Mergers & Acquisitions: 5 Steps to Take When Selling Your Business
Key Takeaways
As you begin the process of selling your business, you may need help figuring out where to start. The first steps you take when you decide to sell your business depend on several factors, such as market conditions, business structure, and how to engage the right advisors to support your efforts. In this article, we outline a few essential steps to help business owners prepare for the mergers and acquisitions process, including:
● Organization and preparation for external scrutiny by potential buyers
● Knowing and understanding the key performance indicators (KPIs) to communicate to potential buyers
● How to best maximize your business valuation
● Understanding the tax implications for selling your business
● Why selecting the right M&A advisor can make a world of difference in the time it takes to sell your business and, ultimately, the price a buyer will pay
We will also discuss the macroeconomic factors that determine the length of the acquisition process, such as the cost of capital, and the appetite and available liquidity for the best potential buyers. The steps below can act as a guide to making sure you understand the steps it takes to successfully sell your business.
Selling Your Business: Understanding the M&A Process
Are you thinking about selling your business? The M&A process can be daunting, with numerous factors to consider. Is the timing right? How will the current market conditions affect the value of your business? Will your current business / ownership structure entice the right buyers? While the process may seem overwhelming, we will detail essential steps business owners should take when preparing to sell their business. Understanding these steps and their importance can help you move in the right direction, ensuring a smooth and successful transaction.
Before you start, you should clearly define your motivation as a seller. Are you a founder who is looking to retire? Or are you an entrepreneur who wants to facilitate an exit so a larger company can take the lead through your company’s next phase of growth? There are many reasons for selling a business, and defining and communicating your motivation ahead of time will help attract the right buyers and lead to terms that meet your goals, ensuring a successful process.
Before embarking on a sale process, you should also be aware of the macroeconomic business environment and market conditions that will impact M&A activity. The cost of capital, industry preferences, recent M&A transactions, and competitive buying activity will all impact potential buyers and their ability to finance an acquisition of your company. High interest rates will increase the cost of capital and impact potential buyers' ability to secure attractive financing. Analyzing recent deal activity can provide insight into trends and valuations, helping set realistic sale expectations in the current market environment.
Once you have clearly articulated your motivation and understand the market dynamics, start working through the following 5 steps to prepare your business for sale:
5 Steps to Prepare Your Business for Sale
Step 1: Get Your Business in Order
In preparation for selling your business, it is essential to get organized across all major functions of your company, including accounting, financial, legal, HR, and regulatory. Ensure all documents and records are ready for scrutiny by potential buyers. If necessary, ensure you have your company’s intellectual property organized and documented.
Understanding your corporate ownership structure is an essential factor in getting organized, as it determines who needs to be present for negotiations and who potentially needs to approve the details of the final transaction. An experienced M&A advisor can help you analyze your records and review any organizational inefficiencies to streamline the process.
Finally, identify the key stakeholders who may need to approve a transaction, such as early investors, shareholders, or other business partners. Consider engaging in cursory discussions with these parties in order to mitigate potential hurdles down the road. The last thing you want is to get an attractive offer to buy your company, only to learn that a key stakeholder does not approve of the sale and will block the deal. Address this upfront with clear communication of your intentions.
Step 2: KPIs: What Buyers Look for When Evaluating Acquisitions
Key business metrics provide insights into a company's profitability, growth, and operational efficiency. Potential buyers will look to KPIs to better ascertain how your business is performing. KPIs are highly industry dependent so you should consult with an experienced M&A advisor to help you identify which KPIs will be most important for your business. Here are examples of key metrics that broadly apply to many different industries:
Financial: Financial metrics demonstrate a company’s growth trajectory and overall profitability. These are evaluated on a historical and projected basis.
Growth: Measures the increase in a company's sales, earnings, or cash flow over a quarterly or annual period.
Profitability: Measures the percentage of profit after cost of goods sold or profit a company makes after deducting operating expenses, but before subtracting interest and taxes. It indicates how effectively a company is able to convert revenue into actual profit from its core business activities. For example, Apple Inc. reported an operating profit margin of approximately 30% in 2023. This means for every dollar of sales, Apple retains $0.30 as profit. Profit margins will vary by industry and your company will be compared to others in the same sector.
Cash Flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Reflects the company's overall financial performance and the income it generates from regular business operations. EBITDA specifically measures the profitability of recurring business operations, giving potential buyers insight into additional profit they may generate by acquiring the company. Cash flow focused metrics could also evaluate maintenance and growth-related capital expenditures required to support your business.
Marketing Efficiency: Customer metrics evaluate the cost-effectiveness of customer acquisition and the long-term value of each customer, which are crucial for assessing growth and sustainability.
