20 Tips to Sell Your Business for the Most Money

Selling a business is in at least one way like any other skill. Exercise the skill enough and you will get pretty good at it, and be able to identify the factors necessary for success. Over the course of selling 67,500 businesses, we have identified twenty critical success factors necessary to sell a business for maximum value, summarized below.

Select Favorable Market Conditions and Timing

Anyone who has ever owned stock in a publicly traded company knows that what’s happening with the overall stock market and economy can have a profound impact on the price of any particular stock, even if the stock is in a company whose financial performance is virtually unaffected by recent economic and market changes. The same holds true for privately held companies. The value likely to received on the sale of a privately held business in Hawaii may be affected by any one or more of the following factors:

• Global and US equity (stock) market conditions

• Global and US debt market conditions and interest rates

• Global, US and Hawaii general economic conditions (e.g., growth rates, employment levels, personal income growth, inflation)

• Economic conditions in the industry of the business

• Foreign exchange rates

• Performance of alternative investments (e.g., commercial and residential real estate, precious metals, natural resources)

• US and Hawaii tax policies (e.g., capital gains tax rate, investment write-off periods)

• US and Hawaii programs to encourage business and investments (e.g., funding for SBA lending programs, incentives for investments in economically challenged communities, investor visa programs)

It’s important to be aware of changes in each of the above factors and to understand their impact on business valuation. Collectively, these factors can double or halve the value of any particular business in a very short period of time. Consider for example the price of Apple, Inc. below, which dropped 39% during a five week market correction early in 2008. During this time there was no meaningful news from or changes from Apple, yet its value dropped dramatically due to market conditions.

Of course, market conditions are not the only timing issue. To maximize value, the timing needs to be right for the business and its owners as well. Since it’s rare for all factors to be aligned simultaneously, it’s vital to understand the relative impact of the various market and company specific factors that may affect value, and to time a sale to optimize among the tradeoffs involved.

Fully Position Company for Sale

While market timing is important, having the company fully positioned and prepared for sale is even more critical. Market conditions can be perfect, but if the business is struggling, or even doing very well but is excessively dependent on the owner, the timing is not right. To maximize value, there first should be a thorough assessment of how well positioned the business is for sale; see for example, an abbreviated version of our self assessment checklist. Then, develop and implement strategies to fully prepare the company.

We have summarized ten proven (but generalized) strategies for preparing a company for sale. A business intermediary or consultant familiar with valuation issues can develop a more detailed and customized plan. The ten based strategies are briefly summarized below:

• Improve the financial performance of the business

• Clean up your books and records, especially your tax returns

• If your business is location dependent, lock up a favorable long term lease

• Diversify your customer base

• Diversify your product/ service base and create recurring revenue

• Strengthen your management/ employee team

• Strengthen operational, marketing and administrative “systems”

• Secure key suppliers, obtain exclusive rights and/or build barriers to entry

• Maintain and upgrade equipment and facilities

• Make the business less dependent on the owner.

Allow Adequate Time for Sale

The average “small market” business (valued under $1 million) sells in about 7-8 months from the time a professional intermediary is hired to take it to market. The average “mid market” business (valued $1-100 million) sells in roughly 10-14 months. Realizing the twenty success factors on this page does not come easy. The sales process is long and complex. To achieve maximum value, it is critical to allow sufficient time. If a sale needs to be rushed for any reason (such as a health crisis with the owner, cash crunch or partnership dispute), the business is likely to sell for a significant discount.

Moreover, the above figures assume the business is prepared to go to market at the time of the engagement. More often then not, the business may need months of years of preparation before it is optimally positioned for sale. Assessment of the business’s salability and planning for sale should ideally begin years in advance.

Select Experienced & Qualified Advisors

The sale of a business is a highly complex transaction, and complexity increases exponentially with size. Having the right experience and qualified advisors can dramatically impact not only the value of the sale, but to a large extent whether a sale will happen at all.

The specific type of advisors needed depends on the size and complexity of the business. For simpler and smaller businesses, a business intermediary, wealth planner, attorney, and CPA are usually sufficient, and often the involvement of the attorney and CPA is not extensive. For middle market transactions, many of the following are also involved, depending on the nature of the business: trust and estate attorneys, employment law attorneys, environmental attorneys, tax specialists, business consultant, commercial real estate broker and/or appraiser, equipment appraiser, banker and even an industrial psychologist.

