It’s no secret… it’s a seller’s market for business owners right now. “Moving too fast, however, can also lead to dollars left on the table. A recent survey of Private Equity professionals cited the ‘lack of proper exit planning’ as one of the root causes of value erosion in mergers and acquisitions (M&A),” according to a recent Axial Radar: The Year of the Seller.
We can’t stress it enough, the key to the successful sale of your business is preparation and having a thorough understanding of the process and players – even in a seller’s market. You need to make sure that you have all of your i’s dotted and your t’s crossed.
Seller beware: A deal that seems like a sure thing can change in the blink of an eye… which is why we always say: Don't celebrate until the ink is dry and the cash is in the bank!
In our previous article in this series, You’ve Received an Offer for Your Business… Now What? Part 3, we discussed Understanding How to Work with Your Business Broker, including a brief of overview of Broker’s Opinion of Value and the Importance of the Broker’s Teaser.
Let’s take a look at the final steps in the process of selling your business, including the importance of the initial conversations with potential buyers, the necessary legal paperwork such as non-disclosure agreements and the Letter of Intent (LOI), and what you may expect during due diligence and closing.
Once your broker has vetted potential buyers, they will engage in discussions with them – frequently in three stages before you sign a Letter of Intent (LOI) and the due diligence process begins.
After the buyer meetings, those who are still interested in your business will be asked to submit a Letter of Intent (LOI) or Term Sheet, which is a written, non-binding document that outlines the proposed price and terms. Hopefully, you will receive multiple LOIs and you will be able to choose which buyer you want to sell to based on both the LOI terms and what you learned about them in the meetings. While this is often an exciting time for the seller, it is important to remember that an LOI is not legally binding – things can always change… especially during the due diligence process.
After the LOI is signed, the buyers will conduct a thorough review of the seller’s business. This process is called due diligence, which is by definition an “investigation,” and during a business sale, it means the buyer will leave no stone unturned! Every issue they find could be a reason to reconsider and/or reduce the purchase price, which is exactly what sellers DON’T want to happen.
There are some steps you can take to help expedite this due diligence phase, especially if you start well in advance, such as:
Due diligence may last from one to several months, depending on the complexity of your business and the size of the transaction. Time can kill deals as buyers and sellers get weary, change their mind, and simply lose faith in the value of the transaction. It is critical for owners to stay focused on business performance during this stage since decreasing revenue and profits is the fastest way to end the deal process. Remember: You can't celebrate until the ink is dry and the cash is in the bank.
As due diligence winds down, legal documents will be prepared by the buyer’s attorney and negotiated with you and your attorney over the course of several weeks. It is essential that you hire an attorney who has business sale experience to ensure that the terms of the deal are as favorable to you as possible and your legal exposure post-sale is minimized. The closing itself is most often completed via email and video calls and the funds are sent via wire transfer to the seller immediately after documents are executed.
Only then can sellers celebrate!
Selling your business is often a long and arduous process, which makes it easy to understand why approximately only 50% of the deals that get to the diligence phase actually close.
We want you to have choices and be able to pick the buyer that will be best for your company and for you. Take the time to make sure you’re fully educated about all of your exit options and find the right people to work with who will help you achieve the most successful outcome.
You need the right tools, resources, and guidance to get started! Business Transition Academy’s proven six-step planning process and training programs provide you with the roadmap you need to exit your business on your own terms. Download our FREE book and gain access to more FREE business owner education resources, including:
We will show you the steps you need to take to plan for a successful business sale or ownership transfer.
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