Have ya ever seen a billion dollar sale of a business and wonder how it happens?
The largest and most successful sales of businesses are handled in a carefully crafted process that has been refined since the early days of business.
I’m gonna break that process down for you right now.
Below are the 10 steps to selling your business — since the biggest and most successful sales of businesses happen with the help of an investment bank, I’m going to include them in my 10 step process.
Here we go:
First, you’ll need to send out a request for proposal (RFP) to investment banks who you think would do a good job selling your business.
You should leverage your network to find a quality investment bank — if you need help with networking, you can start with my articles mentioning business networking tips.
In the RFP, you’ll want to ask the investment banks a common set of questions for them to answer. Here are some examples:
For your choice of an investment bank, I recommend you rely heavily on:
A) Your chemistry with the individual investment banker with whom you’d be working.
B) The references you speak with (you need to dig in with these folks).
C) The experience the investment bank has with sellers like you and buyers of companies that feel similar to yours.
D) A cost structure that is weighted heavily towards the investment bank’s performance (my preference is a straight commission of a sale (1% to 2% is fairly common.
Investment banks will typically charge a minimum amount for smaller deals (this makes sense because “a deal is a deal,” as they say — as in, it takes roughly the same amount of work for an investment banker to sell a $100 Million business as it does to sell a $1 Million business).
You then sign an engagement letter with the investment bank — this can be as simple as a 2-page Agreement.
The investment bank will now work with you on putting together what’s called a “book” (or “Offering Memorandum” or “Management Presentation”).
These consist of the key information on your:
This management presentation — which may be as simple as a 50 to 100 slide Powerpoint-type presentation — will be the main selling document the investment bank and you use to sell your business.
Your new investment bank will do market research and come up with anywhere from 20 to 50 target buyers of your business.
Why so many target buyers?
Most investment bankers stick to their philosophy that “competition breeds the best price.”
Many of these target buyers may be companies you’ve never heard of. The target buyers will typically consist of two types of businesses:
A) “Financial Buyers” — These firms are typically private equity firms that are looking for cash-flow positive businesses to invest in that can be sold to a larger buyer or taken public.
B) “Strategic Buyers” — These are companies for whom your business adds strategic value. For example, you may have products that their existing customers would like to buy or vice-versa (e.g. you have customers who would buy their products).
Strategic buyers may also find redundancies between your business on the expense side such as overlapping customer service, technology or administrative costs that can be eliminated through the combination of your businesses.
Your investment bank will ask the target buyers to sign NDAs in order for them to view an executive summary or “teaser” of your business (the executive summary may be just one page of an offering memorandum or 5 to 10 slides from your Management Presentation.
Buyers are asking questions during this stage (this may take a few weeks).
By this point, about 10 to 12 potential buyers should send in a Letter of Interest that they’d like to buy your company.
These Letters of Interest are non-binding; however, target buyers that submit them are usually very serious.
At this point, your management team will prepare to present to the 10 to 12 interested buyers. The presentation is typically 50 to 75 slides on every aspect of your business…with an emphasis on selling your business.
You will practice your presentation with the investment bank — a good investment bank will ask you dozens of the standard questions that buyers will ask.
Once you’ve practiced, you will perform the 10 to 12 management presentations over a week to two weeks ( e.g. two management presentations per day is common). These may take place at the investment bank’s offices (or at your own offices if you’re comfortable with that).
Around this time, buyers will use what’s called a “Data Room” (sometimes called a “War Room”) — this is a place where they can review financials, stock certificates, audits, account receivable aging reports, accounts payable aging reports, contracts, employment agreements, etc.
This used to be in a physical location but now there are virtual data rooms; a leading provider of such a virtual data room for mergers and acquisitions is Intralinks.
The main benefits of a virtual data room are: 1) Speed — The target buyer can review your documents much faster and 2) Control Over Buyer Activity– You the seller can see exactly what each interested buyer is reviewing (by topic) and how much time they’re spending on the due diligence.
The virtual data room is paid for either by you the buyer or your investment bank for an average cost of $15,000 to $20,000, according to this Boston.com article.
After you complete the management presentations, about one-third to one-half of the interested buyers will send a final proposal to buy your company. Again, this is non-binding on their part but it shows that they are serious.
That means you should have receive 5 or so proposals.
You and your investment bank will now pick 2 to 3 final horses with rankings of #1, #2, and #3. Your investment bank will go to #2 and #3 and ask them if they can “step up” their bids to beat the #1 horse’s bid.
After this dance, there should be a clear #1 choice — your investment bank alerts #1 that he’s #1 (and also alerts #2 and #3 that they are second or third choice).
You now sign an exclusive agreement to let the #1 buyer due more in-depth due diligence on everything about your company.
This is often where some skeletons come out of the closet. Roughly half the time, the #1 buyer will pull out of the deal (in which case you go to #2 buyer and tell him he’s now #1 (and you repeat the one-month exclusive due diligence period)
At this point, final contracts are signed (your investment bank will have been working on this earlier with an attorney representing you) and transfers of assets and any other material begin.
