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3 Things to Consider Before Selling Your Business

Giff Constable Axial | July 11, 2018

For business owners, summer often brings extra challenges like slower sales cycles and the musical chairs of employee vacations. However, summer is also a good time to unplug and take stock of where you are in your life and your business. If that process leads you to think about a sale of your business, you’re going to want to get ahead of the game in three key areas:

#1: Deal with the things that scare buyers away

There are a few big red flags that scare buyers away, especially financial buyers who play an increasing role in one’s exit options today. You will want to review your business, acknowledge where you have weaknesses, create a plan to improve what you can, and be ready to explain what you cannot.

Some common red flags include:

  1. Revenue concentration: try to avoid a situation where more than 20% of your revenue is tied up in the hands of one or two customers.
  2. Customer churn: High growth is attractive, but not if it comes with a really high churn rate. If your customer lifecycles are short, you’ll want to examine how you are generating leads, how you are converting leads, and ultimately how well you are delivering on your product or service promises.
  3. Legal risk: Are your intellectual property rights clean? Do you have any outstanding lawsuits that can be closed off? While legal risk doesn’t always scuttle a deal, you might end up needing to accept worse escrow and indemnity terms than you’ll want. If you can’t clean these items up before you start a process, you’ll want to disclose them early on.
  4. Key person risk: A lot of lower-middle-market businesses run pretty lean, but you’ll want to avoid too much dependence on any one person, especially the CEO. Now might be a good time to prioritize where you should bring in the right lieutenants and start those recruiting cycles.

In addition to those four, you’ll also want to deal with excessive debt (leverage) in the business, employee churn, and high degrees of sales cyclicality.

#2: Prep for a Fast Process

You want to preserve momentum during an sale process. Delays rarely works in the sellers’ favor because so many things can go wrong. The buyer might change their focus or strategy. You could lose a key customer or an important employee. You could miss your numbers in a key month. Any of these things might be fine in normal course of business, but sometimes it doesn’t take much to give a buyer cold feet.

Much of your preparation is simply about getting organized:

  1. Get your financial books in order, and, if relevant, work with an accountant to disentangle personal finances from the business;
  2. Gather your legal documents;
  3. Assemble your key historical metrics (product, sales funnel, marketing funnel, etc) and market data (addressable market, competition);
  4. Organize your go-forward plans (product roadmap, growth plans, etc).

More complicated is dealing with the human psychology around a deal. Do you know your own mind and are you clear about your own goals? Do you want to continue running the business? Are there showstopper terms and conditions where you simply won’t budge?

Lastly, you need to get your key shareholders on the same page. You want to put in the work to align your current co-owners and set their expectations before the deal process begins in earnest.

#3: Build Your Deal Team

Selling a business is stressful, not least because you’re likely trying to run the business at the same time. Surround yourself with advisors you trust such as an excellent attorney, tax accountant, and sell-side advisor.

It’s also worth pulling your key executives in early. They will likely need to be involved in the due diligence process, and you’re going to need them to stay focused on operational execution during all of this. An exit process is not the time to take the foot off the gas. Help them understand why you want to sell the business. Use your sell-side banker to help set their expectations on what the process will look like, and to help tamp down their fears of the unknown.

Coach your involved executives on the fact that a sale process is just that — a sales process. If they are going to be talking to the buyer, you want to make sure they have been coached on what to say. You’ll want to keep a united front.

In conclusion, while 2018 is a good year to be a seller, it’s still a good idea to take care of the above list. Go into your sales process knowing your own mind, having a clean house, and having built a great team around you.

Axial is the deal network for the middle market.

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