After operating your business for however many years, you've decided it's time to sell part or all of it. You've bought and sold a couple of houses in your lifetime and figure it must be pretty much the same, right? Um, no. While there may be a couple of steps along the way that seem similar, selling your business is a much more involved endeavor, making it important to use trusted advisors who will represent your best interests through this process. To understand why, let's take a closer look at what selling your business actually entails. A quick note: what we describe below is a broad overview of the process with more of a focus on selling the business outright. Much of this still pertains when taking on investment for growth. There may be certain situations that could dramatically change one or more of these steps. Regardless, using firms (more on that below) with solid experience in mergers and acquisitions (M&A), such as Fulham Partners, will benefit you greatly and make the process smoother. Signing a Non-Disclosure Agreement (NDA) and an Engagement Letter/Agreement Before working with anyone, it is imperative that you have a signed NDA and some sort of defined engagement letter or agreement. This is to protect your (and their) interests and to ensure everyone is clear on what the roles, responsibilities and duties of each party are. It is a good idea to have your business or personal attorney review these documents prior to signing them. Understanding Your Goals Whenever Fulham Partners enters into an engagement with a client, this becomes one of the most critical aspects. It is vital to the success of selling your business that we all (us, you and any other related parties) have a true understanding of your goals. There are several questions to answer related to this. Here is an initial, but by no means exhaustive list, of questions to answer:
Are you looking for growth capital or a full exit?
What succession planning within your business have you done?
Is it your expectation that on the day of closing you simply hand over the keys and walk away (not as common as you probably would hope, by the way)?
Have you worked with an estate planning attorney and/or tax advisor to establish the right structures that will give you the greatest tax advantage and asset protection?
What do you want your personal and professional life to look like post-closing?
What do you think your business is worth?
What is the lowest valuation you are willing to accept?
Answers to these questions (and more), prioritized, help us to determine which investors might be the best partner(s) for you and will play a key role in everything that follows in this process. Understanding Your Business Here, we start to dive into the nuts and bolts of your business, looking at a variety of things, including:
Your industry (where has it been, where it is now and where it is going)
The type of business you have (B2C, B2B, services, products, etc.)
What makes your product/service unique in the marketplace and what kind of pricing you can demand for your offerings
The types of customers you have, how long they have been with you, which are more profitable and why
The types of vendors you have, how long you have used them, their quality
Your management team and their relative and respective success in their roles
The same for your staff
Any issues or concerns you have for your business and what, if anything, you are doing to address them
Any opportunities you see for your business and what, if anything, you are doing to take advantage of them
Understanding Your Financials This can sometimes be one of the most challenging parts of preparing your business for sale. Yet, we cannot emphasize enough how vital it is to be able to put forward accurate financials that can withstand intense scrutiny. Because of this, we tend to spend quite a bit of time working with you to make sure we have a clear understanding of what is represented in these numbers and how they tie to the basic operations of your business. If you have had your financials audited (best option) or reviewed by an outside CPA firm (good option), then we use those as a starting point. Otherwise, we will start with whatever financials you are able to produce. We then take whichever form of financials you have (year-to-date and going back 3 years) and put them into a format suitable for presentation to initial investors, including teasing out any personal expenses that may be included, as well as one-time charges or other special items. Next, we go to work putting together a forecast for up to the next three years based on your current business, actual/anticipated pipeline, changes to the business you may be making currently or in the near future, etc. Together with the current and historical financials gives the investors a clearer picture of how cash currently flows through the organization and what to expect going forward. This allows them to estimate a range of how long it may take them to recoup their investment. Doing this work upfront plays a key role when it comes time for due diligence (more on that later). Preparing Materials At this point, we should be ready to prepare the materials to market your business to the investors that are most likely to be a good fit. These materials take two basic forms. The first is what is commonly referred to as a blind teaser or overview. It's called "blind" because it does not contain any information that could directly identify you as the business for sale but it does have enough to pique investor interest. The second is a more thorough, in-depth look at your business. Because it will contain confidential information, investors are required to sign an NDA for receiving this second piece. In this piece, investors will see summaries about your business and financials that we discussed earlier among other items that may be important considerations for them in making their decision. This piece may contain the amount you, as the seller, are seeking. Introductory Contact with Potential Investors During this stage, the blind teaser goes out to potential investors, with initial contact typically being done via email. For investors that are interested and want to learn more, there is usually a brief introductory call that does not involve your management team to review what is in the teaser and clarify any items that may be in question. If the investor remains interested, then, once they sign an NDA, they will receive the more in-depth overview of your business. Deeper Dive Now that potential investors have the in-depth overview in their hands, they start doing a deeper dive on your business. This could, and often does, entail:
Calls and meetings with you and your team
Visits to your office, facilities, etc.
