Ask an Investor: How Do I Sell My Company?
This article was posted on BETAKIT on May 19th, 2017.
We’ve talked in past posts about acquisitions and how to get optionality once you have an offer on the table. But, what do you do if you are ready to sell your company but you don’t have any existing offers at the table?
You may have heard the saying “companies are bought not sold.” This saying can be interpreted to mean that the only way to sell your company is to wait patiently for acquirers to come to the table. But that’s not necessarily the case. Many companies have successfully sold by actively seeking offers.
The situation where you might want to sell your company may arise for a number of reasons. Perhaps you’re out of runway, struggling to compete in a saturated market, don’t have the resources to scale, or maybe your shareholders are simply ready for a liquidity event. Whatever the reason, knowing how to create a market for your company when there isn’t any inbound interest is key to a successful exit.
To help us answer this week’s question I’ve enlisted experts Steven Kraft and Sebastien Douville of Firepower Capital to walk us through the process of selling a company.
The first step to take when you’ve decided to sell your business should be, counterintuitively, to take a step back.
Start by asking yourself and your partners: “Why do I really want to sell the business at this point?” Getting to the heart of this question will make this long and arduous process easier for everyone involved. Without doubt, this question will come up in subsequent discussions with buyers. So, are you selling because:
- You and your team have plateaued and aren’t confident in your ability to take your business to the next level?
- Competitors are catching up and will lap you?
- You are looking for an early retirement?
Whatever the reason, ultimately, you need to know the “why” because it influences the sale process greatly. Keep in mind that getting past that first step requires real self-awareness (at both the personal and company level).
After that, look outwards. Stand in the shoes of a potential buyer and ask yourself, “Why would you buy this business?” You need to clearly articulate your value: why you are winning now and why you would continue to win for a buyer. Once you have determined a handful of key value drivers, you need to substantiate them.
Also, if you aren’t obsessed with measuring value drivers, start immediately—good data and reporting goes a long way in making the case for a strong valuation. By the way, this exercise is valuable at any stage of your company’s lifecycle, even if you aren’t looking to sell right now.
Lastly, before going down the path of selling your business, recognize this will be one of the most time-consuming, emotional, hectic, intrusive, and complex processes you’ll likely ever go through. There’s nothing else quite like it, even the largest customer deal you’ve ever landed. So, what’s our point here? You shouldn’t do it on your own. Focus on and do what you do best, which is running your business, and allow deal professionals to run your deal. Deals fall apart for so many reasons and they take time. If that happens, you don’t want to be left with a struggling business because you lost focus for several months, needing to work twice as hard to get back to the place you were at before considering a sale and having to explain that decline in perpetuity.
So, how do you actually sell a business?
For starters, it must be an active process for businesses worth less than $100 million in Canada; don’t wait for buyers because the vast majority of them don’t know you exist. Scan the globe, not just North America, for buyers – there is appetite for Canadian companies elsewhere. Bottom line, it won’t get done if you just sit there and wait. You need to take the opportunity to market. Broad but intelligent distribution of your deal is key.
No matter what context, thorough preparation is a must.
Regardless of whether a buyer comes to you or you are distributing widely, being ready at all times with relevant information, organized the way buyers want to see it, is crucial. No matter what context, thorough preparation is a must.
A significant chunk of value is added by having more than one buyer compete for your business. A well-coordinated, competitive auction not only drives the price up, but also preserves the downside risk of a single buyer pulling out at the eleventh hour.
Even if you’ve sold a business in the past, you most likely still know less than the other side – whether they are private equity, family offices, or strategic buyers. That’s what they do. Having the right project team, made up of both internal employees and external advisors who can match the knowledge, experience, bandwidth, and abilities as those of potential buyers, is critical.
Getting down to the actual process, there are five main stages:
- Preparing collateral that buyers expect to see
- Simultaneously, identifying potential buyers
- Connecting and negotiating preliminary offers with buyers
- Being subjected to the due diligence process of buyer(s)
- Negotiating definitive agreements and closing
Preparing collateral that buyers expect to see
Buyers expect to receive a no-name “teaser” and, if they are interested and sign an NDA, a confidential information memorandum (CIM).
The no-name “teaser” is used to make buyers on your distribution list aware of a potential transaction, but doesn’t disclose the company’s name. Of course, if you do this yourself, it’s self-defeating.
The CIM is either a slide deck, or a written document that describes your company in detail. It should only be given to vetted buyers that have signed an NDA. A lot of information is disclosed in the CIM, but never strategically critical data points like customer names, contract terms, or trade secrets.
Both documents must be written such that you generate excitement in buyers, but not in overpromising, hyperbolic ways. Stick to facts, make the story flow, tell a compelling business case for an acquisition by the (conceptually) most likely buyer.
