By Colin Wheeler, Partner at Ciesco
Choosing to sell your business is no easy decision, and novice sellers will often be riddled with questions when it comes to the process; from knowing the value of their company to finding the right buyer, from the commencement of a process to completion, sellers should understand a number of key factors at play before committing pen to paper.
Know your business value
Business owners often approach the potential of selling their business without knowing their full value. Past profits and assets held are only part of the picture. Potential buyers may look at a multiple of earnings, considering net profits over the last 12 months as well as predictors of future recurring revenue to get a more complete understanding of a company’s present and potential value. They are likely to be interested in amortisation, expenses, owner salaries and any perks contributing to cash flow and affecting potential income. First-time sellers often make the mistake of looking at just turnover or not understanding all the aspects buyers are interested in when considering the long-term profitability and viability of an acquisition.
Consider potential buyers
One of the first priorities should be to be able get in front of potential buyers. An advisor facilitating early high-level meetings between parties at CEO level ensures that minds are aligned, and that time is not being wasted pursuing lost causes. Both sides, seller, and buyer, should aim to establish from the start their valuation parameters to keep expectations neatly aligned. It is vital to have an early understanding of what is expected financially in a transaction.
Seek multiple offers
During the early stages of negotiation, it is healthy to generate competitive interest for your business. Multiple offers result in positive tension, keeping the momentum going towards an agreeable deal that works for both parties. A sale made without competition from different buyers hands leverage to the acquiring party, leaving sellers feeling undervalued or resentful that they might have been worth more to another buyer – or to the same buyer under different circumstances.
The deal must be mutually beneficial
Early-stage conversations between potential buyers and sellers help identify the feasibility of a potential transaction between the parties. As early as possible, both sides should be looking to understand the strategic fit (are we moving in the same direction?) and benefit (do we want the same outcomes?) to both companies by combining the businesses. M&A deals break down when rushed into without consideration of how the project is likely to work long term. These conversations begin once financial expectations have already been set, ensuring that parties are clear about what they can offer towards building something sustainable. An imbalance of strategic fit will be felt in the short term by employees who, doubting the long-term security of their jobs, may well start to leave.
Anticipate any issues that may arise during the selling process
Once a deal is looking likely, a non-binding Heads of Terms agreement should be agreed upon ahead of diving into the full transaction. This is to outline the main critical issues surrounding the deal that could interfere with the final outcome. Most of this will have already been discussed in the preliminary conversations held between the parties early on. The Heads of Terms agreement – also known as a letter of intent – sets out a clear path of intentions during the exclusivity phase towards the completion of a deal, ensuring the pathway is clear and understood with everything in place for a smooth transaction.
Clear communication and coordination are essential
This speaks more broadly to the importance of good housekeeping: a good M&A deal is careful with transaction timing, due diligence, communicating the information and resources required, and has internal materials, accounts and books in order and ready to facilitate a smooth deal. Tight project management to plan and deliver milestones in the transaction process is crucial as parties and their advisors – lawyers, accountants – coordinate their efforts towards completion.
Once a deal is agreed, the transparency and open communication established to this point should support a powerful internal and external communications campaign. At the announcement stage, there should be a compelling logic to the transaction, codifying and reinforcing a consistent narrative to progress with. All of these steps, taken with focus and care, should serve to reassure all parties of the long-term viability of a deal, reassuring buyers and sellers that no stone has been left unturned, that value is fully understood and that there is a brighter future with a deal than without it.