Experiencing your product or service
During this time, if you haven't done so yet, it would be a good time to identify and select a deal attorney to help you with the various documents to follow. Letter of Intent (LOI) With the deeper dive completed, investors serious about buying your business will offer an LOI. (Note: on occasion, during the deeper dive, investors may provide what is called an indication of interest (IOI) letter, in which they affirm their interest in the business and give an approximate range of value from their perspective. Doing this allows both sides to determine whether they are close enough on the valuation to make it worth continuing discussions.) A well-written LOI will contain (again, this is not an exhaustive list):
What percentage of the business they intend to acquire and at what valuation
How they intend to structure the payments (e.g., at time of closing or a series of payments)How much of it will be equity versus debt
What the indemnity escrow amount will be and for what period of time (this is an amount that is part of the purchase price but held in escrow for a period of time the investor deems sufficient to feel confident that everything learned in due diligence and other promises that you make to them are true and that there are no meaningful adverse effects that arise)
Whether they intend for you to stay on with the business post-close and, if so, in what capacity and for what period of time
How they intend to treat the management team and staff post-close
An exclusivity period whereby you typically agree not to discuss investment with other investors or entertain any other offers
Anticipated timing of closing the transaction
Any other items specific to the particular business or transaction
In an LOI, the investor is only identifying what they intend. This is not a binding agreement to purchase your business. Even though this is usually used as the basis for the particulars of the purchase agreement, things may change based on what is found through due diligence. Negotiation Because the LOI requires you, the business owner, to accept it to be valid, you have three options:
Accept it as written
Reject it in its entirety
Propose a counteroffer
This is your opportunity to negotiate the anticipated terms of the agreement to most closely align with your prioritized goals. Compromises probably will have to be made, and if you have the right partner in the investor, the compromises will be seen as fair by both sides (assuming, of course demands by either side are what most would consider reasonable). Due Diligence Once there is an accepted LOI in place, the due diligence process begins. This could be a post all on its own, so we will just cover some basic highlights of what is involved. Due diligence topics normally include:
Quality of earnings review
This is where the work we did earlier on to really understand your financials and ensure they are accurate and defensible pays off. Many a purchase price has been discounted (sometimes heavily) because of issues or concerns that emerge during this review.
Part of this review will include a look at your corporate tax returns with a reconciliation back to the business.
This will include a review of any intellectual property (trademarks, copyrights and patents) you may own and any potential infringements; contracts with customers, vendors and outside third-parties; any conflicts of interest that may exist; prior, pending and possible litigation that may exist; employment matters; tax issues; any potential regulatory concerns, etc.
They want to understand the extent that any existing or potential legal issues could negatively (or positively) impact their investment.
Product's or service's place in the market
Management and staff assessments
Note that the diligence materials you provide would be uploaded to a secure, password-protected virtual data room. Purchase and Sale Agreement Now, we are getting down to the final details of what the deal will be. The purchase and sale agreement will come from the investor, using the LOI as the baseline. However, it must be noted that the investor may (and in most cases will) make changes to some of the terms of the deal based on what was learned through the diligence process. While often these changes are in favor to the investor, there are circumstances where those changes benefit the seller. The agreement itself will include the terms of the agreement and will include, either within the agreement or by reference, other important important documents. These can include:
Representations and warranties
Essentially, these are things that you, the seller, and they, the buyer, attest to be true and accurate about the business and each parties ability to participate in the transaction. Remember the escrow amount mentioned earlier? This is why it is there. If anything that the seller attests to be true and accurate turns out not to be, the buyer can withhold an appropriate portion of that escrow amount.
Covenants not to compete
This is you promising not to compete against the business you are selling with another business for a specific period of time.
Other restrictive covenants
These could be anything that you could do that may harm (directly or indirectly) the business you are selling.
Employment contracts, if applicable
These would be anything else that is needed to address specific aspects of the transaction.
More Negotiation When you receive the draft of the purchase and sale agreement (and all associated documents), you and all of your advisors working with you on the transaction need to review it to ensure it is meeting your needs, wants and desires, including taxes and asset protection. This, of course, means more negotiation. If both sides have been open and honest throughout the process and have been operating in good faith, these negotiations, while challenging at times, often can be resolved through fair compromise. Conditions to Closing After finalizing negotiations, you will have a final version of the purchase and sale agreement and associated documents. Also included in the agreement and not previously mentioned specifically, are the conditions to closing. These are all the things that each side must deliver to the other in order for the transaction to close. Conditions will include certain certifications, board resolutions allowing the sale to happen, any assets being transferred (or covenant to transfer upon funding) and any other items required by the agreement to allow the transaction to actually occur. The good news is, once these conditions are met, you, my friend, have sold your business, which leads us to the last step in the process. Closing, Funding, and Whatever Is Next for You With everything done, the transaction closes, the money hits your account, and you are off to whatever is next. If you took investment for growth, that means getting to work building the business. If you sold the business outright, it means the next chapter in your life. Keep in mind, though, even with an outright sale, you may be serving a role in the business for some specified period of time. Regardless, that next chapter will be yours. Congratulations! As you can see, selling a business is a highly involved process that can take an extended period of time to accomplish. Using trusted advisors, like Fulham Partners, throughout can make the process smoother and more rewarding for you. Contact us any time with questions or to learn more about what selling your business might look like.