One of the gravest mistakes a business owner can make is to sell his or her own business. It is said that “any attorney who represents himself has a fool for a client”. At least the attorney has some legal training. Business owners frequently sell their own companies, avoiding broker fees but invariably netting significantly less than they would with professional representation. For more information, read our primer: Should you sell your own business?

Among the team of advisors necessary for an optimal business sale, the business intermediary plays a central role, orchestrating the involvement of all the parties and keeping the deal moving forward. Within the team, generally it is only the business broker that:

• Has experience handling hundreds of business transactions, and focuses full time brokering businesses as a profession.

• Has the diverse set of skills necessary to be intermediate the sale of businesses, including sales, marketing, business valuation, negotiating, legal, general business knowledge, operations, financial, tax, legal, etc. While attorneys and CPAs are often brilliant at what they do, as a rule they are, both by personality and training, terribly ill suited to sales, an essential skill in brokering businesses. At VR, we have hired professionals of all types to be intermediaries, and the failure rates of attorneys and CPAs in business brokerage trails only that of engineers.

• Has relationships with thousands of business buyers, and is continually in discussions with potential buyers (as opposed to working with just the one or two known to the seller), to keep any particular buyer honest.

• Is not vested in the status quo. Attorneys and CPAs in particular frequently lose clients upon the sale of a business and thus are naturally inclined towards preserving the status quo.

• Are compensated to make deals happen, and are not paid more, nor find their professional risk reduced, when the deal dies or gets dragged out.

The choice of attorney(s) is also critical. The sale of a business can be an extremely complex legal transaction, and it is imperative, especially for larger and more complex deals, to have attorneys who have completed dozens of transactions during the last 3-5 years. Business owners need to ask their regular business attorney how many business transactions s/he has completed recently, and if the answer is just a few, engage an M&A experienced attorney for the transaction.

Most business owners are familiar with the expression “deal killer attorney”, and that is not by accident. Deals are killed every day by attorneys who believe they are acting in their clients’ interests, when in fact they are operating beyond their area of expertise. In a zealous attempt to protect a client, an inexperienced attorney may sabotage a deal 20% or more richer than what the second best buyer would pay. If the deal dies, it’s the seller, not the attorney, who will need to keep running the business, perhaps for years to come.

To a much lesser extent than with attorneys, some of the same issues apply with CPAs and other advisors. CPAs in particular are often looked to for advice on business valuation, yet most have little experience or education on the subject.

Rigorously Protect Confidentiality Throughout the Process

It is imperative to protect seller confidentiality throughout the sales process. Many businesses can be severely damaged by mere rumors that the business is for sale, should these rumors circulate to employees, customers, suppliers or competitors. The leaking of sensitive information, such as financials and customer lists can cause further damage.

All public marketing materials need to be carefully scrutinized to ensure they are sufficiently disguised to reveal nothing that could be used to identify the business. Prospective buyers need to be thoroughly screened to ascertain their resources and motivations. In some cases, it is advantageous to limit marketing exclusively to buyers who are “off island”, to drastically reduce the chance any Hawaii resident will learn of the sale.

During the negotiations and due diligence and processes, buyers will request information about and access to highly sensitive aspects of the business, such as financial records, customer lists and contracts, supplier agreements, employee lists and responsibilities, employment contracts, lists of equipment, sales backlog and pipeline information, etc. They may demand to interview employees, customer, landlords and suppliers as part of their due diligence process. Some of the information and access will need to be provided to make the deal happen, other requests need to be deferred to later stages of the process, and still other requests must be resisted at all costs. Appropriate legal agreements need to be executed along the way to ensure the seller is protected if the deal does not consummate. (Hawaiian Airlines’ dispute with Mesa Airlines is a textbook example of the risk inherent in this process.)

Maintain Business Performance Throughout the Process

The sale of a business is an extremely time and management intensive process. It is easy for an owner, particularly when managing the sale himself, to lose focus on the business during the process and for performance to suffer as a result. To sell for maximum value, it is vital that business performance be maintained throughout the selling process.

