Deciding how and when to sell your business can be an important and complex process. At Hughes Klaiber, we specialize in selling businesses with annual revenues between $4 million and $20 million.
Below we’ve assembled some of the questions entrepreneurs frequently ask as they begin to consider a potential sale of their business.
There are three types of buyers who purchase most businesses with annual revenues between $4 million and $20 million:
- Strategic buyers are companies already involved in your industry, who want to build their own businesses via acquisition. Many companies find that buying another company is easier and quicker than building business organically by finding new clients. Examples of strategic buyers include current local direct competitors, competitors in other locations who want to expand their geographic footprint, or companies with a slightly different current target market who want to expand into your target market.
- Financial buyers include private equity firms or other types of investment groups that have raised capital and may be interested in helping you or another management team expand the company for a future sale or other liquidity event. Financial buyers are usually looking for companies with strong current and projected growth.
- Wealthy individuals such as high-net-worth former entrepreneurs or corporate executives are also frequent buyers, either by themselves or in conjunction with other partners who may provide some financing. We find this type of buyer especially common in New York City, where there is a large base of family capital and many high-net-worth individuals.
We also frequently see hybrids of these types of buyers, such as successful serial entrepreneurs who have started small private equity firms.
Strategic buyers have historically had the reputation for paying the best prices to acquire a company, but in today’s market with excess private capital funds available, strategic buyers may be outbid by aggressive private equity buyers.
A privately held small or mid-sized business is generally valued as a multiple of the last twelve months' earnings before interest, taxes, depreciation, and amortization (EBTIDA). The appropriate multiple varies by company, depending on the size of the company, industry, and a host of other issues including the company’s track record, whether or not the company has a strong and recognizable brand, whether there are recurring revenue streams or contracts in place, and the value of the company’s assets including leases, inventory, and intellectual property.
Bear in mind that the value of your business as stated on paper is really a hypothetical amount. The true value of the business is how much one or more buyers will pay, so the way in which you market and position the business, and find and manage potential buyers is very important. An effective sales process that includes preparing strong marketing materials, organized financials, and a credible road-map to continue to grow the company, all play a very large part in whether multiple buyers make a bid to acquire the company and drive up transaction value.
It’s also important to understand that some offers may not be paid in all cash at closing. A buyer may propose that some of the value be paid over time in the form of a promissory note or an “earn-out”, where some of the purchase price is contingent upon future sales of the business. For some sellers, a lower overall offer with a higher percentage of cash at closing may be more attractive than a higher offer that includes an earn-out or other contingent payment.
Historically, the average total time to sell a company is nine months. However, this varies from company to company, and generally takes longer in a challenging economic environment.
The initial step of preparing your business for sale usually takes four to eight weeks.
Once the marketing materials are complete, we work to obtain a letter of intent, term sheet or other expression of interest from one or more qualified buyers. The length of time spent working with buyers can vary significantly, depending on the overall level of buyer interest in your company.
Bear in mind that once you receive an offer in the form of a letter of intent, there is generally a due diligence period, which can last anywhere from three weeks to several months before closing. Many buyers may also require you to stay with the company post-sale for a transition period.
In an ideal world, business owners maximize the selling price of their companies by selling during a strong economy, when valuations are high and the company is growing quickly. However, in reality, making the decision when to sell a business requires balancing the economic environment and prevailing valuations, performance of the business, and the entrepreneur’s personal goals.
Some entrepreneurs decide to sell when they feel they have reached a plateau in the company’s growth, or when additional outside resources and investment will be required to further build the company.
For others, competition and a rapidly changing business environment has changed the dynamics and margins available in their business, making the returns of the business less attractive.
Personal goals or issues, such as changing family obligations, other career opportunities, retirement plans, burn-out or health concerns, also frequently drive a decision as to when and whether to sell.
Most entrepreneurs choose to keep a potential sale confidential, to ensure that employees do not become concerned about the company’s future prospects.
Confidentiality is also important to ensure that clients, vendors, and competitors don’t hear of a potential sale.
It’s not unusual to let employees know that the company has been sold after the transaction is complete. However, in some very limited circumstances, it may make sense to let key employees or other important stakeholders know about your plans. For example, if you are approaching – or are well past – retirement age, employees or clients may be relieved to know that you are looking for a way to continue to operate the company.
Most buyers require the seller to help with transition issues, such as facilitating introductions to key clients and vendors.
Whether the seller stays on in a management role after the initial transition generally depends on the goals of both the buyer and seller.
Some sellers want to stay with the business and agree to continue in a key role such as managing sales or continuing to act as the public spokesperson for the company, while relinquishing the day-to-day management headaches of the business. Other sellers, especially those with other pressing demands or a desire to retire, may want to leave the company as quickly as possible after the transition period.