The opportunity to sell your business may come as the result of a long and thoughtful process. Or it may unexpectedly appear when a buyer presents themselves through a business broker.
No matter how you reach the decision to sell your business, be prepared for a process that is long and complicated. You’ll need at least six months to work on your financials to ensure they’re ready for a potential buyer. Many sellers need to start the process as early as 12-18 months ahead of time. Be prepared to give buyers at least 3-5 years of financial records.
Here are 5 factors you need to look at to improve your chances of a successful sale.
The negotiation and sale process will be less stressful if you hire the right investment banker to support the process. You’ll also need the assistance of lawyers and accountants to close the transaction. Before choosing a broker, interview several. Especially if you’re not willing to pay, it’s hard to find a quality broker who will protect your interests and help you get a better deal. You should also check with others who have recently sold businesses to see if they have someone to recommend.
Confidentiality is a Must
Confidentiality about the sale can make or break your business and the sale. Some potential buyers are also competitors. So when contemplating a sale, it’s critical to assess whether the buyer is truly interested in the sale, or just fishing for information. Then work with a skilled lawyer who can help you construct an airtight NDA.
Due diligence is a key part of the sale process, and gives the buyer a chance to test the claims the seller has made about the business. So when responding to initial inquiries, only respond what is necessary. Due diligence usually only begins after a letter of intent is signed.
Buyers will want to conduct a comprehensive review that includes combing through legal and financial documents. They’ll review commercial agreements, real estate leases, employment agreements, internal operations and documents, intellectual property, customer lists, regulatory compliance, licensing, and similar issues. Buyers in larger transactions may expect the seller to construct a data room that makes it easier for them to review key documents.
Letter of Intent
A letter of intent (LOI) marks the official beginning of the sale process, and determines in large part how the sale will proceed. The buyer should commit to a firm price, or at least a price range. The LOI should clearly outline what factors might change the price, and whether there is a “break-up fee” if the buyer backs out at the last minute.
The structure of the transaction—asset or stock purchase—will determine which agreements you must sign. The buyer will hold you responsible if things go awry after closing. In some cases, the buyer may request an earn-out over time or post-closing escrow to protect their interests. It’s important to have a lawyer review these agreements to protect your interests.