a Professional
If you’ve been following this month’s blog series, you have already estimated what your company is worth and you should be in contact with a business broker to transition your business to the right hands. However, even if you have an accountant, broker and a financial advisor on your team, these experts may not be expressly qualified in business transition work.
There are unique transition firms that work with business owners to highlight the best practices to relinquish ownership of a company and comprehensively prepare for the move. Who can recommend a great transition firm? Start by asking your accountant, lawyer or broker, or consult with a local trade association in your industry.
Entrepreneur Magazine lists the following information as needed before meeting with a transition firm:
- Financial documents:
- A minimum of five years of financial documents
- Audited financials for three years
- Pro-forma sales and cash flows for two years out
- Three years of taxes
- Company insurance documents
- Personal financial information (account statements, complete copies of federal and state tax returns, estate documents)
- Customer lists (shows history of longevity)
- Vendor lists and relationships
- Operational systems and procedures for everyone and every part of your business
- Legal corporate documents
- Contracts with vendors, suppliers, customers and clients
- Intellectual property rights and assets
These experts can become involved at any stage of your transition to review the work you have completed, provide recommendations and take the necessary actions to get you on the right track. Even after you have completed your transition, a transition firm can work with your financial planner to assist with wealth management.
If you follow the steps below (in order) with a transition firm, you will be able to exit your business in a less stressful fashion:
- Gather all data and documents about the financials of your firm
- Interview experts for your transition team
- Select and begin consulting with your transition team
- Create and execute your transition plan (which could range from six months to five years)
- Successfully complete the transaction
- Ensure that a wealth management system is put in place for a secure financial future
When you started your company, who did you seek the advice of first – an accountant, lawyer or financial planner? Share your selection with us in the comments section below.
Week 2: Who Is Interested In Your Business?
If you have considered selling your business, it’s vitally important to do the proper research. My prior post discussed getting a professional valuation of your company, and this post will give you some ideas on how to locate and identify the best possible buyers.
I recognize that financial valuation isn’t the only factor when looking for buyers. You are selling the product of years of hard work, and you want to be sure it’s the right match. With that in mind, I’d like to offer a few tips to help you in finding an appropriate successor and partner:
- Hire a business broker. Business brokers are much like real estate agents for businesses. They will actively market you and guide you through the process. The Wall Street Journal has partnered with a very useful website called http://www.bizbuysell.com. Check them out to get specific references for brokers in your area.
- Look for people you respect in your industry. If they run their business successfully, you can be confident that yours will transition seamlessly under their care, as well.
- Don’t overlook the competition out of habit. Your biggest competitors may well be the best people to buy you out. The combination of your innovations and theirs may well give rise to a product, service or a way of doing business that can change lives.
Frankly, a business broker is the biggest asset you can have while navigating the waters of a sale. They will be able to give you advice on everything from valuation to closing, with the added incentive of a percentage of the deal to get you the best price possible.
Remember, you’re not just selling the tangible assets of a business. You’re selling your brand and your reputation. Your careful planning today will assure you a comfortable retirement. I encourage you to do your due diligence, just as your eventual purchaser will have done theirs.
In your opinion, how long does it take to build a strong brand before it is ready for sale?
When is it time to step away from your business? Have you achieved all the goals you had in mind? Are you able to retire and pass the torch onto a trusted advisor? These are questions you may want to consider early on in your entrepreneurial career.
When business owners have less than a year to prepare for the sale or transition of their company, some decisions may be made hastily. By looking ahead, you can position your businesses correctly, find the best person to take over and train them appropriately. Whether you need to bring in a salesperson to attract new clientele, jump into a new market niche, cut down on your overhead or acquire another company, it is best to begin your initiatives now.
A corporation can survive without the original owner or founder if there are processes and details outlined in advance. This month, I will feature the questions you should ask yourself when putting together a succession plan.
Week 1 – How Much Are You Worth?
Owners pour their heart, soul, and all their resources into growing their business. This means that their company is going to be their biggest retirement asset.
The value of your business extends above and beyond your sales revenue. Many owners start their companies from scratch and work for decades to establish a successful operation. As a result, they need to do everything they can to protect the value of their brand and take care of their long-term relationships with their customers and clients.
The total value of your company is comprised of:
- Your company’s reputation
- Your employees’ capabilities and qualifications, and past performance
- Your advantages over competitors in key regions
- The profit contribution of your major clients to the firm
Planning is paramount for long-term financial security. At what age do you plan to transition your business to someone else?