SELLING YOUR COMPANY IS THE ultimate strategic sale of your career; you can expect this stage of your Exit phase to demand the same kind of long hours you put in during the Startup phase of the business. Remember the elements of the Sales Maxim that you learned in chapter 10: Sales = Confidence = Knowledge = Customers and Product. You’ll need to be extremely confident going into the sale of your business, and that means you must develop a masterful command of every detail of your product (in this case, your company) and customers (your potential buyers). You also need to be well grounded in an understanding of the marketplace. If you’ve become less directly involved with some aspects of your business over the years, you’ll need to do some homework before you put it on the market.
Your next task is to tackle the hard work of preparing yourself, your staff, and your business for the sale. You may have such deep confidence in the unique strengths of your business that you think it will sell itself. It won’t. Unless your business is a high-profile brand, you will need to muster all of your marketing and sales skills to attract the appropriate buyer. And that will be the case whether or not you use a broker or other representation. You also will need to call upon all of your abilities as a leader to keep your company on track while you’re attempting to sell it. You’ll be dealing with a wide variety of buyers and situations during the sale, and you’ll have to find innovative ways to engage their interest and move them to make an offer. You can expect to feel the same sense of urgency for success that you felt during your Startup phase, and that energy will help carry you through this demanding time.
At the time I decided to put TRC on the market, the company was still winning business based on the value-added features and innovations we had developed. Even though margins were eroding in the market, we were still growing in the academic consumer segment and with consortia partnerships. Many of our direct competitors weren’t faring as well. Our largest competitors had been developing their academic divisions over the years, and they were beginning to take market share. Some of the smaller academic dealers silently closed their doors, while others were acquired for pennies on the dollar. Many owners balked at selling their business at a price lower than its historic value. But the past is history; with their businesses in decline, these owners often were left scrambling to get their company back on course or to agree to a short sale in order to stem future losses.
I wasn’t in this predicament. My business was healthy, and I had long ago created an exit plan that had helped me prepare for this phase. Once I made the decision to sell TRC, the preparations for that sale unfolded quickly. I had done my Entrepreneurial Exercises in advance and knew the route I wanted to take to put TRC on the market. I had already researched and chosen a respected Chicago law firm and a professional broker to handle the legal aspects of the sale. Over the next month, I worked with these firms to pull together the portfolio TRC would submit to firms that showed interest or that we had targeted as being potential buyers. At TRC, we did a bit of housekeeping to clean up the physical appearance of the office, and we began assembling the historical financial information that potential buyers would want to review. When our preparations were complete, TRC’s information began appearing on the multiple listing feeds that announced to the M & A community that the company was available for purchase. I had no apprehensions about the sale, and I was anxious to see what the next steps would entail.
In this chapter, we’re going to look more closely at these fundamental tasks that you, too, will undertake when you place your own business on the market. You’ll learn how to position your organization as a viable, valuable package—and yourself as an entrepreneur and a leader—as you prepare to enter the marketplace. We’ll also explore the essential steps for that preparation, including the task of getting your operation and its documentation in good order and hiring the right professionals to help you achieve the most successful outcome from the sale. Finally, I’ll offer some tips to help you mentally prepare for the roller-coaster ride of negotiations that lie ahead.
A successful exit plan covers two main areas of consideration—transitioning the ownership and leadership of the organization, and maximizing the wealth that transition generates. Although transitions can take numerous forms, such as handing over control to a member of the family or selling the business to employees, in most cases, the transition involves an outright sale of the business. Wealth maximization is tied to securing for shareholders the best value for their ownership interest. These two phases of your exit strategy may not unfold at the same time, but after you have decided to sell the business, you must immediately begin making careful preparations for achieving all of the goals you’ve set forth in both parts of your plan.
To position your business (and yourself) for a positive transition and to maximize the wealth generated by the sale, you need to be able to answer some serious questions about your motivations and expectations for the sale. Why are you selling? What are your goals for the sale? What comes next? What will your business be without you at the helm? Let’s examine some of the ways you can prepare to answer these questions clearly and without hesitation.
