Selling a business is one of the most significant milestones in an entrepreneur's journey, requiring thorough planning and execution to ensure a smooth and successful exit. While the process can seem daunting, understanding the key steps involved, building the right team, and organizing your financials can all lead to a successful sale.
The decision to sell a business can be driven by internal factors such as retirement, succession planning, liquidity needs, or a shift in business goals. External factors like market trends, economic conditions, or industry consolidation can also prompt a sale.
When it comes to planning for a sale, HCVT Advisory Partner Sid Chitnis emphasizes the importance of forward thinking: "What I wish every client thought about was: What is my life going to look like after I sell the business? Do I want to continue working within the business or exit completely?"
Before jumping into the sale process, business owners should take a moment to reflect on what life will look like after the sale and ensure the timing aligns with both personal and business goals.
Selling at the right time is crucial for maximizing value. Ideally, the best time to sell is when revenue and EBITDA are growing, not declining. Industry-specific cycles and market conditions should also be considered to capitalize on high valuation periods.
A successful sale is rarely accomplished alone. Assembling the right team of experienced advisors is critical to navigating the complexities of an M&A transaction. The deal team typically includes an investment banker, CPA/accounting firm, tax advisor, wealth manager, and attorney.
Advisory Partner Daren Mesrobian highlights the value of specialized experts: "Most businesses have accounting firms and legal counsel in place, but they may not have the depth of knowledge and understanding of market terms that an M&A specialist would in their respective field."
Financial transparency is one of the most critical factors when selling a business. Buyers rely on accurate, GAAP-compliant financial statements to assess the company's true value. Poor financial organization can erode buyer confidence and reduce the potential sale price.
"Before you even get to the sale process,” Mesrobian shares, “you need financials that a buyer can rely on as the basis for preparing an offer."
Additionally, tax structuring plays a vital role in maximizing after-tax proceeds, a factor often overlooked by business owners.
Properly positioning your business is vital to securing the highest possible valuation. While providing raw financial data is necessary, it is not enough. Business owners must present a compelling investment story that showcases the company's value proposition.
Chitnis advises, “Sellers should not just provide historical financials and say, ‘Here, give me an offer.’ They need to frame the business to buyers in the best possible light, which may involve normalizing add-backs, adding details where warranted and providing forecasted financials."
The due diligence process allows buyers to verify the business’s financial and operational health. This phase is critical, as any unexpected issues that arise could derail the deal.
"If buyers discover problems during due diligence, they’ll either renegotiate the deal, reduce the price, or walk away entirely,” says Mesrobian. “Getting ahead of issues is key."
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The journey doesn’t end with the sale. Business owners must plan for life after the sale, including financial management, tax implications, and personal goals.
"Getting advice from an M&A tax expert to structure the deal ahead of a transaction can significantly increase after-tax proceeds,” Chitnis explains.
The path to selling a business is fraught with potential missteps. Common mistakes include unrealistic valuation expectations, lack of preparation, and choosing the wrong buyer.
"Your business might look similar to another company that sold for 15X EBITDA, but that doesn’t mean you’ll get the same valuation,” said Mesrobian. “Every business is unique."
Selling a business requires careful preparation, strategic positioning, and assembling the right team of advisors. By cleaning up financials, proactively addressing buyer concerns, and planning for post-sale life, business owners can ensure a smooth and profitable exit.
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