CAC (Customer Acquisition Cost): The average cost it takes for a business to acquire a new customer. This can vary greatly by acquisition channel.
CLTV (Customer Lifetime Value): The total revenue expected from a customer throughout their relationship with the company. A customer who buys from you only one time will have a much lower CLTV than repeat customers.
Marketing Spend % Revenue: Marketing Spend as a percentage of total revenue demonstrates how effectively the company converts marketing / advertising spend into revenue.
Customers & Suppliers: The nature of customer and supplier relationships is critical to support ongoing operations and to drive future growth.
Blue Chip Customers / Suppliers: Strong relationships with important customers or suppliers can provide significant value to potential buyers.
Contracts: Contracts with key customers or suppliers can provide stability and/or favorable economics to buyers. The transferability of these contracts is important to evaluate as part of an M&A process.
Volume / Pricing power: The extent of your volume / pricing power among customers or suppliers can support stable growth and margins that is favorable for buyers.
Cash Flow / Liquidity: Cash Flow and Liquidity metrics evaluate how much cash flow the company generates from ongoing operations and the ability to meet short-term obligations and manage cash flow effectively.
Operating Cash Flow: Total cash generated from regular operating activities. This excludes cash flow from investing or financing activities.
Ability to Support Debt: Debt is often used by financial buyers to support the acquisition. Companies that have strong cash flow and can support greater debt can be attractive to certain buyers.
Current Ratio: Measures a company’s ability to pay short-term liabilities with cash and other highly liquid short-term assets.
Understanding these KPIs is crucial for assessing the overall health of a company and preparing for rigorous M&A due diligence. They provide a comprehensive view of financial performance, customer value, and liquidity. Potential investors and buyers depend on these metrics to make well-informed decisions about which companies they may want to acquire and how much they are willing to pay for those companies. For example, when Salesforce acquired employee instant messaging company Slack for $27.7 billion in 2021, they closely examined Slack's revenue growth, customer acquisition costs, and overall financial health to ensure the acquisition would benefit Salesforce and that Slack’s growth was sustainable for long-term profit.
Step 3: Position Your Business to Maximize Valuation
Before engaging with potential buyers, you’ll want to maximize your company’s valuation. To do so, step back and examine several aspects of your business, notably those associated with the KPIs detailed above. Identify if there are any nonrecurring (one-time) expenses that you can add back into your earnings for an adjusted EBITDA. These may include any one-time fees and charges (specific legal or consulting fees, one-time product development costs, etc.) that your company does not anticipate occurring again in the future.
To identify additional value drivers, you can also assess the market value of so-called “hidden assets,” such as owned real estate, brand value, historic net operating losses, and/or investments in other companies. These types of assets may be owned by a company, but not fully valued on the company’s financial statements due to various accounting principles. Uncovering and accurately valuing these types of assets may require careful analysis and diligence and is an area where an experienced M&A advisor can add value and help position your business for maximum valuation ahead of engaging in the M&A process.
Step 4: Understand the Tax Implications for the Business Owners
The tax implications of selling a business can significantly impact the sale and the final sales proceeds you may receive. Asset sales and stock sales have different tax consequences. In some cases, creative tax structuring can add significant value to the sale process. Working with the right tax consultant can help you decipher these complexities, avoid potential tax pitfalls, and identify valuable opportunities.
Step 5: How to Select the Right M&A Advisor (vs. a Business Broker)
If you want a successful transaction that garners the best price for your business and ensures a smooth transaction as a seller, choosing the right M&A advisor is crucial. M&A advisors provide specialized expertise, and there is a difference between M&A advisors (commonly referred to as investment bankers) and business brokers. Business brokers are experienced in selling companies with revenue less than $10 million but don't have the experience, disciplined processes, or professional network to sell larger companies. If your company has more than $10 million in annual revenue or has an expected valuation greater than $10 million, you should hire an investment banker who has specific expertise and experience in mergers and acquisitions.
There are multiple benefits to working with an M&A Advisor as part of your sales transaction. Those include:
Time Management: Reduce the time and attention required from you as the business owner, allowing your focus to remain on current operations
Confidentiality: Act as a buffer to keep the plan to sell the company confidential. This is meaningful internally for employee retention and externally for your competition
Due Diligence: Facilitate the complex due diligence process and assist with legal transaction structures
Negotiation: Skilled M&A advisors can negotiate the terms and conditions of the acquisition on your behalf. These agreements can get very complicated quickly, so aligning yourself with a trusted advisor who is looking out for your best interest will lead to a better result.
Buyer Network and Marketing: Leverage their connections and marketing skills to create competition and potentially raise the sale price.
