Entrepreneurs focus on starting their businesses – not getting rid of them. However, there may come a time when a change of ownership is desirable; or necessary, and if you focus daily on streamlining the business and keeping it in the right condition to be sold tomorrow; you can rest assured that you have the best possible exit strategy in place. The thing that makes a business most valuable in the future is if it has an owner who continually tries to do everything a bit better, and does this every day.
Personal and financial considerations
Selling a business you have started from scratch and invested much in personally requires thorough reflection: How much do you want to sell it and how do you want this to happen? How do you envision your future role with the business, and that of your employees? How do you want the business to be carried on; for example, would you still be prepared to sell if it will just be closed by the purchaser after the most important aspects have been stripped?
Financial considerations are naturally mostly concerned with the required price for the business. You must, however, also consider whether capital should be injected into the business, what the payment terms should be and whether you still want to keep shares in the business, which may be worth more in the future. The tax and inheritance situation in connection with the sale must also be clarified before the sale can be executed. Finally, in this phase you must get an overview of the prospective process and identify which tasks must be performed and by whom and decide which advisers should be involved in the process, including both professional and private advisers.
Getting your business market-ready
Selling a business is almost exactly the same as selling a used car. It must be repaired and polished and then you must find the buyer who will pay most for it. You can consider a large number of different buyers – family members, who will partially inherit, employees who can take over, competitors who will merge or others in the industry that run a related business and want to expand. You can also sell to professional investors; and for large businesses there is also the possibility of going public and getting a broad group of investors and owners. Identifying the right, possible buyer is largely a question of finding the people who can make the right introductions in their networks and act as match-makers. The purchase and sale of a business is largely a matter of trust and a personal introduction in this connection is, literally, worth its weight in gold.
“Even though you may plan to remain the owner of your business for many years, it can still be advantageous to think about your exit in good time.”
Besides finding the right buyer for the business, it is also very important for the sales price for the business to be ready for sale. Making it ready can involve making a 360 degree analysis of the business and trimming, quality assuring or developing the business. It may be that the business should not be sold until you have employed more people, developed a new product or established the business in a new market. Getting ready can also mean that the business must be made less dependent on its owner by documenting business procedures and starting to train employees and delegating, so that the business will be capable of continuing without its present owner.
Finally, the business might need to strengthen its brand, or make itself known in the media, so that it seems and, in fact, is worth more to the purchaser. You can produce sales material by compiling a prospectus or a folder with all the information to be made available
to the buyer during the sales process. Such a folder can include the business profile, product descriptions, price lists, customer references, organisation plan, press clippings, budgets, accounts and, basically, everything that can help to give the purchase the best possible impression of the business and to minimise the fear of buying a pig in a poke.
Closing the sale
When an interested buyer has been found, the final sprint towards an agreement will begin, an intense process both emotionally and in the consumption of resources. First off are the negotiation meetings, which start with entering into a confidentiality agreement, continue with signing a declaration of intent and conclude with drawing up a draft contract with the trading terms and conditions. A key point at all meetings is to find a way to determine the value of the business. What the business is worth is not something you can just calculate, although there are many valuation models that estimate a business’s value on the basis of historical earnings, actual values, future earnings or cash flow. These models can be used in negotiations, but when deciding what the business is actually worth, what matters, as in all trading, is what the seller wants and what the buyer will pay. Therefore, the value of the business can also depend on what other, similar businesses were sold for or what the business’s technologies, customers, brand etc. are worth to the buyer. Finally, there can also be an emotional valuation; if the buyer or the seller has a price in mind that they just think is right for a variety of reasons.
After this consensus, it’s mostly downhill the rest of the way towards executing change of ownership. A purchasing agreement and other documents are compiled, with the help of a lawyer, to bring the change of ownership to completion, including e.g. director contracts, owner agreements and perhaps confidentiality agreements, competition provisos and option agreements, which are part of the basis for agreement. These agreements will contain everything negotiated pertaining to the purchase price, payment conditions, severance payments, positions on the Board, confidentiality about the purchase price and many other things. Before the agreements are ready to be signed, it is, however, normal practice for the buyer to carry out due diligence, where the buyer makes sure that the information given by the business about different situations is correct. This can involve legal, technical and financial due diligence, which is based on the premise that the purchase price can only be re-negotiated, if this control process reveals situations that are problematic and which were unknown during the negotiation process. Fortunately, as a seller, you can usually be prepared for all the documentation that the buyer will ask for, so due diligence will not hinder the last step in closing the sale.
The winding-up phase
The change of ownership process does not end when the ink is dry, because the changeover period starts now and this consists of arranging for the change of ownership to be made public, winding up the business relationship and starting a new working life. Employees and selected suppliers and customers should not first read out about it in the media.
When the farewell reception is over, you, as the former owner, may have had your last working day, but this is not always the case. The winding-up phase can involve performing some final tasks before withdrawing and supporting the introduction of a new management, among other things. You may stay on as a Board member, so that the business retains some of the knowledge gleaned over many years, or you may never set foot in the business again.
If you have just begun to build up your business it can seem rather early to think about your exit. However, even though you plan to remain the owner of your business for many years, it can still be advantageous to think about your exit in good time, partly because it prepares you for any unexpected opportunities for a sale or merger that might arise, and partly because a continual focus on exit means that you will keep trying to make the business independent of you, as the founder. This is a process that is necessary in any case to create growth, because it gives more qualified employees and gives the founder resources to work on the business’s further development.
This article first appeared in the June/July 2018 issue of Your Business Magazine. Download it on read it online here.