Selling Your Business: Strategic Factors and Types of Buyers
In our last article, we discussed how to maximize your company’s potential sale price by focusing on a handful of “value drivers” during the time leading up to the business’ sale. Here, we discuss the strategic aspects of selling your business and the different types of potential buyers.
When it comes to selling their companies, Los Angeles and Southern California business owners can sometimes get very emotional. After all, most owners have worked for many years building up their businesses and have invested a lot of “sweat equity” into them.
However, it’s important that you try to remove emotions from decisions about selling your company as much as you possibly can, and instead base your decision to sell on strategic factors. Selling your business is too important a step for you not to approach the decision and process from a rational, logical and strategic standpoint.
Why Do You Want to Sell — Really?
The first step in the process of selling your business is to take a step back and honestly assess why you believe you might want to sell your company. For example:
• Are you ready to retire and reap the financial rewards of your many years of hard work?
• Are you burned out on running the business and ready to take a well-deserved break?
• Do you want to try your entrepreneurial hand at starting and running another business (or businesses)?
• Is it time to hand the management and ownership reins over to your children or other heirs?
• Have you taken the business as far as you can given your skills, knowledge and abilities?
Once you have made an honest assessment of why you want to sell your business, the next step (assuming you truly do want to sell) is to build your team of M&A experts, starting with your investment banker. This individual will play a critical role in the business sale process, essentially serving as the “quarterback” of your team and guiding you step-by-step through the sale process. Other key team members generally should include an accountant and attorney who specialize in mergers and acquisitions, and perhaps an outsourced CFO as well. The sale of your business is likely the largest and most complicated transaction you’ll ever undertake, so you want to recruit as much experience onto your M&A team as possible.
Your investment banker will serve in the role of “market maker” by first building a database of prospective buyers and then working to create interest in your business among them. He or she will also create a confidential offering memorandum that presents your company in the most favorable light to potential buyers. The memorandum should be written in such a way that it attracts not just any buyers, but the right kinds of buyers, and also positions your company to sell at the highest possible price.
Types of Business Buyers
Keep in mind that there are several different kinds of potential buyers for your business. The main types of business buyers usually include:
• Complementary buyer — This is another business in a niche or industry that complements or enhances your business. The combination of the two businesses together could create synergies that strengthen each company and result in new opportunities for the merged entity.
• Strategic buyer — This is often a competitor that can bring enhancements and add value to your company’s products or services, as can your business to theirs. The merger of competing businesses must make sense, though, from both an economic and a marketing standpoint. You must also consider the cultural fit between the two merged companies when examining a strategic or complementary buyer. Clashing values, cultures and business philosophies are a primary factor behind failed mergers and acquisitions.
• Employees or management — Selling your company to employees or management is usually accomplished via an Employee Stock Ownership Plan (ESOP) or Management Buyout (MBO), each of which can take a number of different forms. These vehicles may enable you to sell the company to your employees or managers over time and thus phase yourself out of the business over a period of months or even years.
• Private equity investor — PE investors may want to grow your company and sell it at a profit some time in the future. Private equity is similar to venture capital, but PE investors are generally looking to buy more established and mature businesses, rather than risky startups. And they often tend to hold onto the businesses they buy longer than venture capitalists do before selling them.
While it’s easy to get emotional when it comes to selling your business, it’s important to remove emotions from the equation as much as possible. Instead, you should base your decision to sell on strategic factors. Once you have made an honest assessment of why you want to sell your business, you should build your team of M&A experts, which may include an outsourced CFO services provider. Such a provider can bring an objective perspective to the sale process and work together closely with your investment banker, accountant and attorney to help ensure the best possible sale outcome.