Explaining Why You Want to Sell
So, why do you want to sell your business? That will be the first question every potential buyer will ask, but it’s also a question you need to answer for yourself. Although it may require some soul searching, you need to be very clear as to why you’re selling in order to strike the best deal and to rest easy after the sale is done. Are you doing it for the nonemotional reasons? Have you considered alternatives to selling? Have you prepared yourself for the worst-case scenarios that might result from the sale? Have you determined the lowest returns you would be willing to accept from selling? Thoroughly think through your reasons, and be prepared to outline them simply and with conviction.
Granted, your personal reasons may differ from those you share with the rest of the world. That’s where your selling skills come into play. You’ll need to be able to spin your public reasons for selling into an engaging elevator pitch that you can recite with enthusiasm and confidence. Be prepared for potential buyers to do some digging in an attempt to unearth any undisclosed problems that might be driving you to sell your business and that could later expose them to risk or overpayment. In fact, savvy buyers will do all they can to find and leverage any weaknesses in your story in order to negotiate a lower sale price. The more completely you understand your motivations for selling, the better able you’ll be to lay them out simply, logically, and persuasively to prospective buyers.
When you sell your business, you aren’t just handing over your office keys to a new owner. You can negotiate any of a variety of outcomes for this transition. When you’re preparing to sell your business, it’s important that you form a clear understanding of how you want your transition of ownership to unfold.
When your business is up for sale, your entrepreneurship may be up for sale as well. Entrepreneurs command tremendous influence, knowledge, and relationships, and a company that buys your business may require you to stay on for a period of time after the sale. If your potential buyer has that outcome in mind, you can expect to be scrutinized as closely as your company’s books. Refusing to put in this time could kill the deal. The transition you ultimately negotiate may be influenced by the buyer’s future plans for the business, but you need to be able to clearly and articulately outline your own transition expectations in those negotiations.
Before you place your business on the market, you also need to have a solid plan for maximizing the wealth generated by the sale (details about this process follow in the next section of this chapter). You are likely to have an idea of what your business is worth, and that figure may serve as the minimum bid you’ll accept. The financial outcome of a sale can be very complicated, however, and involve any of a wide variety of methods for payment, including stocks, stock options, timed payments, earn-outs, or any variation and combination of these and other methods.
The vast majority of buyers will finance their purchase, which can involve a degree of risk for you, as the seller, and take an extended period of time to complete. Do you desire an asset sale or a stock sale? What are the tax and legal implications of the sale, and how are they unique to your type of incorporation? Your own research and the advice of your legal advisor or broker can help you answer the questions that will help you determine what kind of transaction you want (and/or will accept). In addition to outlining your expectations for transitioning ownership and wealth maximization to prospective buyers, you’ll also need to incorporate them into your company’s offering to the marketplace.
Minimizing Negative Blowback
Owners can be self-centered when it comes to selling their business. It’s a very personal process, but one that involves far more people than you may realize. Stakeholders, friends, and family all will form their own interpretations of your reasons for selling your business, no matter what reasons you give them. But it’s your job to shape perceptions about the sale among those whose opinions truly matter to your organization’s profitability and health—and that group includes you, as the owner and entrepreneur. You need to plan for accomplishing this task before any talk of the proposed sale begins to circulate.
As you prepare to put your business on the market, determine how you will craft your customers’ conclusions about the sale, since most will see little upside for them in the news. Your employees will have very real concerns about their job security and new management. Suppliers will fear losing you as a customer, and your competitors may take the news as a sign of weakness or an opportunity to obtain confidential information. For all of these reasons, it’s best that you keep news of a potential sale confidential until you can release it in a very controlled manner.
Every company sale is unique, as are the reasons for that sale and the buyer’s intentions for acquisition. There is such a wide spectrum of possibilities that offering direction and advice as to how to handle employee, customer, or vendor concerns is difficult. It is unlikely all parties will see a happy ending to the transaction. Think through the ramifications to each constituent, and plan for how and when to address them with the news, remembering never to burn bridges. These relationships may surface again further down the road when you emerge again, possibly with a new startup.
