If you’ve managed to build a prosperous business, you’re in the minority—according to the U.S. Bureau of Labor Statistics,
65% of businesses fail within the first 10 years.
While continued profitability is wonderful, it isn’t the end goal. At some point, every business needs to change hands, whether because of retirement, a desire to pursue new opportunities or an unplanned life event, such as a health problem. As many business owners learn, selling a business requires an entirely different set of skills than running one.
To understand what it takes to sell a business, it’s helpful to discuss what the journey looks like, what your role is as the owner and where you can get help along the way. The process can be broken down into five steps.
1. Make yourself replaceable.
It might seem that being a profitable company is enough to attract multiple potential buyers. The weakness many owners fail to see is that while they may have built an engine to generate profit, they haven’t fully extricated themselves so that it runs independently. As long as a business depends on its founder to survive, its appeal to outside buyers is likely to be limited.
The legwork of making your business saleable starts long before you actually need to sell it. If you haven’t already done so, elevate your best employees into leadership roles and begin teaching them the skills they’ll need to eventually take over your role.
The process of making a business run without the founder is no small feat. Use the time you gain from hiring and relying on strong employees to reduce risks in the business and make it less dependent on you. Many business owners get outside help for this multi-year process, often from peer groups like Vistage, EO or industry-oriented mastermind communities, as well as coaches in groups like the Exit Planning Institute.
2. Determine what your ideal buyer looks like.
As you structure your business to function without you, also consider what makes you valuable to a certain kind of buyer. It’s not important for your business to appeal to a large number of prospects; in fact, being really good at one specific thing could be what makes you extremely important to one unique buyer.
To create an initial list of prospects, think about businesses that could benefit from combining your operation with theirs. Be creative: Perhaps there’s a competitor in your industry, a business you regularly interact with as a buyer or seller or a strategic partner. Do some research on the companies you identify and take note of which ones have expanded through M&A in the past.
3. Qualify your top prospects.
Even if a prospective buyer looks good on paper, they may not be a viable partner for any number of reasons. After you’ve compiled your starting list of prospects, the next step is the most logical one: simply ask whether they’re interested in talking further.
If you have a pre-existing business relationship with a company you’re examining, it might be easiest to reach out directly to its CEO, as one business leader to another. Frequently, though, a third-party investment banking professional will assist with this step.
These conversations are usually very quick, since most businesses won’t be interested and will say so. A small percentage might be open to a confidential conversation. The key to this step is discretion. You probably don’t want to publicize the fact that your business is for sale, and prospects might not want it known that they’re talking to you.
4. Begin parallel negotiations.
Ideally, this vetting process results in a short list of viable prospects who are interested in serious discussions. Because only a small percentage of deals make it all the way to closing, you can increase your likelihood of receiving the best possible offer by beginning a parallel negotiation process with each serious prospective buyer.
This sounds complicated, and it is—mostly because you won’t be sharing the exact same information with every party. Far from being devious, this is actually the most honest and helpful way to conduct negotiations. By only answering the questions asked and not sharing information that might be extraneous or irrelevant, you help keep conversations focused on the most important facts.
As you answer questions from individual buyers, it’s very important to keep track of what information is being shared with whom. This allows you to give prospective buyers enough information to formulate meaningful offers that are grounded in reality rather than assumptions.
5. Put the deal in writing.
After solidifying your initial deal terms, you and your prospective buyer will sign a letter of intent, which outlines, among other things, the proposed purchase price, the deal structure and the due diligence period. While the period leading up to the LOI does include a less robust form of due diligence that’s primarily about looking for red flags, confirmatory due diligence involves digging into the inner workings of a company to make sure every assumption in the LOI is verified.
Once both parties have completed their due diligence checklists, an attorney will assist with drafting a purchase agreement, though their role is solely to ensure the ownership of the business is successfully transferred in a legally binding way. What attorneys won’t do is advise on the fairness of the business terms; this would be the role of an investment banker serving in an advisory capacity.
Making It To The Finish Line
To have the best chance of a successful deal, it’s crucial for buyer and seller to be fully candid about both their strengths and vulnerabilities. Having a respectful, responsive attitude can also be tremendously helpful.
Even with those elements in place, it’s very common for deals to fall apart before completion, sometimes due to bad timing or other unavoidable circumstances. For many business owners, selling a business is a rollercoaster ride of emotions, but with patience and diligent planning, it’s possible to make a deal that delivers the best possible price for your business.
