Selling your business is the triumphant validation of your hard work and ambition.  It means someone other than you has bought into your dream.

The problem is, unless you know how to exit a business properly, you may end up like many other owners who leave millions on the table – just because they don’t understand how business exits work.

When selling your business, you need to be “Investor Ready.”  Essentially this means that you need to:

• Reduce the risk in the business, and
• Increase the profitability.

Here are the first two of the five things you need to do to prepare your business for sale as part of the Investor Ready process.

1. Get Alignment

This is the very first item you have to deal with.  It is important that all the owners, shareholders and relevant stakeholders are aware of the impending sale and agree that it should go ahead.  If they are not aware, or do not agree, deal is unlikely to eventuate.  The parties will usually have different agendas and these need to be resolved prior to a sale.  You have to have internal so that a deal is not derailed at the last moment by an intransigent shareholder who refuses to sell or who holds the others to ransom for a disproportionate share of the proceeds.

Ideally, of course, you have a shareholders’ agreement that governs the sale of shares.  Venture capitalists, for example, insist on “drag along/tag along” rights in shareholders’ agreements so that minority shareholders are dragged along in a sale of company shares by the majority. Drag along rights mean that the majority can accept a good offer and are not held to ransom by the minority.  Conversely, tag along rights permit a minority to tag along in a sale of shares by the majority so that the minority doesn’t get left with a small stake that they can’t sell.  Shareholders’ agreements also deal with the sale of a business.  Usually it is by (say) a 75% majority voting on a special resolution.

In the absence of drag along/tag along rights or a clear majority, you need to get alignment with the other shareholders.  The agreements you reach should be documented so that there are no issues later.

Management and key employees must also be consulted and a plan put in place for their continued employment post-sale.  Buyers are very wary of buying a business, only to have all the management leave shortly thereafter.  One way of managing this to put a clause in your employment agreements giving employees two-part bonus: one payable when they sign on with the new owners at completion and a second bonus 12 months later if they are still employed in the business.  Yes, you pay the bonuses, but it is good insurance in getting a sale away at all.

2. Have a Strategy for a Financial Exit and a Strategic Exit

Generally, businesses are sold to either a financial buyer or a strategic buyer. A financial buyer is one who buys the business purely on the numbers and pays accordingly.  Such a buyer might pay a multiple of earnings, a limited amount for goodwill, an amount for stock and valuation price for land and buildings.

A strategic buyer, on the other hand, focuses more on the strategic value of the business.  Does the business:

• Solve a problem for the buyer,
• Provide a scalable opportunity, and
• Have a product that fills out the product line of the acquirer?

A strategic buyer is less interested in the profitability and more interested in how it can exploit your assets in its own business.  A strategic buyer will often pay more than a financial buyer for the same assets because the strategic buyer will be able to do more with them.

Ideally, then, you seek out a strategic buyer.  The reality is, though, that the majority of sales through normal channels are to financial buyers.  So the challenge is to identify at least some strategic elements in your business, then present them to the purchaser to justify a higher price.

Once you and your shareholders, stakeholders and key management have made the decision to sell, you have to put in place a strategy to do three things:

• Reduce the risk to the purchaser,
• Increase the profitability for the purchaser, and
• Identify the “Most Probable Buyers” at an early stage.

The eventual price is simply a function of:

• The risk of things going wrong for the new owner, weighed up against
• The potential profits from the acquisition.

Liabilities, issues, customer problems, litigation and lack of systems all increase the risk for the purchaser and reduce the price. To achieve a higher price, these issues must be rectified during the Investor Ready process. Obsolete stock should be disposed of, excess assets should be sold off and ageing debtors should be got in. Revenue can be ramped up by embarking on joint ventures with strategic partners.

This is also the time to ramp up existing relationships with the Most Probable Buyers or quickly establish such relationships if they are not already in place. This is so that when the sale conversation comes up, they are more than aware of the benefits of acquiring the business.  You have to use these relationships to point out the strategic synergies so that the eventual sale conversation is not so much about the financials, but about the possibilities.

At this early stage, think about how your product range, systems and positioning will fit in with the Most Probable Buyers’ businesses.  If there is a clash, this should be dealt with early rather than becoming a sticking point in the actual sale negotiations.

Better still, you can develop a product that fills out a potential buyer’s range a year in advance of negotiations commencing.

Conclusion

Alignment and getting Investor Ready are both matters that have to happen before the sale.  In the next post, we look at three more matters to cover before you go to market with your business.