Even though you have to mentally prepare yourself for selling your business, you also have to prepare yourself for not selling it. You may go to market only to find there are no buyers who meet your reserve requirements. Or you may get an offer, and, for a variety of reasons, the deal may fall through. Every stalled or failed attempt to sell represents a loss in time commitment, resources, money, and energy. The adrenaline rush you experience when you think a deal is locked up can leave you feeling drained and discouraged if the deal falls through. By preparing yourself for the inevitable setbacks in the sale process, you can regroup and direct your energies back to scaling, innovating, and leading the business you thought you were going to be leaving. And, by minimizing information leaks about pending deals before the agreements are finalized, you’ll avoid unnecessary speculation, emotional upheaval, and misdirected energy among your staff, your customers, and other concerned parties.
Thorough preparation was critical during the Idea, Startup, and Running phases of your business, and it’s equally important now. To maximize the value of your business, you need to get your ducks in a row. Let’s look at some of the most critical parts of that process.
Getting Your House in Order
Just like putting a house up for sale, you need to put your business house in order before you begin presenting it to potential buyers. You can’t untangle a badly disorganized company overnight, so you’re a step ahead if you’ve managed the business and its processes carefully over the years. Your first concern should be that all legal affairs are in order; don’t even consider putting your business on the market before you’re certain you’ve taken care of any outstanding legal issues. Any type of personal or business litigation hanging over your business needs to be concluded prior to a sale—and that includes divorce proceedings that might be in the works for you or your partners. The last thing you want is an ex-spouse making a claim against your business while you are at the negotiations table.
Cleaning house also includes touching up minor “bruises and blemishes,” and the list of those problems can be rather lengthy. As an example, consider reviewing your accounts receivable for bad debt. Old receivables are going to be a point of contention during the negotiations for your sale, and their value will likely be taken off the overall business valuation after a buyer has made an offer. Anything over 90 days past due will be considered a write-off. To avoid losing value down this rabbit hole, you’ll need to work really hard at collecting, hire an agency to collect for you, or consider selling off your old receivables.
Depending on how your business manages its inventory, you may be wise to draw down to a just-in-time level. If there are persistent or recurring customer service issues that you haven’t yet resolved, particularly with high-profile customers, get them corrected now. Many of these issues should be day-to-day priorities for your business, but they become especially critical when you’re getting your business ready to present to prospective buyers.
Reviewing Your Documentation
Another task you need to take care of before you go to market is a careful review of your business’s internal documents and financial records. After making an offer, your prospective buyers will launch an incredibly thorough and involved due diligence process. Every legal contract you have, including those for copier leases and telecommunications services, will come under the microscope. Expect your buyer to review all agreements between your business and suppliers, customers, employees, partners, service providers, and landlords—even bids awarded by customers. Quick access to these records will make the process smoother. You might even benefit from taking a dry run with an expert, to identify any documentation deficiencies, so you can correct them prior to the chaos and frenzy of due diligence (in chapter 15, “Negotiating and Closing the Deal,” you’ll learn about my own painful due diligence process during the sale of TRC).
To make doubly certain that you have a clear idea of your company’s valuation, run through multiple financial valuation models to calculate your own estimate (because these valuations play a critical role in the negotiating process, I also describe them in more detail in chapter 15). Also, work with your accountant or legal advisor to ensure that you have been following proper accounting principles, procedures, and documentation. Before you undertake any lengthy or expensive process, however, check with a professional to be certain that the results will be worthwhile. For example, don’t rush out and conduct an audit if you’ve never done one just because you’ve heard that it’s best to have been audited going into a sale. Audits are expensive, and yours may not be necessary, depending on the size of your organization.
