Selling your business requires honesty.
You must be prepared to answer the questions that buyers have in an honest, almost clinical way.
Starting strong in your business exit process involves being honest about your motivation, your numbers, your employees, your customers and your competitors.
It’s a bit like going to the doctor to get your moles checked – annoying, frustrating, a bit anxiety inducing but you come out on the other side aware of what needs to be removed and what looks a little funky but is actually just fine.
1. Show your pain
This is key but so often overlooked.
Buyers firmly believe that if there’s no pain, there’s no seller. Even a fair deal can start to look suspicious if the buyer doesn’t understand the seller’s motivation. Be clear on the problem you are solving by selling your business. Are you bored? Wanting to spend more time on the boat? Ready to commit fully to the side project you like more? Have an illness? Any answer is viable – it just needs to be stated.
A little over a year ago, we worked on a deal that was going great. Two brothers called us in response to outreach we made on behalf of one of our executive buyers. They were looking to sell the company they owned. The company fit our buyer’s skills and experience. The two parties liked each other. Due diligence went well and the deal structure was fair. But we could not figure out why these brothers wanted to sell. The business was growing. The brothers were young. Relationships appeared to be strong. There was discomfort on our end because we didn’t understand where the pain was.
It eventually came to the surface that the brothers’ parents, who lived in Florida, were having serious health problems. One of the brothers planned to move to Florida to be caretaker. And, without his brother as his partner, the other owner also wanted to exit the business. We found the pain and our discomfort dissolved. We had empathy for them and became more motivated to get the deal done to assist in relieving their pain.
True transparency is challenging but the more you can give, the easier it is for the buyer to get on board. Humility is powerful. As startling as it may be, saying, “I know I’m not the best owner for this company for the next ten years” is influential in moving the deal forward. We had a client that chose to sell his company, not because his wife was bugging him to retire, but because he realized that the business deserved something different. If you believe the business is underfed in your hands, acknowledge that to the buyer. That opportunity for growth is attractive to them.
Buyers believe that if there’s no pain, there’s no seller. Be clear on the problem you are solving by selling your business – it provides the full picture that the buyer needs to be confident in the deal.
2. Get a valuation
Putting a number on your business may feel overwhelming and unsettling. But a valuation is vital for any progress to be made in selling your business. It is ok if the valuation isn’t certified – just get it done by a third-party.
Be sure to have your valuation tested by a minimum of two bankers. Pick one banker you know and one you don’t know. A deal that can’t get past the bank can’t happen at all. The intel from the bankers is important in seeing if your valuation number can translate into realistic deal possibilities.
To give you an idea of what may be required of you when you walk into a valuation, this is the initial information we ask for when we perform valuation exercises:
• Federal tax returns for the past three years
• Year-end profit and loss statements and balance sheets for the past three years
• Seller Discretionary Cash Flow Worksheet (this is a proprietary DVS Group document used to help us uncover the true owner benefits of your company)
• Available sales projections
• Yearly Capital Expenditures for the past three years, any anticipated Capital Expenditures
Valuation is a daunting process. We tackled some of the tough valuation questions in our Ultimate Guide that you can read here.
3. Consider employee survival
This is likely one of the first things you considered when you decided to sell your business. You know an ownership transfer will impact your employees. Thinking through the transition from your employees’ of view is important. Be intentional in when and how you communicate about the sale with your employees.
There are a lot of great resources out there to help you do that well. This article on the Axial Forum is a good place to start.
4. Think through customers and relationships
If they love you, congratulations, that’s the worst thing for selling your company.
The higher your business’ reliance is on you, your personality or your relationships, the harder it will be to sell. If you are moving toward selling, move away from the company’s operations. A strong management team is important to buyers. The less involved you are in day-to-day operations, the more comfortable a buyer will feel in pursuing your business for an acquisition.
5. Ask if your product or service is obsolete
A great product or service means nothing if nobody wants it. I can produce the best buggy whip the world has ever seen but, guess what, we don’t drive buggies anymore. What are you doing today to ensure your business will be needed in ten years? The answer to that question is essential to a buyer’s decision.
Along with cultural change and market demand, take stock of your equipment, the training your employees have, your communication patterns, anything that would impact your relevance. You may see ways in which you’ve been complacent to growth – this does not help you with the buyer and it is likely it could hurt you. In order to move forward, buyers have to be confident that your deflection of growth opportunities now won’t impact their ability to create growth opportunities in the future.
Honesty can be harsh.
But the good news is that you’re here, you’re thinking about these things now.
Selling a business takes time and it takes intentionality.
Maybe asking these questions helped you see an area where change needs to occur in the business. Or maybe you realized you need to frame things a bit differently going forward.
And all of that is ok. Because being honest is how you start strong in your exit process.