Consider, for example, the following chart of the price of Astea International, a publicly traded software company, before and after announcing its quarterly earnings. One bad quarter (3 months) earnings reduced the value of the company by 32%.

Buyers invariably insist on seeing financial statements right up until closing, and if recent months show a decline, they may demand a price reduction or even pull out of the deal altogether.

While such a reaction may seem excessive, a last minute earnings decline triggers buyers’ worse fear – that the real reason the owner is selling is that the business is or will soon be in decline due to unknown factors not disclosed by the seller. It’s a phenomenon we call the “fear of insider trading”. The seller of a small business is the ultimate insider, who may know a key customer will be switching suppliers or a major new competitor entering the market, and is seeking to dump the business before it implodes.

Sellers are often burned out, already focused on a new business opportunity, suffering declining health or a partnership dispute, and maintaining the business may be the last thing on their minds. But it’s absolutely necessary to achieve optimal results. Of course, financial performance is not the only issue. It’s important to continue to maintain capital equipment, recruit and train employees, invest in sales and marketing, etc. In short, operate the business as usual – or better.

While maintaining strong earnings is important, the worst thing a seller can do is cut back on investments and activities necessary for the long term health of the business to save a few bucks. One needs to continue to invest in advertising, inventory replenishment, maintenance of equipment, training of employees, etc. just as was done in the past. Buyers are looking for an ongoing business, not one being wound down or liquidated. Major changes in the business in the business (e.g., dramatic changes in product/service offerings, pricing, capacity, etc.) should also be avoided.

Thoroughly Understand Industry Dynamics & Growth Opportunities

It is important for the seller and business intermediary to thoroughly understand important industry dynamics. These factors can influence business valuation, timing for taking the business to market; the sales pitch, focus and content of the selling memoranda, marketing plan and target market, and negotiating strategy.

Factors to understand include:

• Industry growth rates and trends; which customer segments or geographies are growing fastest; which products lines or services are in greatest demand; summary of the best growth opportunities and potential value

• Competitive strategies; strengths, weakness, opportunities and threats; market share trends; threat of new entrants; etc.

• Cost and pricing trends

• Supply/ supplier trends; assessment of critical suppliers, relationship with competitors;

• Key technology trends; impact on cost, quality and product/ service delivery

• Legislative or tax issues.

Accurately Assess Company Value to Financial & Strategic Buyers

Prior to taking a business to market, it is important to have an accurate estimate of the likely value. For a detail discussion of the approaches to business valuation, key factors affecting valuation, rough rules of thumb, and more, review our in depth discussion of business valuation – what is your business worth? Note that there are some compelling reasons to consider a formal business appraisal.

It is also important to understand the distinction between financial and strategic buyers. Financial buyers are those that are not likely to realize significant synergies from an acquisition. Generally, they are individuals or entities that do not have a business in the industry of the company being acquired, nor in a closely related industry. Strategic buyers, by contrast, have business operations in the same or closely related industry, and are expected to enjoy significant synergies.

A valuation (or appraisal) of a business will estimate its fair market value, the price one would expect it to sell for under normal conditions, when both seller and buyer are fully informed and neither is acting under compulsion.

The investment value is what the business is worth to a specific buyer, and reflects anticipated synergies. If potential synergies are high, the investment value can be dramatically different from fair market value, and can vary substantially by buyer. Google, for example, was able to justify paying more ($1.6 billion) to acquire YouTube than Yahoo or Microsoft because its technology and advertising network enable it to realize more revenue from the site than the other bidders. Underestimating the value of potential synergies can leave lots of money on the table, while overestimating the value may turn off the best potential buyers. This uncertainty is one of the reasons, that for larger businesses (valued at $3-5 million and higher), it often makes sense to go to market with no stated asking price.

Evaluate Risks & Benefits of Approaching Strategic Buyers.

Strategic buyers, by definition, directly or indirectly participate in the industry of the company being sold, and may realize substantial synergies through a purchase. Some businesses may have hundreds of potential strategic buyers, while others have none.

Strategic buyers may include any the following, depending on the industry:

• Direct regional competitors

• Companies that sell similar products or services in other regions, but not in direct competition in the seller’s region

• Customers of the seller

• Suppliers of the seller

• Companies with complimentary product or services

• Companies with suppliers or customers in common with the seller.