Simultaneously, identifying potential buyers
As you prepare collateral, it is a good time to build a list of the potential buyers for your business, and the people at those companies that make things happen.
You should be familiar with active acquirers in your sector, your competitors, and perhaps companies up or downstream from yours that may be interested in acquiring. That is a good first batch of prospects. Can you get to the leader of their corporate development teams, or to the private equity partners that have your sector expertise? Do your homework and take the time to weigh their reputation, deals they’ve done, how they’ve treated the teams they brought on, their financial strength, etc. The people you deal with make a huge difference.
It’s important to note that there are buyers out there you’ve either never heard of or wouldn’t think to contact. There are thousands of private equity firms (and their associated portfolio companies), foreign buyers, family offices and so on. In our mandates, we find that sellers will know about 20 percent of the buyers we eventually talk to.
Connecting and negotiating preliminary offers with buyers
Now that you’ve identified and vetted your list of potential buyers, it’s time to reach out.
A first e-mail/phone call should:
- Be quick and to the point: buyers see a lot of opportunities.
- Explain why there is a good fit: show them you did your homework (e.g. reference a deal they just did) and that it’s not a shotgun approach – thoughtfulness goes a long way for a potential buyer
- Define clear next steps as to how you will proceed
- At this point the buyer will do one of the following:
a. Ignore your message
b. Say they are not interested
c. Ask you to send more info
Don’t completely give up on those a’s and b’s – persistence pays off, but your focus should be on those expressing real interest.
If you work with an investment banker, they would do this with all buyers and send the no-name “teaser.” If you’re on your own, then you’d skip to sending an NDA to those who express interest.
Then, clarify their interest and get comfortable on your end: gauge how serious they are and how capable they would be to conclude a deal. Are they fishing for info or are they actually keen on moving forward? Trust your gut on this one.
Acknowledge offers as they come in. Ask clarifying questions, but avoid negotiations at this stage.
Once the NDA is signed, send the CIM with more colour around strategic fit. At this stage, you will have multiple buyers asking you questions, ranging from how you’d like to structure a deal, to why forecasts look a certain way, and so on. It’s demanding, but it’s part of the process to getting offers.
As you get a sense of the buyers’ appetite, you should set a deadline for non-binding letters of intent (LOIs) and what they should contain via a “process letter.” Give buyers enough time to prep offers – they often need to go through board approvals. Ask buyers to include all the parameters that are important to you in the offers, but be aware of what’s “market.” Decide whether you want the process to be exclusive post-LOI: smaller deals don’t usually have that luxury so it may be an over-reach.
Then, run the auction. Acknowledge offers as they come in. Ask clarifying questions, but avoid negotiations at this stage. Once you have the full set of LOIs, then negotiations begin, culminating in either a single buyer selected for exclusive due diligence, or a small set of buyers into non-exclusive due diligence.
Being subjected to the due diligence process of buyer(s)
As we wrote earlier, due diligence is incredibly intrusive from the seller’s perspective. Typically, external accountants and lawyers are brought in to gather info, analyze it, and report it to the buyer—an extra layer of risk mitigation. They are paid (well) to find every possible fault in the deal.
The preparation of step one will come in handy here, but it’s unlikely you can be fully prepared for the hundreds of requests you will get. A tidy house is important.
You should anticipate 45 to 75 days of due diligence.
It’s important to have built a relationship with the buyer by this point, so that a real discussion about what’s reasonable and not in terms of due diligence can be had.
Negotiating definitive agreements and closing
Anything that is found in due diligence will be used against you relative to the original offer that was made. You negotiated the LOI hard, but it was non-binding; negotiating definitive agreements is the real deal. Be ready for anything at this point, though a major change from the original offer usually causes one of the parties to walk.
The scope of definitive agreements is daunting. Make sure your legal counsel and investment bankers have done several similar transactions—they work hand in hand in this last step. Specifically, they should advise you on what is standard with respect to representations and warranties you will be asked to make, any amounts of cash left in escrow, and any conditions precedent that must be met.
Finally, be aware that closing procedures may not match the signing date of the definitive agreements.
Once the deal closes, congratulations! It’s likely one of the most, if not the most, meaningful transactions of your life. Celebrate this milestone, but don’t forget you most likely still have to show up to transition the business to the new owners for a few months or years!
Environics Analytics (“EA”) is a leading North American provider of marketing and analytical services. The company needed financing to support its expansion plans in the US and Canadian markets, and wanted to secure capital from a senior lender that understood EA’s value drivers. FirePower surfaced numerous proposals, then negotiated and improved on the terms and conditions to the benefit of EA.