The buyer then wires money into your account (and wires the commission directly into your investment banker’s account).
A buyer will often ask that a certain percentage of the sales price (e.g. 10% to 15%) go into escrow to cover “Clawback” provisions. The definition of a clawback is the right for a buyer to “claw” “back” a certain amount of money for things that you the seller fail to deliver over a certain period of time.
The whole process from beginning to end should take about 6 months with about:
I hope you get to enjoy a sale of your business some day — I’ve experienced one of my own and it was a blast!
Oh, and don’t forget to read my friend Doug’s 7 Steps to Maximize the Value of Your Business — afterall, it’s tough to sell your business for much if you haven’t built in amazing value!
I often get asked the following questions from business owners and leaders:
Well, I’ve got my own thoughts but there’s a guy you’d much rather hear from — he’s been doing mergers and acquisition (M&A) deals for 20 years.
His name is Doug Hubert (pictured) and he leads the M&A work as a Managing Director at CBIZ Inc.
He and I graduated high school together and even though I haven’t done a good job staying in touch, he was kind enough to share seven tips for you to use to maximize value in your business. Here they are!
1. Build a deep management team
One of the most difficult challenges for an entrepreneur, and one of the critical differences between a good company and a great company, is the depth and quality of the senior managerial team.
Too many entrepreneurs make the mistake of trying to run and grow their businesses with only one or two people capable of making critical decisions.
As a result, most businesses will plateau in their growth. If your company can’t function efficiently without your direct daily involvement, then you need to immediately begin to hire and develop talent or the future of your business is in jeopardy.
Jack Welch, the former CEO of General Electric, considered talent development and succession planning one of his greatest accomplishments in his tenure. Treat this issue with the same importance.
2. Diversify your customer base
Your largest customer should ideally be no more than 15%-20% of your revenues and/or profitability. While it’s often efficient and easy to allow a major customer to develop into a substantial portion of your sales, nothing could be more dangerous to the future health and value of a business.
Once a customer becomes a critical portion of your revenues and/or profits, then they own you. They can begin to dictate the
financial terms of the relationship and any change in their business, be it financial, personnel or otherwise, has a direct effect on the health and value of your business.
While it might require extra effort and possibly some short-term sacrifices to your bottom line as you build other accounts, the long-term benefit of a diversified customer base is a significant reduction in your financial risk profile.
3. Maintain quality financial information
A consistent area of weakness with most small and middle-sized companies is the lack of strong financial documentation. Most business
owners don’t want to spend the extra money to obtain an audit, believing a review or a compilation is just as good-it’s not.
Audited financials provide credibility with bankers, commercial financing sources, insurance companies, and most importantly, potential buyers.
The extra money spent will be recovered in a higher premium when the business is eventually sold.
4. Develop a proprietary product or service
To truly thrive as a company, you must distinguish yourself in the marketplace by offering a unique product or service that can’t easily be replicated by competitors. While this seems obvious, very few companies are dedicated to creating this distinction.
Ask yourself if your customers, employees and competitors can all quickly describe what differentiates your company. A superior product or service will create the opportunity for a pricing advantage in good times and customer loyalty in difficult periods.
5. Focus on profitability
Too many business owners measure the success of their business on top-line revenues rather than pre-tax profitability. Value is created through maximizing profit, not maximizing revenue growth-a $25 million company earning $5 million pre-tax is worth more than a $40 million company earning $2 million pre-tax.
Another common mistake is desire to limit profitability to limit taxes. While fast growing businesses often need the extra cash to fund growth, this approach loses money for business owners, as the focus becomes tax avoidance rather than operational efficiency and profit maximization.
There are legal ways to minimize your taxes through the use of an S-Corporation or LLC rather than a C-Corporation.
6. Prepare and execute a business plan
Establish operational and financial plans and goals for your business in one, three and five year increments and share them with your employees. The plans should take into account various economic, industry and company specific scenarios and how management would react to each.
In addition to creating a road map for your future growth, this will focus your business and your employees around quantifiable goals and will allow you to make better business decisions as you grow your business.
7. Seek the help of outside professional advisors
Seek the assistance of outside professionals, especially a full service accounting firm, who can provide valuable advice as you grow your business.
Not only can they provide objective counsel as you grow your business, they can help you avoid disastrous legal, financial and operational mistakes that may have significant financial consequences down the road.
Similarly, if you plan on selling your business or are approached by a buyer, an investment banker can ensure that you obtain the best possible transaction by re-stating your financials, preparing a memorandum that highlights the intrinsic value of your business (including off-balance sheet items) and quietly approaching other buyers to ensure a competitive process.
CBIZ Mergers & Acquisitions Group, Inc. (“CM&A”) is the investment-banking arm of CBIZ, Inc. (NYSE:CBZ). CM&A predominantly represents owners of businesses with revenues between $15-300 Million in mergers & acquisitions transactions. CM&A offers a comprehensive and customized approach and welcomes all inquiries, which are treated in confidence.
To learn more about valuing a company and other mergers and acquisitions information, and to learn more about Doug, visit the CBIZ Website.
©2009, CBIZ, Inc.