Written By: Francesca Nicasio
Some business owners see themselves running their companies for decades — maybe even passing them down to their children — but most entrepreneurs don’t want to own and operate their companies forever. Industry data shows that 53% of business owners want to either sell their business or transfer ownership within the next 10 years.
If this is you, then you need to ensure you have a well-crafted exit strategy.
Mergers and acquisitions (M&A) are an attractive prospect for entrepreneurs because they provide a strategic exit route while ensuring long-term financial security and legacy preservation.
That said, the process of selling a business can be incredibly challenging, and only 30% to 40% of companies listed for sale are sold.
Why Do You Need an Exit Strategy?
Your exit strategy can make or break the sale of your business. A well-crafted plan can maximize the value of the business at sale so that you can secure a solid financial position post-purchase.
In addition, a well-defined exit strategy — one that outlines the steps involved in transferring ownership — minimizes operational disruption. If there’s a smooth handover of leadership and responsibilities, your business can keep running.
A strong transition plan isn’t just about handing over the reins to someone new; it’s about ensuring that you and your business can thrive well after the sale.
How Do You Know When to Sell?
The ideal time to sell your business depends on a combination of personal, business-related and market considerations.
On the personal side, you may be ready to pursue M&A if you’re approaching retirement age or looking for a lifestyle change. Maybe you’ve lost your passion for running the business or feeling burnt out. In these cases, selling your company may enable you to pursue new adventures.
Business-wise, you may consider selling your company when it has reached a certain level of maturity. Has the business grown to a certain size, and you’re not interested in taking it further? In some cases, the business may have reached a growth plateau, making M&A a good option.
Finally, the market itself could start telling you that it’s time to sell. If favorable market trends or emerging opportunities arise, selling may allow you to capitalize on these developments, see a positive ROI on your investments and pursue new ventures. Similarly, if you receive unsolicited or attractive acquisition offers, it could be a smart idea to explore them.
How Can You ‘Market’ Your Business as an Ideal M&A Target?
If you’ve decided to sell your business, you need to position your company in the best possible position. Here are expert steps to establish your business as a good M&A target.
Strengthen your cash flow
“In the end, cash is king.”
Cash flow is always the first thing buyers look at — whether they’re private equity firms or competing businesses growing through acquisition.
As such, the first thing you should do before marketing your business to potential buyers is get your cash flow in order. You can do this by “cutting expenses in areas that will not hurt revenues or profitability. This may also involve the owner taking a salary as a W-2 employee. Owner Salary is a big component of Seller’s Discretionary Earnings — or some people use Adjusted EBITDA. In a small business where the owner is the daily operator, the owner’s salary may often be the biggest part of the business’ cash flow.
Do buyers — and yourself — a favor by ensuring all company paperwork and components are in order. This will make the due diligence process immensely easier.
Get your house in order. This is everything from sales to operations, accounts payable and accounts receivable, and everything in between. Buyers spooked by a messy due diligence process. It literally could cost you the deal.
Small business owners should gather all financial records, update their list of assets, and organize all contracts to ensure all information is organized and aggregated in one easy-to-access location. Make sure all key stakeholders are aware of the need to clean up shop and make it easy to give the potential buyer the information they ask for.”
Remove yourself from the business
Having an owner who’s heavily involved in the business’s daily operations can complicate the transition process, making the company less attractive to buyers.
Owners should minimize their involvement in their company’s day-to-day. Start removing yourself from the daily operations by adding a layer of management below you. Step away from being the face of the business. This makes the business more appealing, especially to private equity groups.
Round up your key players
A solid team in place reassures buyers that your business can continue to operate successfully post-acquisition, which makes your company a lot more appealing.
Having key personnel identified, managing and leading teams is a very attractive thing for buyers because it shows stability, order, predictability and more importantly, scalability.
Pro tip: maintain confidentiality
While finding potential buyers is relatively easy, securing a serious prospect is a different story.
You can’t under emphasized the importance of maintaining confidentiality when finding a buyer. You can do this by creating a blind profile.
Blind profiles include vague and ambiguous details on the business — what it is, some high-level financial information, etc. Do not name the business, the owner or the precise location. This compromises confidentiality
When the public knows the business is for sale, there is a chance the business may lose customers.
How Will You Know if a Buyer is the Right Fit?
A good buyer is not only willing and able to purchase your business but also motivated to do so. Here’s how you can determine if a buyer is a good fit or if you should go elsewhere.
Watch for red flags early on
You can usually learn a lot about a potential buyer in the first 15 to 20 days, which is why this period is essential for spotting red flags.
A telltale sign of a poor fit is experiencing difficulties during your early discussions.
The initial negotiations, letter of intent and due diligence stages should be easy. Difficult people, sloppiness and poor response times are major red flags that all too often end up being the sign of a bad buyer.
Assess the buyer’s economic stability
Just as the buyer would want to assess your business’s financial stability and cash flow, you should also evaluate their financial strength and credibility.
It’s key to ensure you are going to receive payment for your business. Even when you are willing to provide seller financing, make sure the upfront payment is adequate and ask for account statements or other proof of their financial capability to fund your business.
Set a Plan for Your Business’s Future
There are several factors to consider when deciding whether or not to sell your business. If you do decide to go down the M&A route, you must take steps to make your business as attractive as possible to potential buyers.
From strengthening your financial position to finding interested parties, doing your homework — and the legwork — to secure the right buyer will make the sales process easier and more rewarding.