Now is a good time to update and document your SWOT analysis (an analysis of your strengths, weaknesses, opportunities, and threats, which you learned about in chapter 6) and to catalog your organization’s intellectual property and differentiating features. Together, these documents will serve as content for your company profile, which you’ll use as a marketing tool when you go on the market. Be thorough in listing your company’s IP assets: patents, trademarks, and copyrights will lead the list, but be sure to include any other nuance, procedure, process, or methodology that makes your company unique. The sale will hinge on a valuation of your financial model and your intrinsic/IP factors; the latter will give you your greatest leverage in boosting the price you can command from your buyer. Finally, don’t forget to collect your own information and insights about your organization. There’s a lot stored in an entrepreneur’s head and that needs to get down on paper, not only for marketing purposes but for the eventual transition as well.
Hiring Professionals to Help With the Sale
In addition to your own research, gather the services and advice of a variety of experts to help you prepare to present your business and negotiate its sale, and do this well in advance of your actual offering. Without exception, you need to retain the services of an attorney with strong merger and acquisition experience, as well as those of an expert on applicable tax liabilities. You also may want to retain a broker and a professional negotiator.
Many people enlist the services of a business broker or M&A specialist to help create and execute their plan for selling the business; that’s what I did. Take time and do your homework when finding the right person or company to help you through your sale, because skills sets and services vary greatly. I would highly recommend seeking advisors who have done considerable work in your industry and are familiar with your vertical so they can lend their experience to your company. This is the one factor that can really tip the scales in your favor during the process.
The planning activities outlined in this chapter should help you determine what services and talent you need to augment your own knowledge and ability. But in just about every case, you can expect to need the help of a broker in reaching the multiple listing services that will promote your business to private equity, third-party buyers, and foreign investors. Yes, there are a number of web-based services available, but to maintain credibility and attract quality buyers, I recommend that you work with a professional broker who knows how to reach M&A specialists.
Most brokers are similar to real estate agents in that they list your company in the multiple channels of active buyers. They have relationships with private equity and venture capital firms, private investors, foreign investors, and listing services. You want your broker to attract the largest possible pool of potential buyers to foster a competitive bidding environment. Many brokers will represent and assist you throughout the sales process, including the formal exchange of documentation and negotiations. They also should assist in “packaging”—putting together a traditional sell sheet and prospectus to present your business and its benefits to potential buyers. Like a real estate agent, a broker will take a percentage of the gross sale; many request an up-front retainer for their services.
If you talk to enough seasoned entrepreneurs, you’ll find plenty of stories, both good and bad, about the brokers they have encountered. You’d like to think that your broker is on your side to maximize the value of your business, but that isn’t necessarily so. In reality, most are focused on closing the deal in the shortest amount of time to collect their commission. I can’t fault them too much, and there certainly are pros out there doing a great job. Ultimately, however, brokers are salespeople who have quotas to hit. You need to be aware of this as you manage your broker’s work during your sale.
Pay particular attention to your broker’s pitch and positioning. Like any good salesperson, a good broker knows all the emotional points to hit with entrepreneurial owners. Understand that your broker will be selling to you, too, through the process. You have to separate good advice from sales pitches and hold true to your goals and objectives. You also must remind yourself not to rely too heavily on your broker’s efforts, as that person’s faith in the value of your business will never match your own. It’s easy during the long courting process to get tired and have the urge to push things off on your broker. Never take yourself out of the loop; stay in control of the sales process, from beginning to end.
DEVELOPING YOUR PRESENTATION
Just like any sale, you will need to develop an effective sales presentation for each potential buyer meeting, with a focus on that buyer’s needs and how your company can address them. Your broker will help you compile a prospectus containing a high-level overview of your organization’s financials, market niche, product and service features, and intellectual property. The broker will also put together a one-page sell sheet for initial mass release, designed to garner interest in your company among potential buyers. Your actual presentations, however, must be tailored to the specific company that has expressed interest in acquiring your firm and how the sale could help it accomplish its goals.
I like to play Texas Hold’em poker with my neighbors. One thing I’ve learned from experience is that I may be holding decent cards from the initial deal, but they don’t mean much until I see the “flop”—that’s when the other players reveal their hands. In poker, it’s easy for less-experienced players to get blinded by aces. For instance, if I get dealt an ace and then a nine, I can become so focused on that ace that I forget to decipher what type of hand my opponents may have. Inevitably, I miss an obvious flush or straight.
