One of the benefits of writing business books is that I'm often invited to give keynotes to large business groups and associations. One of the most common questions I get asked at the end of my talk while I'm meeting with the attendees is the following:
"David, what do you wish you would have known about selling a company that no one told you before you sold?"
I still remember the sale of my first company roughly 10 years ago. It was a real estate training company with just over $3 million per year of EBITDA, one partner, and no outside investors.
I felt excited, scared, intimidated -- it was an emotional roller coaster.
I worried that my first buyer wouldn't; if my staff would find out too early in the process and leave; if my customers would hear of the sale and defect. I had spent a decade building the company from scratch and it was my first time selling a business.
Here are the eight lessons I wished I would have known back then (which have helped me enormously in the sale of later companies) but had to learn the hard way.
1.Your first "buyer" likely won't. Imagine it -- you've found your ideal buyer. It's a mature, well-funded, and successful competitor who clearly wants to buy your company.
So you sign the LOI (Letter of Intent), and your imagination starts fantasize about all the great things that you'll do when that final wire comes through and you are finally free.
But the odds are overwhelmingly against that first buyer being the actual company that you sell to, and you need to hold your emotional excitement in check until the sale is closed and the final wire transfer goes through to your account.
If you don't, you'll likely find yourself so wrapped up in making the deal with this first buyer work, that not only will you incrementally make more and more concessions, turning a good deal into a sour one, but what's worse, you may very well lose sight of keeping the business running well, only to have the buyer drop out, leaving you with a business that is less valuable.
2.Run your business as if you were going to own it forever. There is no better way to guarantee that you have a strong negotiating position through the entire sale process than to have your business continue to grow.
For example, a former client was selling her $20 million per year manufacturing company. She went through three buyers over two years until her fourth buyer actually closed. I remember talking with her a year into this process after her second buyer dropped out and she shared that the only thing keeping her going was the fact that her sales continued to trend up and the price just got higher on the company.
3.Find the right investment banker (or business broker) and let them do their job. Your job is to build an amazing company, and to give your investment banker all the data and information she needs to produce a compelling book and story to sell your company.
But you've got to let her do her job which includes vetting buyers, being the point person for all the early stage negotiations, and doing all the heavy lifting in the due diligence stage.
Most CEOs and entrepreneurs like to control everything--to be in charge--but this is one time that you would be well advised to let your advisor team do their functions.
Remember, there is nothing you can do to help effect a solid sale that's more important than to continue to run a growing and remarkable company.
4.Be careful how your buyer labels your business. I worked with the owner of an executive search firm/ outsourced I.T. services company who was in the process of selling her company. She literally doubled her sale price when she demonstrated that her buyer's earlier categorization of her company as an "employment agency" wasn't accurate.
In one 90-minute phone call she helped her prospective buyer see her company not as an employment agency, but as an executive search firm and outsourced IT services company.
This shift in label allowed her buyer's lender who was financing the deal to more than double the multiplier it used when valuing the company and brought her sales price up by millions.
What is the most advantageous frame for your company?
What steps can you take in the next 12-36 months to deepen your claim to that more valuable frame?
5.Due diligence is a two-way street. I've observed that many selling companies wait too long to do their due diligence with the prospective buyers of their company.
Do they really have the financial strength to close? Do they actually treat employees and customers the way you want your remaining staff and customers to be treated? Will they honor their word (based on past behavior with their customers, venders, and other companies they've purchased) on key deal points like earn outs?
If you wait too long to start asking these questions you're likely to rationalize or ignore any problem signs you find out. This is human nature, since by that point you'll have too large of a vested emotional stake in that buyer being "the one."
This can push you to end up with a deal that is far different from what you once upon a time would have been willing to accept.
6.Run a litigation check on your prospective buyer. I was talking with one of my business partners when she shared with me a key lesson she learned when she sold her 600 employee company. She sold her company to a $500 million buyer who was doing an industry roll up. They were charming. They were personable. And they were also a company with multiple legal cases with lenders and sellers of other companies.
If she had only had her attorney do the litigation check early in the process she would have learned of the five active lawsuits they were pursuing, and she would likely have sold to another company and as a result saved herself a world of pain.
7.Increase your valuation by having solid systems in a documented, demonstrable format. With our clients we call this having your "UBS" -- your "ultimate business system". This is your master system of how you organize, store, access, update, and prune all your systems.
Many owners hear this and think I mean having a "policies and procedures manual" which I most certainly do not.
The problem with a policies and procedures manual is that rarely are they used, and almost always they are a static, dated thing.
Instead, I mean having a living, breathing discipline inside your company of documenting best practices, and using those systems daily.
Think of your UBS as the organized collection of tools (spreadsheets, word docs, scripts, checklists, samples, software tools, templates, etc.) in a searchable, accessible, and editable way. This will likely be cloud-based collection of file folders or enterprise software with intelligent controls in place as to who can access what.
In the context of selling your company, a prospective buyer can now see that the knowledge to run your company and perform each of the critical tasks is not in the head of any key employee, but rather it has been absorbed into the systems and internal controls of the company. And they can see that editing, refining, and using these systems are part of your company culture.
8.Be careful about the timing of when you tell your team. Generally you'll be taking your controller or CFO into your confidence and telling them about the potential sale at the very start. You'll need their help to get your documentation together for the investment banker.
I'd suggest that you wait until you have a solid buyer before you site your senior management team down. When you do this you must answer the key question that will be on their mind - what will this mean to each of them?
It's worth considering setting aside some portion of the sale for your leadership team to incentivize them to both support the sale process and to stay on beyond the transition of the ownership (assuming that this is important to your buyer and you, for example if you have an earn out, want to protect your other staff and customers, etc.)
As for the balance of your team? I would suggest you tell them only after the deal has closed. If you tell them earlier, you run the real risk that they will get scared and potentially start looking for other alternatives.
There you have a list of the eight lessons I wished I would have known before I sold my first company but had to learn the hard way.
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