The Business Owners’ Special Series (B.O.S.S.) No. 40

The decision to sell your business can be a difficult one, followed by an arduous process. An unprepared seller may face many unpleasant surprises along the way. As a seller, you can expect the potential buyer to conduct a thorough investigation of your business’s operations, systems, processes and financial records in what is known as the “due diligence process.” Before the buyer writes you a multimillion-dollar check to buy your business, they will meticulously probe and wear you down, consuming endless hours of your time. If you have not thoroughly prepared your business for sale, the offers you receive from potential buyers may be disappointing. Furthermore, the gap between the offers you receive and the amount you had expected to sell your business for can be financially devastating.

Business owners may not understand that different types of buyers bring different opportunities, as well as different sources of anxiety. Selling to a buyer that does not align with your exit goals may lead to regret, both in financial and emotional terms, which you will live with for a long time.

Fortunately, “exit planning” exists to reduce and even eliminate the heartache, regret and financial disappointment when selling your business. Comprised of many value-building steps, it’s a robust process that maximizes business value and works toward satisfying the business owner’s business, personal and financial goals. The following will focus on three of those steps that are often overlooked.

Step one: Choose the right type of buyer

Educate yourself on the different types of buyers and understand what each type of buyer will offer in terms of opportunity and potential discomfort. For example, consider the following two scenarios of buyers who are both highly interested in acquiring your business:

• Buyer #1 may offer a higher price than Buyer #2. However, Buyer #1 may make dramatic changes to the business shortly after they acquire it. They may discontinue certain products or even your entire brand by selling your products under their own label. They may terminate relationships with those who they perceive as ‘low-value customers.’ They may move segments of the business out of the state or out of the country, and lay off a large number of your employees.
• Buyer #2 may offer a lower price, but may continue the legacy you created with respect for the brand and an appreciation for your customers. They may operate your business with little to no disruption to your company culture, employees, customers and reputation.

Action item: Make certain you understand the different types of buyers and identify which types of buyers align with your exit strategy. Pre-screen buyers and eliminate those that do not line up with your exit objectives.

Step two: Become a process-driven business

When the buyer takes a thorough look at what your business has to offer during the due diligence process, they are seeking out the weaknesses and risks in your business. When they find them, they will reduce the purchase price they offer.

To avoid this scenario, you must examine your business through the eyes of a buyer. This can be difficult to do, and an exit planning advisor can assist you with this vital step. Searching for risks and weaknesses that a buyer may potentially recognize typically involves identifying opportunities for business improvement and value enhancement. Every improvement you make before the due diligence process will likely contribute to a higher sell price of your business.

For example, you may have an amazing marketing manager whose marketing abilities have resulted in an increase in sales. However, there is a glaring weakness if the marketing process only exists in the head of the marketing manager. When a buyer identifies this weakness, they are apt to reduce their offer price. The value enhancement opportunity is to make certain that your marketing process is well-documented so that it can be continued by the buyer without dependence on a specific individual. Buyers will pay more for systems and processes which function as turnkey operations.

Action item: Review every functional area of your business and make certain you have a specific, identified process for each segment. The process should be in writing and included in your company manual. This manual will demonstrate value to a buyer as it gives them assurance that your processes can be repeated and continued after the sale.

Step three: Document everything and build your ‘data room’

A buyer will review your business in depth during their due diligence process. They will request a seemingly endless list of documents, such as: active contracts for all customers, vendors and leases; proof of protection for your intellectual property (i.e., copyrights, trademarks, patents and domain name registrations); documentation of sales by product line and by customer, going back three years; a three-year sales forecast; three years of cashflow statements; restated financial statements, eliminating owner discretionary expenses and the non-recurring items of income and expense; employee handbooks; CRM system data records; process manuals (as explained in Step Two, above) for all functional areas; and a host of other documents. When a buyer asks for this extensive list of documents, you do not want to be surprised – you want to be prepared.

Action item: Start building your ‘data room.’ This is an electronic file management system, where you store documents that you will ultimately share with a potential buyer once they have provided a signed letter of intent. Sit down with your exit planning advisor and identify the documents that will go into your ‘data room.’ Continually monitor and update this; preparing a ‘data room’ now will make the due diligence process less onerous. You will not only have more credibility with the buyer, but it will command a higher price for your business.

Exit planning is an essential process of becoming a value-driven business that buyers will pay a premium to acquire. By investing the time upfront to engage in exit planning long before you are ready to sell your business, you will potentially realize a huge return on investment.