You might be a rookie when it comes to selling your company, but you don’t have to be blinded by your “aces” when the time comes to put out the For Sale sign. Your business has some great attributes that make it unique. Those attributes are your aces, and you might be tempted to dig in your heels and demand a certain value for your company based on them. But you may be forgetting to consider what cards the buyer is holding. Your buyer may be interested in aspects of your business that you aren’t considering, simply because they don’t feel like aces to you. Getting locked into your perceived strengths may derail a deal or allow you to sell short other meaningful aspects of your business.
During the courting phase for TRC, I pushed the Microsoft Select large account reseller (LAR) status that we possessed as a significant and unique value add because only 19 dealers in the country had this designation and no new dealers were being added. Much to my disappointment, several interested buyers couldn’t have cared less about our LAR status. They didn’t understand its significance, and even if they did, it served no purpose for them. To retain their interest, I had to get off my obsession with our LAR status and focus on aspects of TRC that held real appeal and value for my prospective buyers.
Selling your business is about creating a buzz. Your goal is to build within multiple buyers a sense of urgency about acquiring your business. During preparation, you assembled a list of potential or targeted acquirers, along with a list of selling points that are most likely to attract buyers. Now is the time to work those lists. As you match buyer candidates with your organization’s selling points, don’t limit your ideas to your industry. Create scenarios that outline roll-up strategies for going public; ideas for integrating technologies; the potential for synergistic cost savings; plans for potential geographic expansion; or plans for adding new segments, products, and customers. Buyers will have their own intentions and ideas to consider, but your creative thinking will help target a wider audience and potentially heighten buyer interest.
When TRC hit the market in late 2005, I was curious to see how the marketplace would react and what potential buyers we would attract. I had assembled a list of about 20 companies that I felt would make a complementary fit with TRC. The list included Best Buy, which was starting a new education-focused reseller division; Systemax, a conglomerate of resellers and an international personal computer manufacturer; Office Depot, which had a fledgling focus on education and software licensing; and ASAP Software (a company that Dell eventually acquired). Although my exit strategy targeted a Fortune 500 buyer, I didn’t restrict myself to those prospects; I wanted to cast the widest net possible to bring in potential buyers. My goal was to attract several buyers at once, to trigger a bidding war.
As you begin the process of courting potential buyers, train yourself to look at your company through their lens and think of ways that your business could add value to each acquirer’s organization. Always—always—keep the focus of your courting efforts on the buyer, not you! Although your business means many things to you, at the end of the day, you are selling a product that must answer a buyer’s need. Your job is to find out what that need is and position your company as the solution.
Our first responses came from several small companies I’d never heard of, some in the IT industry, others engaged in unrelated products or services. A few of these prospects caught our interest, but their low-ball offers didn’t. Even so, I found the experience of engaging with these companies and learning their motivation for buying TRC exciting. Each encounter gave me an opportunity to hone my selling skills and adapt my presentation to the unique needs of that potential buyer. I would decipher the buyer’s intentions, then adapt my presentation to highlight the features that best fit the buyer. It was exhilarating.
Successful courting ends in negotiations, and that’s a process that requires absolute objectivity. Everything you’ve done to prepare yourself and your organization for the sale will help arm you for the negotiations process. In the process of positioning your organization for the transition, you’ve prepared yourself and your business for a smooth transfer of leadership and a more profitable sale outcome. You know your reasons for selling, and how to best present those reasons to potential buyers, as well as your clients, customers, and staff. The process of getting your documentation in order has helped you refresh your command of the details of your operation. All of this careful preparation, teamed with the professional advisors you have hired to help you manage the sale process, will help you maximize the personal wealth you’ll receive from the sale of your business.
In the next—and final—chapter of this book, we’ll talk about how to successfully navigate the negotiating process. That process will be the culmination of every accomplishment you’ve made in the conception, startup, and operation of your entrepreneurial enterprise. The negotiating table stands at the final gate of your journey, so you can’t afford to let your energy or focus waver as you approach it.