The following is adapted from The Exit-Strategy Playbook.
You know how you built your business into the successful organization it is today. In fact, when it comes to your company, you’re an expert. But do you know the steps involved in selling that company successfully? Do you know how to instill confidence in the buyers so that they bid high because they want to own your business?
If not, then I’m here for you. In my world, I have seen the sale of a company with a purchase price of $500 million completed in as little as three weeks. I have also seen a small deal with a purchase price of only $10 million take over a year to complete.
Obviously, when you sell your business, your goal is to be like the first example, not the second. And you can help make that happen by being a prepared seller—one who understands the process (which I’ll explain here) and successfully executes each and every step.
#1: Start with Transparency
The first step in selling your company involves your investment banker spending time with you and your management team to make sure everyone is ready for the sale. This requires going against the trend of making the sale process confidential, and instead being transparent with your team about what’s happening.
If you aren’t sure how to do that, let me tell you what I do: I keep all of my employees in the loop. I tell them that at some point over the next few years, I’ll be bringing in a new set of shareholders.
That buyer will come in, and we will keep growing. And I tell them this process will continue until, someday down the road, we are too big to remain private and we potentially hit the public markets.
#2: Build Your Team
Successfully selling your business means bringing on trusted members of your team to help you dive into the sale and work with your banker. You’ll want at least one person from finance, one from operations, and one from sales and marketing, depending on the size of the company.
This small team will help you while interfacing with the universe of buyers. The more people who can articulate your vision and assist with all the diligence requests, the faster the process will move and the better the buyer will feel.
#3: Create the One-Page Teaser
Once you’ve assembled your team, your banker will dig into the business, look at the financial statements, and determine the potential universe of buyers based on your input and the future you desire. Once they’ve done that, they’ll create a one-page teaser.
A teaser is colorful, catchy, and includes a high-level overview of the company, history, and industry. This teaser is sent out to the universe of potential buyers who might be interested in purchasing the company.
It’s your banker’s job to locate these buyers. To do that, they may focus on companies in your industry, private equity groups that are active in this type of vertical, or other similar commercial or consumer businesses that might be interested.
#4: Draft the Non Disclosure Agreement
While the teaser is being distributed, you will begin drafting a fairly simple non disclosure agreement (NDA). This NDA is a confidentiality agreement with fairly benign terms designed to protect your company’s information.
Generally, there is little risk or concern of a financial buyer learning too much in the sale process. However, if there is a strategic buyer in your area and demographic, the NDA may be more targeted and specific.
The banker will very quickly whittle down the buyer list to the ones who are potentially in play. Perhaps they send out 50 teasers and narrow the universe of buyers down to 25 who respond and are interested. At this point, the banker will send out the NDA.
#5: Release Your Confidential Information Memorandum
After the NDAs are signed, your banker will create and release your confidential information memorandum (CIM) or confidential information presentation (CIP). The CIM/CIP is a 50- to 100-page document that delves into the opportunity in extensive detail.
It describes your company, what you do, your products and services offered, how big the addressable market is, how the company is managed, the number of employees, and employees’ average tenure.
It also includes information about the market served, growth over time, prospects for the future, and growth projections. The buyer universe wants to know the plans for the next five years and how the company—with a new owner—can exploit additional opportunities in the marketplace.
#6: Participate in Fireside Chats
The next step in the sales process is to participate in a series of one-on-one conversations, sometimes called fireside chats, with the top prospective buyers. The goal is to answer any questions the potential buyer has (and, honestly, to make them feel special).
During a fireside chat, conversations will stay high-level. This is the time for your canned elevator pitch on the business.
At this stage, the buyer is developing an internal model for your business. They are building projections and trying to determine how the company might grow and/or what the long-term synergies might look like. While it won’t get deep, the fireside chats might yield some intel around the type of questions you are likely to field during the upcoming management meetings.
#7: Gather Indications of Interest
After the fireside chats, your banker will ask the potential buyers for an indication of interest (IOI). This is typically a non binding bid expressed in a range of numbers because the buyers still don’t have quite enough information to give a single number.
IOIs are generally light on detail because buyers are mindful not to alienate a seller. Typical IOIs will be one to four pages in length and tell you how impressed the buyers are with your business and how they would like to be the partner to drive you to the next level.
At this point, your banker will discuss the bids with you. Then, you will work together to thin the herd so you’re only moving forward with a select group of people.
#8: Hold Management Meetings
After they’ve expressed their IOI, the top prospects come in for management meetings and spend half a day with the management team. At this point, they want to see if this company has sound processes in place and if the leadership team knows what they are doing and are engaged and ready to execute.
A portion of the meeting is set aside for the buyer to give an overview of who they are, why they are interested, and how your universe will be better if you choose them. This is a great time for you to ask some questions about the buyer and their vision for the company and its leadership after the close.
You should think of questions ahead of time, and don’t be afraid to send a list in advance of the meeting. This is a big deal for you, so give it the time and thought it deserves.
#9: Seek Refreshed Bids
After the management meetings, the banker will seek refreshed bids from the buyers. This bid will no longer be a range; it will now be a hard number.
IOIs become LOIs (letters of intent), and now many salient deal points start to be included, or at least known and communicated. These are still nonbinding, but those at the lead end of the pack will start to separate from the rear.
At this stage, buyers are looking for exclusivity and a defined time period to close. Bankers want to keep competitive tension; buyers want exclusivity. It’s a fine line to walk, but a good investment banker will be able to handle it.
#10: Work Through Diligence
During diligence, the buyer’s goal is to make sure they understand all the potential liabilities. Along with digging into your company, they’ll also be looking at you.
The buyer will conduct criminal background checks and try to learn everything about your history. If there are any skeletons in your closet, now is the time to bring that knowledge to the forefront.
During a typical sale process, your banker will help you and your assembled team prepare for diligence. The banker will dedicate an online space where you and your team will upload company-generated information into folders so the buyers in diligence can access the information they need to conduct a thorough review of the company.
#11: Write the Purchase Agreement and Prepare for Closing
At this stage, you’re getting close to closing, so a purchase agreement will need to be drawn up. Each deal contains a customary set of features, including a description of what is being sold, who is selling, and who is buying.
It also includes a basic set of parameters around trailing liabilities—who owns them and for how long, as well as what is included and excluded. Basic agreements typically contain some baskets and mechanisms for truing up working capital adjustments (things like accounts receivable, payable, payroll, benefits, and so on).
In addition to the basic purchase agreement, other legal documents may need to be negotiated, such as real property leases, consulting or employment agreements, and noncompetes. Some of these may be referred to in the purchase agreement, but they are still separate agreements that need to be negotiated before closing can take place.
Preparation is Key
So there you have it! As you can see, each step is important and nuanced, but by knowing what to expect and being prepared, you can move through the process as efficiently and effectively as possible.
Of course, every sale is going to be a little different, but after doing this for 20 years, I can tell you that every successful sales process has a very structured and methodical flow. Understanding that flow—and having a good investment banker at your side—is instrumental in making the process smooth and successful.
For more advice on how to successfully sell your business for maximum value, you can find The Exit-Strategy Playbook on Amazon.