The decision to approach and/or respond to strategic buyers or not, and if so, which specific buyers is an absolutely critical one. As noted in step 5 above on confidentiality, mere rumors that the business is for sale can cause significant damage. Companies in the seller’s industry can wreak much more havoc, since they know the key players and may be in a position to take customers, suppliers or even employees from the seller. Of course most companies conduct themselves with integrity, but one can never be sure how any particular company will act. The decision is best made on a case by case basis, considering for each buyer:

• The magnitude of potential synergies

• Estimated ability to complete the transaction

• Expected level of interest

• Likely fallout if a deal doesn’t consummate

• The company’s and key executives’ reputation for integrity.

Prepare Professional & Detailed Selling Memoranda.

An adage reads: “You only get one chance to make a first impression.” This certainly holds true in the sale of a business. Prospective purchasers first impression of a potential acquisition is based the selling memoranda, the prepared materials that provide a detailed overview of a business for sale.

Several versions are needed, a disguised executive summary that gives a brief introduction to peak buyer interest but withholding identity of the business, and more detailed versions that are provided after buyers sign non-disclosure agreements and are qualified and prove their seriousness.

Memoranda should be prepared in a variety of formats, including paper, PDF, spreadsheets, Internet, and digital video, to fully and persuasively communicate the opportunity. Topics covered in the various selling memoranda may include the following topics, and run from 10-100 pages, depending on the size and complexity of the business:

• Executive summary

• Market and industry environment

• History

• Owner, management team & employees

• Products & services

• Financial history and recast financial statements

• Financial projections

• Growth opportunities

• Potential synergies with acquirers

• Customers (e.g., profile, concentration, segmentation, etc.)

• Suppliers (e.g., concentration, exclusives, terms, etc.)

• Lease and facilities

• Equipment

• Operations, overview and systems

• Sales & marketing strategies and systems

• Intangible assets (e.g., intellectual property, franchises/ licenses, etc.)

• Photographs and/or video

While the marketing materials need to give full coverage to historical financials and the current status of the business, it is critical to remember that buyers are primarily focused on the future. One needs to be able to fully document and explain past performance while enthusiastically selling the future opportunity.

Conduct Comprehensive Worldwide Search for Qualified Buyers

The best buyer for any particular business may come from anywhere in the world. The buyer may an individual or family; a competitor, customer, or supplier; a private corporation or publicly traded company; a private equity group or other investment fund; or management team. The buyer’s motivation may be to own a family business, accelerate growth, break into Hawaii, or obtain an investor visa. To obtain maximum value, a systematic and comprehensive marketing and sales effort must be developed to reach all of such viable buyers.

The marketing plan should address the following issues, depending on the size, industry, complexity of the business and owner preferences:

• Procedures for maintaining confidentiality

• Profile and clear screening criteria for prospective buyers

• List and/or criteria for buyers that will not be considered (e.g., specific companies, buyers in Hawaii, etc. to protect confidentiality)

• List of likely strategic buyers worldwide (obtained from a variety of third party and internal databases)

• List of likely private equity buyers worldwide (from third party and internal databases)

• Advertising vehicles to be used (e.g., VR offices, VR web sites, VR email distribution lists, VR list of cooperating brokers, immigration attorneys, direct mail, telemarketing, etc.)

Persuasively Present Opportunity to Each Buyer

Once the plan is developed and approved, execution begins. The sales pitch may vary substantially depending on the target. Industry buyers, for example, will likely be focused on potential marketing and operational synergies, customer overlap and cultural fit. Private equity groups looking for add-on investments will behave largely like industry buyers, while those seeking new platform investments will have significantly different criteria. Foreign corporate vs. foreign individual investors vary greatly in their acquisition criteria. A Korean national’s most important objective may be an E2 or EB5 investor visa to establish US residence, while a Japanese corporation may be primarily interested in establishing a foothold in Hawaii and picking up experienced, bilingual talent.

While pitching prospective buyers, the buyers should be qualified against the following criteria:

• The financial resources and motivation to purchase the business on acceptable terms

• The personality and risk taking profile to pull the trigger

• The management ability to run the company and satisfy stakeholders successfully

• High levels of synergy.

