How to sell a company - 7 sell-side M&A tips to get to a close
In the past 15 years, I've been on one side or the other of 7 M&A transactions, and in this blog post (about selling a company) and the next (about buying a company), I thought I would document what I've learned about the process, some common pitfalls, and tips for success.
When you're thinking about selling you're company, there are a few value drivers to keep in mind:
Growth. Very few buyers are interested in or accepting of shrinking or stagnant businesses.
Earnings. Most businesses are valued on an earnings multiple, so sell more and spend less doing it to earn (a lot) more money.
Technology. In many industries, there's an implicit value in any technology you've created - whether or not it's patented. If you haven't patented any technology that's useful in your business, talk with an IP attorney and consider filing a provisional patent application or two.
Other Intangibles. Perhaps you have a particularly good partner channel to sell your products, or you service a segment of the market that's hard for other companies to acquire - whatever the case, strategic buyers might value you much higher as a result.
So let's say you've optimized for growth, earnings, technology, and other intangibles, and you're ready to go sell. Here are the seven tips I promised to help you get the most value and likelihood of completing a transaction.
Timing. Choose the time of your sale carefully. You want all the value drivers above to be on your side, and you want them to be directionally heading upward. Also consider the macroeconomic environment, and your own (and your investors') needs and desires for liquidity. Selling in a low interest rate environment (for financial buyers) or a high stock market (for strategic buyers) or both (this makes 2015 particularly attractive) generally leads to higher valuations.
Don't Go Alone. There are experts in this stuff, and if you aren't one, then consider hiring one (verify M&A experience, tie variable compensation to success) or using an advisor. There are lots of advisory services available, but most common are investment banks. The tricky part about bankers - they're expensive, and depending on your company's profile, you may not sell it for a much higher price with a bank involved.
Consider a Different Attorney. There are some very good attorneys for general business, but I've seen disastrous advice given (or lack of advice ... just as dangerous) by "generalists" versus M&A specialists. Larger local firms will have specialists that have already completed nearly identically sized and structured deals as yours - interview them, and make a smart choice.
Prepare for Due Diligence in Advance. I figured this one out after my third deal - there will come a time when you are asked to make representations and warranties about the business, and exhibits numbering hundreds of pages in length will answer various questions related to this in the final documents. There's no reason to wait until you're asked to prepare all of this - get with your attorney and start compiling information now, or - even better - start running your business to make diligence easier later. For example, you might need to produce a copy of every customer contract. Might want to start a "contracts" file in your own private deal room, even if you're years away from selling.
Set Expectations Lower Than You'd Think. This should be universally applicable: you want your family, investors, bank, and most others thinking it's going to take longer and yield less than you think. You want the buyer thinking the business is going to do $X in sales and $Y in earnings in the next 3 months, so you can actually deliver 1.3X and 1.5Y. Nothing kills a deal like missed expectations, and setting them is entirely in your control. Whatever you do, don't over-promise.
Trust Matters More Than Legal Documentation. While this might be counterintuitive, especially to your attorney, it's important that you develop a rapport with the buyer and can rely upon that rapport during the process. No matter how smart each party's counsel are and how lengthy the agreements, either party can screw the other. While you will be signing a document at some point, make sure you can look the seller in the eye, shake a hand, and trust between you that you are both working toward a common goal. If you get nervous, be prepared to pause or walk away from the deal with the support of your board of directors.
Take a Xanax. Okay, I'm only a little joking. There are going to be lots of highs and lows during a sale process. I absolutely promise that there will be times you're popping Champaign and pricing luxury goods, and times that you're certain that all is lost and the deal is off. This sine wave of emotion is very similar to entrepreneurship's emotional roller coaster, but more compressed. Within the space of weeks to months you're going to feel like a tornado hit you, and you need to keep a level head.
This entire post is squarely focused on selling a business in a change of control transaction valued between $1 million and $200 million. Smaller than $1 million is a job better left to a business broker to speak about, and larger than $200 million will necessarily involve a different set of personas (an investment bank is likely a prerequisite, and the transaction mechanics will be driven by a subset of a board of directors). I can't speak about larger or smaller transactions because I don't have any direct experience outside of that range, but I would be interested to learn about others' experience. Do tell...