At Keene Advisors, we pride ourselves on our experience and the level of support we offer our clients. We are experienced in navigating the complexities of financial and strategic transactions. We provide comprehensive support throughout the sale process, ensuring transparent communication, constant counsel, and alignment with your long-term goals.
How Long Does it Take to Sell a Company?
The time it takes to sell your company depends on various factors, including market conditions, the overall cost of capital, and the availability of buyers in your company’s industry.
Understanding Market Conditions
Current market conditions play a significant role in the timing and success of your business sale. The cost of capital, driven by interest rates, will determine the cost of financing, and high rates can make deals more expensive, potentially reducing the number of buyers as well as the price those buyers are willing to pay.
It's also essential to understand sector-specific trends. Some industries might be experiencing consolidation, where larger firms actively acquire smaller ones to increase market share and take advantage of emerging technology. Keeping an eye on recent M&A transactions in your industry can provide valuable insights into what buyers are looking for and how to position your business accordingly.
Your Business Size & Structure
Additionally, the size and structure of your company influences the time it takes to sell. Small businesses typically take a shorter amount of time, as they tend to be less complex and have fewer assets and fewer key stakeholders who have to approve a deal. Larger companies can take longer to sell–they usually need a different pool of potential buyers and will have a longer, more complicated diligence period.
The same goes for the structure of your business or sale process – selling assets and retaining liabilities provides for a much more straightforward diligence process for buyers and can result in a faster process. The sale of a company with a broad group of investors with very different desired outcomes can result in a longer sale process.
Both small and larger businesses benefit from working with a dedicated M&A advisor. This advisor can guide them through the extensive due diligence process, which often requires coordination across multiple departments. Missing even one step can significantly lengthen the process and time it takes to sell your business.
There is no one response to “how long will it take to sell my business?” The timing varies greatly, but most acquisitions will take four to six months or longer to complete. However, it is not unusual for a sale to take up to a year. Start organizing early and give yourself more time than you think you need.
Prepare your M&A Team
It is essential to select the right team of advisors, including an M&A Advisor, appropriate legal counsel, and a well-informed tax advisor.
An M&A advisor provides strategic guidance, helps you prepare your financial model, works with the executive team to create your company’s marketing materials, contacts potential buyers, and helps negotiate the best terms of a sale. The investment banking team will coordinate the entire internal and external team and ensure that your company is presented in the best possible light to the most strategic buyers.
Legal advisors provide guidance on the transaction's legal structure, help draft and review all necessary documents, and ensure that the acquisition complies with applicable laws and regulations. They also assist in resolving any legal issues that may arise during the sale process.
Tax advisors help you understand the tax implications of the sale and identify strategies to minimize tax liabilities. They can advise on the benefits and drawbacks of different deal structures, such as asset sales versus stock sales.
Preparing a Business For Sale: Ask These Three Questions
In summary, selling your business is a significant decision that requires investment, preparation, and expertise. You will want to understand three core components:
Is this a good time for your business?
Is this a good time for the market?
Is this a good time for the best buyers?
In order to maximize the value of your business, you need all three components. Having the proper support team with mergers & acquisitions experience can help you answer these questions and makes the difference between a successful sale and the process failing to meet your objectives.
Keene Advisors is a Full-Service Strategy Consulting and Investment Banking Advisory firm with over $40 billion in successful mergers and acquisitions, capital raising, and restructuring advisory transactions. We are dedicated to transparent communication and seamless guidance throughout every stage of the process, always aiming to align short-term needs with long-term goals.
Contact us today with your inquiries and to learn more about how we can help you achieve a successful sale.
Mergers & Acquisitions Glossary:
M&A (Mergers and Acquisitions) Advisor - often referred to as an Investment Banker - a team of professionals who help companies buy, sell, or merge with other businesses, providing strategic and tactical guidance.
KPIs (Key Performance Indicators) - Metrics used to evaluate a business's performance, such as growth rates, gross margin, operating profit margin, EBITDA, and Customer Lifetime Value (CLTV).
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) - A measure of a company's financial performance, showing earnings before specific deductions.
Customer Acquisition Cost (CAC) - The cost associated with acquiring a new customer, including marketing and sales expenses.
Non-recurring add-backs - One-time expenses that can be added back to a company’s earnings to reflect ongoing profitability.
Hidden Assets - Valuable assets that are not immediately apparent from looking at a company’s financial statements, like real estate or tax credits.
Due Diligence - A thorough business appraisal by a prospective buyer to evaluate its business structure, assets, liabilities, cash flows, intellectual property, employees, and other material information.
Corporate Ownership Structure - The organization of a company’s ownership, affecting who needs to approve a sale.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.
Securities related services offered through Burch & Company, member FINRA / SIPC. Keene Advisors, Inc. and Burch & Company are not affiliated entities.