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CEOs

Why Selling Your Company Takes Longer Than You Think

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It’s taken years to build your business, but now it’s time to move on. The question is: how long will it take to sell your company?

The process of selling a private company involves many variables — too many to consider in just one article — but there are frequent culprits that tend to elongate the process unnecessarily. No matter the size or industry of a business, every exiting executive will need to assemble a deal team, gather documentation, assess the timing of the transaction, build a buyer list, and, of course, execute the sale.

Below is a look at major pitfalls that might arise at each of these steps, how those pitfalls add time, and how smart executives plan years in advance to avoid them.

Assembling a deal team

Taking the right first step when selling a business will go a long way in determining the final valuation and sale price of the business. Almost always, that first step is hiring an investment banker and the rest of a deal team.

A complete deal team can provide enormous support before, during, and after the sale. For executives looking to maximize that value, an investment bank can help sellers obtain a 25% better price for their business than the seller would get on his own. If the sale price isn’t the main priority for the business owner, an investment bank can also help them choose the right buyer or partner.

Although there are many bankers out there, it is important not to underestimate the time it will take to find the right one. According to Omar Diaz, a Chicago-based investment banker at Dresner Partners, the process of finding the right banker is “taking a lot longer these days” for most CEOs.

If a business owner waits until he is ready to retire to find an investment bank, it could easily add 6-8 months to the sale process. A business owner needs to find the right partner, educate them about their business, and develop mutual trust.

However, if a CEO begins building relationships with investment bankers well in advance of the exit, the sale process can become extremely efficient. This strategy not only accelerates the investment bank selection process when the time to exit does come, but it also ensures that the selected banker has a firm understanding of the company executive’s exit goals. This can mean a buyer list is built more quickly, and negotiation happens at a faster pace.

CEOs that wait to build a deal team until they’re ready to sell risk missing out on the right opportunity due to timing or settling for subpar representation. Beginning a sale process without an investment bank is an easy way to add 6-8 months to the process.

Gathering documentation

Having an organized CIM is critical to a successful exit — but it takes time to create. Business owners that overlook the process will see it reflected in the final offer.

Bob Champoux of RC Advisory Services warns his clients that they should be prepared to bare all, referring to the moment when a CEO decides to sell as “open kimono time.” Customer lists, supplier lists, competitor lists, organizational charts, strengths and weaknesses assessments, intellectual property, trade secrets, and other items are all likely to be required documents, on top of three year’s worth of monthly financials, according to Champoux.

Additionally, for Champoux and for most other investment bankers, all of this information is required from company executives before entering into an official sell-side engagement. As a result, the CEO who lacks every piece of documentation must factor in the time necessary to build and verify each file. This can very quickly add months to a sale process. If you have not been organized to date (in the way that PE firms look for), it can be extremely costly — in both time and manpower — to resurface all of the old documentation.

Assessing timing

The arrival of an offer, circumstances surrounding owners, the financial health of the business, and market cyclicality all combine to impact each company executive’s definition of “the right time to sell.” Unfortunately, according to Peter Rothschild of Daroth Capital, maximizing profitability while simultaneously catching the market at a valuation-peak is a nearly impossible feat.

“(Most) clients want to do the impossible,” says Rothschild. “(They want) to time the sale perfectly to get full and fair market value, and they also want to capture as much of their earnings as possible.” This is extremely difficult and often needs months of planning and foresight.

Steve Little of Zero Limit Ventures helps his clients extract maximum monetary and nonmonetary value through transactions by optimizing the timing of the deal. Little always evaluates a business before taking it on as a client, and oftentimes that evaluation leads him to the conclusion that the timing for a deal is not right. Taking the time to allow the market to mature or to implement operational changes can ultimately lead to a higher sale price. According to Little, this period of adjustments and maturation can last up to 2 years.

Building a buyer list

After his evaluation period, Little typically tells his clients, “Here is where you are today. If we do these things, and put them in front of these guys, we’ll maximize returns.”

As Little illustrates, the effort to optimize timing often coincides with the effort to optimize the buyer list. Executives want to negotiate with buyers who will deliver the outcome they want for their business post-transaction, both financially and operationally. In addition, incorporating potential buyers in industries with generous valuations, like technology, can create a more competitive bidding environment later on.

Nevertheless, maintaining focus is imperative. “We’re in a true global marketplace,” says Diaz. “You used to have (a buyer list made up of) 10-15, maybe 20 strategics max, plus 20 (private equity firms) and other financial (buyers).”

Now, “in 2015 you’ve got hundreds of PEs and dozens of strategics.”

Covering every potential buyer adds time, as does eliminating them slowly. Getting into substantial discussions with a buyer who turns out to be the wrong fit is even worse. To expedite the building of a buyer list, both executive and banker need a clear sense of what factors will drive the deal’s value for the sellers and their stakeholders. That sort of mutual clarity is born of the deep trust that typically builds over time, as well as the luxury provided by an opportunity to optimize different metrics and measures in advance.

Executing the sale

By the time a company is actually being marketed for sale, dozens of hurdles have already been cleared. But, of course, nothing is finalized until final agreements have been signed. There are a number of factors that will affect how long it takes to sign a deal with a buyer.

Perhaps the most important factor throughout the marketing process is the performance of the company. During the due diligence process, buyers will be given financial projections for the business and will monitor those closely throughout their subsequent evaluations. For a CEO who wants to expedite negotiations with a buyer, Little notes, one of the best ways for him to do so is to drive his business to exceed the provided projections. Buyers will then move quickly to get a deal done, rather than pay a premium for better performance. Conversely, CEOs who take their eye off the ball and allow a company to falter as it’s being sold incentivize buyers to move slowly. Buyers will wait to drive the price down, if not kill the deal outright.

Negotiations of final terms are often also liable to drag on. This is especially true in cases where multiple shareholders participate in the exit. “I’ve had deals fall through because different shareholders back out,” says Champoux. When evaluating buyers, terms, and conditions, building consensus among all stakeholders is necessary to ensuring efficient negotiations.

Naturally, getting cold feet at this stage in the game is detrimental. Backing out of a deal once it is set in motion will not only irreparably damage the relationship with that buyer, but it will also send negative market signals likely to affect an executive’s ability to sell later. Be certain that the time is right to sell your business before deciding to do so.

Conclusion

The process of selling a company is analogous to running a marathon. Every marathon is 26.2 miles long. The runners who have spent time training for it can expect to complete the race in a matter of hours, while those who begin unprepared are going to take far longer to cross the finish line, assuming they ever do.

Prepared CEOs keep their companies in good shape by building relationships with investment banks well in advance of an expected sale. This ensures that they have proper documentation in hand, that their company’s performance is peaking with the market, that they know which buyers to target in which industries, and that the execution of the deal flows smoothly.

To the contrary, those who avoid training under the assumption that they’ll simply be able to run the marathon on the day of the race tend to find that they don’t finish with a time to brag about.

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