In almost every industry, the top 20% of sales professionals generate about 80% of the sales. So it’s vital that the persons pitching the business to prospective buyers have exceptional sales skills. They need to know how to get past the people screening the calls for potential decision makers, and how to make the most of what may only be a few minutes to pitch the business. They need strong understanding of the industry and business and a deep knowledge of the fundamentals of mergers and acquisitions.

Carefully Orchestrate Negotiations or Auction with Multiple Buyers

If the prior steps are handled properly, there should be several qualified buyers interested in the business. The process needs to be carefully orchestrated so that all buyers feel they are being treated fairly. Good relations need to be maintained with all, in case a chosen buyer doesn’t work out.

It’s important to control the negotiation process and flow of information. Buyers will want as must information as possible before making an offer in order to make their estimate of investment value, while the seller needs to withhold or defer providing sensitive information to protect the business. Knowing what information to provide at what stage of the process is an art, not a science, and highly dependent upon the specifics of the parties and the anticipated transaction. Withholding too much may turn away a viable buyer, while providing too much creates excessive risk.

Buyers will seek to gain an exclusive negotiating position and restrict discussions with other buyers, while sellers want to keep the process more open. In a perfect world, the process is managed so that buyers are putting forth offers simultaneously in an auction format.

Carefully Manage the Due Diligence Process

Due diligence is the phase of the sale process after which the basic price and terms of the deal have been agreed to, but before the transaction becomes fully binding. Many sellers and brokers get the false sense that the deal is assured once price is agreed to, but this is certainly not the case.

Business transactions frequently fall out of due diligence, for any number of reasons, including:

• Seller can not back up representations made in the selling memoranda or in verbal communications

• Poor financial records and documentation

• Recent decline in financial performance of the business or in the value of buyer’s assets

• Deficiencies found in inspection of furniture, fixtures and equipment, inventory or other tangible assets

• Something occurs in the business which materially decreases (or increases) perceived value, and the parties can not agree on what if any adjustment in agreed to terms is appropriate

• Failure of either party, or of third parties such as landlords and CPAs, to provide information in a timely way

• Obstacles to transferability discovered in key agreements, contracts or other important business relationships

• Failure of landlord to assign leases or otherwise approve of buyer

• Failure of franchisor/licensor to assign franchise/license or otherwise approve of buyer

• Evidence of pending difficulties with key customers, suppliers or employees emerges, or indications from any of these parties that they are dissatisfied with the buyer or transaction

• An attorney, CPA, wealth advisor, estate planner or other advisor recommends against the transaction to either party

• Business is found to be too dependent on owner and/or owner’s family

• Obstacles or delays in obtaining required licenses, permits or insurance

• Failure of buyer to obtain required financing

• Personality conflicts emerge between buyer and seller, or one party gets the sense the other is not trustworthy or cooperative

• A family member of either party advocates against the deal.

• Either of the parties gets cold feet or buyer/sellers remorse

While managing all the above potential challenges, it’s important to simultaneously:

• Continue marketing the business and

• Continue communications with other prospective buyers

• Maintain business performance

• Plan for the career, financial and lifestyle transition to occur after the close.

As one might imagine, managing all the above can be incredibly stressful and challenging. The cumulative stressors typically involved in the sale of a business (retirement, change to a new type of work, major investment, mortgage, move of residence) is one of the more stressful experience many individuals will experience, on par with the stress induced by divorce. [See: Recent Life Changes Questionnaire by MA Miller and RH Rahe, 1997]

While we’ve identified the most common obstacles that arise during due diligence above, space does not allow a meaningful discussion of solutions to overcoming the challenges. For that we would need to write a book on business brokerage. For our purposes here, we note that some of the most critical success factors are to keep a cool head throughout the process, willingness to compromise, and assistance from experienced, professional advisors.

Maintain Highest Level of Integrity and Professionalism

When trying to sell a business, it’s only natural to want to paint it in the best possible light. As brokers, we certainly do that within limits. However, if one goes too far and misrepresents a business, or fails to disclose material facts that could affect its value, one risks not only losing viable buyers but substantial legal liability as well. It is imperative to be forthcoming and conservative in all representations about the business, and to disclose upfront all material facts that could affect its value.