Selling a Business: How the Selling Process Works
Here’s an interesting fact: in 1978 the average length of time it took to sell a business was 57 days. Today the average time is 225 days – a 4 times increase!
We are aware of this fact and over the years have learned how to work with business owners to shorten this sales cycle. There are many factors that go into setting the foundation for a successful sale, so it’s no surprise that our clients consistently ask us, “what is the selling process and what do you do to ensure success?”
If you watched the accompanying video on this page, you saw Eric outline our five-phase selling process. This is a process we’ve been able to fine tune over the years, learning from both our failures and successes. We are now able to close almost all of our engagements by utilizing this process. That’s not bad when you consider that the industry average is that nearly 75% of all business sales fail to close.
As you watch the video and read this article, pay special attention to what happens before you put your business on the market. These are crucial steps, and as you’ll see by reading other articles on this site. What you do before you put your business on the blocks will help you to minimize the amount of time it takes to sell, and also put you in the best possible position.
Selling Your Business: It’s all about preparation
1 Phase I – The Initial Meeting
First, let’s talk about what happens before you even start the sales process.
Planning and preparation are the keys to success. Business owners who take the time to prepare their business for sale are much more likely to sell the business, sell it in less time, for a fair amount, and with better terms.
During this meeting we’ll talk about your company – such as your financial history, company structure, employees, your strengths in the market, and the challenges you face. We’ll find out more about your industry, the market you serve, and how you stack up vs. your competitors. And just as important you’ll find out how we work and what we bring to the table.
If you’re ready to continue moving forward, we’ll kick into Phase II.
Bowman/Hanson handled every detail of the sale, and I could not have imagined how many details there was going to be. One of the best things was referring us to a specialized attorney for the deal. Their ability to coordinate the attorneys, landlords, and CPAs was greatly appreciated. ~ Jerry Canabou, Former Owner of Screentronix, Inc.
2 Phase II – Research, Plan & Build Value
In Phase Two, we will do our homework, and analyze five years of financials, perform a financial recast, and conduct research on recent M&A activity for similar businesses. You’ll walk away from this meeting with a short list of specific ways that you can quickly build value into your business.
The goal of phase two is to give you an honest assessment of the value of your business: the type of buyers we should target, and the various deal structures you can anticipate. Note that we do not advocate the $30-50,000 doorstop that some people sell as “Business Valuations.” We’re interested in determining the estimated market value of your business, then letting the market determine the true value using a competitive process you’ll read about below.
These initial meetings are a critical step in determining the right time to sell your business. This could be one, two, five or more years down the road.
We put everything on the table with the goal of providing you ample information to make an educated decision about the appropriate time to sell your business. Rather than pressure you to sell, we give you the information you need to make the decision on your own time. All this activity is about shortening the sales cycle.
With Phase 3, we begin our formal engagement.
3 Phase III – Marketing
Phase III involves 6 distinct steps.
Step 1: Sign the Agreement
First we initiate a engagement agreement which will set the framework of our relationship and lets us begin our marketing and sales efforts.
Step 2: Deal Book & Buyer Vetting
In step two, we create a detailed Deal Book, the essential Marketing Materials for Selling Your Business. Before we mention your business to a single buyer, we complete the deal book and prepare everything necessary to market and sell your business.
The deal book is both a marketing tool and sales tool. We intentionally answer all the questions prospective buyers might have so that all he or she needs is the deal book to make a quick go/no go decision.
The level of detail we provide in the deal book also enables us to meet with a prospective buyer only once before they’re ready to make an offer.
As you can imagine, we spend a great deal of time preparing the deal book. We know the hard work we put up front will pay big dividends as we move forward in the process.
Concurrent with creating the deal book in step 2, we build a list of vetted and pre-screened potential buyers. This list will include professionals from our database of potential acquirers, strategic buyers we identify who could find strong value in your company, and targeted private equity firms. We review and further vet this list with the seller to ensure confidentiality and to help shorten the sales cycle.
Now, in steps three through six, you’ll learn our method to having quick, smooth, and successful transactions.
Step 3: Active Marketing
In step three we simultaneously contact everyone on our list about your business with a blind summary, and then move quickly to step four. It’s important that we present a blind summary because we need to maintain strict confidentiality at this point.
Step 4: Refine Buyer List
Step four is picking the short list of buyers we will decide to move forward with, the ones that have shown the most interest and see and understand the value proposition.
Usually within days of our initial marketing push we receive inquires from interested parties. Our goal here is to quickly refine the potential buyers and, with seller input, sharpen our short list to only those buyers whom we feel are best suited to see the acquisition through to the finish line. They have signed a non-disclosure agreement and have demonstrated a financial ability to acquire the business.
Step 5: Buyer/Seller Meetings
Once we’ve further refined the list, we move to step five. During step five, we arrange for the buyers and seller to meet. Typically these meetings will last anywhere from one to two hours and are designed for the buyer and seller to gain a deeper understanding of each party, dig a little deeper into the business, and give everyone the opportunity to ask targeted questions to determine if there is a good fit based on each parties objectives.
Step 6: Auction, Select Buyer, Agree to Terms
After we’ve met with all potential buyers, we move to step six of the marketing and sales process.
We use an auction, or RFP-like process to tightly control the timing of responses from interested buyers. We specify deadlines for interested buyers to submit their Letters of Intent (LOI). We coordinate all this activity so that we’ll receive multiple offers at the same time.
This enables us to easily compare and contrast ALL offers simultaneously, discuss the merits of each, and collectively agree on our response and which party we choose to move forward with. This is important because serious buyers will not wait months for a formal response.
When you and the buyer have agreed to the terms, we move into phase four of our overall process – the due diligence phase.
Kris did all the work. I just gave him the information he needed to put the Deal Book together, and he gave me the space to keep running the business. ~ Lou Marsella, former owner Momar Industries
4 Phase IV – Due Diligence
The due diligence phase is the reason closing times for M&A transactions have increased so dramatically over the last 10 years. In today’s world it’s not uncommon for a buyer to conduct financial audits, environmental audits, IT audits, and invest a great deal of time and resources to comb through your business.
5 Phase V – Final Negotiations, Deal Structuring, Paperwork
Concurrent with the due diligence activities is when we also enter the last phase – final negotiations. Here is where we draft additional agreements, exhibits, schedules, consulting agreements, leases, assignments, and third party consents. Phases four and five culminate with the final agreement and closing of the transaction.
Then once the funds have been wired to your account is when the celebration begins.
Hopefully you now have a clearer picture of the process you’ll experience in selling your business – from your initial meeting with an M&A intermediary to the celebration of seeing the funds wired to your account.
I encourage you to look through our site – gather the information you need to make informed decisions – and please feel free to give us a call with any questions you may have.