Selling a business is a complicated affair. Add to that the emotions and interpersonal dynamics involved in a family-owned business, and it's easy to see why many families wait too long to sell or experience less than stellar results.
To help better understand and prepare for an already challenging operation, DWT's Family Business Resource Center is presenting a multi-part series of articles tackling some of the more difficult aspects of the process. Here we provide a general overview of selling a business, which—broadly speaking—breaks down into three segments: the preparation stage, the marketing process, and getting to closing. Each is addressed in turn.
"Time Kills Deals." That old adage is 100 percent correct.
A successful transaction requires the seller to do a lot of internal work before presenting the business to the market. The seller must conduct a substantial amount of preliminary review and work so that it can present buyers an accurate picture of the business, mitigate risk, and develop a strategy for how to structure the transaction.
Some of the most basic questions that sellers will ask themselves may include: Will any assets be retained? How will intra-family contracts, such as real estate leases, be treated? What is the preferred sale structure—a sale of equity or assets?
Reaching answers to these questions involves a combination of financial (CFO/investment banker), tax, accounting and legal professionals collecting and analyzing information on the company. That information allows your deal team to determine things such as the company's valuation, key financial and operational metrics, potential for litigation, and any other risks that might be present.
Do your homework early. Later in the sale process, the buyer is going to require that the seller provide it with this same information.
Many sellers wait to conduct this diligence until that time comes. However, waiting is ill-advised. Starting the diligence process early gives the seller the opportunity to "clean up" the business. This, in turn, leads to higher valuations, increased negotiating leverage, and a smoother transaction.
Marketing the Business
Once a company has conducted diligence and cleaned itself up, it is ready to test the market. The first step in this process is for the seller to identify what type of buyer they would like to target, often with the help and guidance of an investment banker. Then, the seller will send out a "teaser"—a brief summary of the business—to the target buyer audience.
Those materials will usually not disclose the exact identity of the seller but generally describe the nature and size of the business. Interested buyers will then request more information. At that point, the seller will enter into a non-disclosure agreement with each interested buyer. This allows the seller to disclose its identity and begin to discuss the inner workings of the business without the risk of giving away proprietary or sensitive information that will disadvantage the seller in the market.
After review of the company information provided, buyers will be invited to submit expressions of interest, which are non-binding offers, typically noting a range of values and other key aspects of a potential acquisition. The seller may choose to set up preliminary meetings with the management teams of the interested buyers to get a better of sense of who they are and what they bring to the table before continuing with the sale process.
Getting to Closing
Under the best scenario, the sale process will turn into an auction where the seller will not select the buyer until the very last moment. A competitive auction brings out the best prices. By this time, the field of potential buyers will have been narrowed to a select few, and the parties will start taking significant steps towards making a deal.
The first such step is for the parties to negotiate a Letter of Intent (LOI). An LOI is a non-binding outline of the proposed transaction, including summaries of all key terms. If there are multiple buyers, the seller will send each a preferred form of LOI, instruct the buyers to make any adjustments to the form that they see fit, and then weigh each buyer's LOI to determine the best offer. The LOI typically contains an exclusivity provision, meaning that once agreed to by the buyer, the seller must cease its marketing efforts and deal with the buyer exclusively for a period of time.
Once the LOI is signed, the proposed buyer will continue its due diligence efforts to understand the finer details of the business and evaluate the risks of proceeding with the sale. What the buyer discovers during diligence will influence its bargaining power and how it may seek to modify the deal. If the seller has conducted adequate diligence during the preparation stage, as suggested above, this process should not result in any unwanted surprises or material changes to the deal terms expressed in the LOI.
As this process continues, the seller and buyer will negotiate the form of the definitive agreements, including specific representations and warranties, indemnifications, and closing conditions. Ideally, those terms were set forth specifically in the LOI so that any negotiations can be narrowed. Once definitive agreements are signed, there is typically a short period of time during which conditions to closing are satisfied or waived.
Selling a business is a long and complex process. To make sure that you reach the best deal possible and encounter the least amount of angst along the way: (1) start early, (2) build a great team of financial, tax and legal advisors, and (3) prepare the company for sale in a proactive and thoughtful manner.