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.
Understanding When and Why to Sell
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.
Timing Your Sale for Maximum Value
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.
Building the Right Deal Team
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."
The Role of Each Advisor
- Investment Banker/Broker: Manages the sale process, helps market the business and negotiates offers
- M&A CPA/Accounting Firm: Supports your accounting and tax needs throughout the transaction, e.g., ensures financials are GAAP-compliant and prepares quality of earnings (QofE) reports
- M&A Tax Advisor: Structures the deal to maximize after-tax proceeds
- Wealth Manager: Helps plan for financial security post-sale
- M&A Attorney: Mitigates legal risks and negotiates contract terms
Preparing Your Financials for Sale
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."
Key Financial Metrics Buyers Evaluate
- Last 12 months (LTM) revenue and EBITDA
- Adjusted EBITDA, excluding non-recurring expenses
- Working capital requirements
- Growth strategy projections
Additionally, tax structuring plays a vital role in maximizing after-tax proceeds, a factor often overlooked by business owners.
Positioning Your Business for Maximum Valuation
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."
Identifying and Addressing Key Exposure
- Legal and compliance issues: Address any regulatory or legal risks
- Concentration risk: Ensure the business isn’t overly dependent on the owner, customer or supplier
- Operational inefficiencies: Identify and fix internal weaknesses that might deter buyers
The Due Diligence Process
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."
Managing Due Diligence While Running Your Business
- Delegate responsibilities to your advisors to ensure smooth operations continue
- Keep key employees engaged but avoid revealing sale plans too early to maintain performance
- Proactively disclose issues to buyers and offer clear explanations for any financial adjustments to prevent renegotiation
Post-Sale Considerations: What Comes Next?
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.
Post-Sale Planning
- Wealth management: Plan for how you will manage your newfound liquidity and investments. Dividing wealth into current generation (you + kids), future generations and charitable endeavors.
- Transition of ownership: Ensure a smooth handover to new leadership and communicate the transition to employees and clients. In certain transactions, there may be a requirement for you to assist the buyer with operations over a certain period.
- Personal planning: Decide how you will spend your time and energy post-sale
Avoiding Common Pitfalls in Business Sales
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."
Avoid These Common Pitfalls
- Overvaluing your business: Misunderstanding your industry and business model’s true value can lead to disappointment
- Inadequate preparation: Failing to organize financials or address risks early can lower the deal value
- Deal Fatigue: Having the right advisors can avoid a prolonged transaction timeline and take some of the burden from you
- Choosing the wrong buyer: Not every buyer will align with your goals; consider both financial and strategic buyers
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.