Preparing For an Exit – What to Consider When Selling Your Business

For the owners of most private companies, selling is a new and daunting process. Capitalizing on the value of the business in such a situation can be difficult for the unprepared. If you are considering selling your business, careful planning early in the process can help you ensure the process runs smoothly and ends with the best results.

1. Know Your Goals.

Before taking any steps, you should first have a clear understanding of why you are selling. A sophisticated buyer will question why they should buy your business if you no longer want to own it. It is important to be prepared to answer this question both for the buyer and for yourself. If your goal is to retire, you should have a firm understanding of how much money you will need to receive for your business to maintain the lifestyle you want during retirement. A qualified financial planner can assist you in making that determination. If your goal is not to retire, you should carefully consider how selling the business will affect you. Most buyers will require you to sign a non-competition agreement, prohibiting you from competing with the business for several years after the sale. If you cannot retire on the sale proceeds, can you afford to be out of work in the industry for several years? If not, you may need to negotiate an exit that provides for your continued involvement in the business after the sale or reconsider whether a sale to a third party is the proper exit for you. Other options include an installment sale to a key employee or succession planning to a family member.

2. Understand your company’s value.

A realistic expectation of your company’s value is needed to make these tough decisions. While business owners typically have a general idea of their company’s worth, they may not have a firm grasp of its actual current market value. Obtaining a valuation from a professional source can provide you with a realistic expectation for your exit and help you negotiate proper value for your business based upon defensible information.

3. Put your house in order.

Before proceeding to market, make sure your business is ready to go under a microscope. Potential buyers will typically conduct in-depth due diligence on your business before acquiring it. If their review uncovers any potential risks, they could be scared off or reduce the purchase price. By carefully reviewing your business in advance, you can identify potential weaknesses, eliminate red flags, alleviate a buyer’s potential concerns and maintain your bargaining position. Make sure your corporate records and financial statements are accurate and up-to-date, important arrangements are properly documented, your key employees are retained, lawsuits have been settled and there are no skeletons likely to pop out of your company’s closet.

4. Keep it quiet

News of a potential sale may cause suppliers, customers or employees to look for opportunities elsewhere due to the company’s uncertain future, which can decrease the company’s value. It is important to maintain confidentiality by restricting disclosure of the proposed sale to those individuals needed for the sales process and requiring nondisclosure agreements when prudent.

5. Stay focused on your business.

Selling your business can be a full-time job. Don’t forget that potential buyers will be scrutinizing the profitability of your business. If revenues falter or other concerns arise because you have not concentrated sufficiently on your business, buyers may seek to reduce your purchase price or back out of the deal entirely.

6. Learn and manage the process.

Commencing the sales process, identifying the right buyer, negotiating the terms of the sale and closing the transaction can take longer than expected. Depending on the risk adversity of the buyer, due diligence alone may take 30 to 60 days, or in some cases longer. Understanding the sales process will allow you to be prepared, plan accordingly and start the process at the right time to maximize the marketability of your business. You should also identify upcoming issues, such the expiration of critical licenses, leases or other agreements, and be ready to deal with them. Don’t let surprises derail your transaction.

7. Get the right help.

Most business owners have little, if any, experience selling a business and find themselves negotiating with experienced buyers. Engaging professional advisors that are experienced in mergers and acquisitions early in this process will level the playing field, help maximize the value you receive for your business and ensure you are protected in the process. The sale of your business is not the time to hire a family friend or relative that is not an experienced mergers and acquisitions professional. The right professionals will guide you through the entire sales process and help you avoid common mistakes and pitfalls that can be difficult and expensive to fix in order to get your deal back on track.

It is never too early to begin this process. By taking the steps to evaluate your options, understand your company’s value, put your business in order and obtain professional assistance, you are strategically planning for the successful exit you want.

 

WHAT TO INCLUDE IN AN EXECUTIVE SUMMARY FOR INVESTORS?

In the last couple of days, I have had three first time CEO entrepreneurs present me with their initial draft of an executive summary that they planned to give to potential investors. I know the companies, and that they have compelling value propositions, but in each case they failed to address some of the critical elements that one would expect to see covered. And in each case, those missing elements may have been sufficient to make an investor pass on taking it any further or inviting the entrepreneurs for a meeting.

Although this posting might appear sublime to the seasoned entrepreneur, I believe it to be sufficiently important to address, since the life blood of a startup is the infusion of capital, and obtaining capital begins with presenting a potential investor  something that will hopefully make them “want a piece of what the entrepreneur is offering.”

Remember that an executive summary is usually just a two page document, designed to whet the appetite, so that the potential investor wants to hear and learn more. A summary is, by definition, incomplete, and can’t cover everything, and although there are no hard and fast rules as to its structure, there are certain topics that virtually every investor expects to see covered. Remember that you often only have one opportunity to make an indelible impression, and the following are the key elements that should be clearly and concisely addressed in the executive summary:

Introduction:  Include one or two sentences that communicate your compelling, unique value proposition to a really big problem. If you lose the potential investor here, they probably won’t make it any further into the summary. Think of your elevator pitch, and distil it into a sentence or two that makes the reader want to read more.

What is the pain in the market that you are addressing and why will customers pay for your solution?  Generally, little pains don’t result in large companies, and investors generally don’t want to invest in companies that don’t have significant upside potential. So, you have to clearly articulate the current or currently emerging problem or need that your product is going to address, and ultimately solve. By addressing your solution, which will solve the significant problem or pain to come, by making things quicker, faster, cheaper, more efficient, etc., you are building the case for a compelling value proposition.

What is your solution to the pain?  What is your product that you are developing to address the pain, and how will it in fact solve the problem that you have identified? Is the product disruptive and unique? If it doesn’t require significant behavioral change on the part of the target customer, be sure to convey this, as this will underscore that there may be early and widespread adoption of your product or service. Where are you in the life cycle of development? If you are post prototype and ready for commercial launch, let the investor know, because the risk profile of the investment may be significantly diminished and make yours a more attractive investment.

How does/will your company make money?   If you have customers, and are generating revenue–tell the investor. The investment proposition is different if you have started to gain some traction in the market, and are just looking for scale money, as opposed to the alternative. The risk profile is obviously diminished if the dogs have already shown that they will eat the dog food! If you are pre-revenue, you have to clearly articulate the way in which you are going to generate revenue from your product, and in so doing, articulate that yours is or will become, a scalable, predictable business model.

Addressable Market.   If the market you are going after is small, you will probably not generate any interest from investors. Even if you can demonstrate that you can capture 50% of a really small market, the upside potential for investors will make this an unattractive investment opportunity. Demonstrate a deep understanding of the size and growth of the overall market, and articulate the size of the market segment or vertical (the low hanging fruit) that you initially intend to address.

What is your unfair advantage?   In other words, what is your competitive advantage, and is it a sustainable competitive advantage. Is your competitive advantage based solely on the fact that you have the first mover advantage? Or do you have an IP portfolio/patent strategy that has or has the potential to result in an impregnable wall around your solution? If you are playing in a space, where it is simply a case of first to market wins, your targeted investors will be different to those where you have a sustainable competitive advantage. There are many investors that won’t invest in that race, or a race to get eyeballs, notwithstanding the recent frothiness of the market in the Valley.

What is the competitive landscape?  It is imperative that you should have a deep understanding of the competitive landscape, as this really goes to the heart of your ability to achieve success. Avoiding current or potential competitors, or demonstrating a fundamental lack of awareness of your actual or potential competition will, in all probability lead to an instant loss of your credibility. If there are actual or potential competitors, clearly convey why yours is or is going to be the alternative of choice. Even if there are no competitors, and you are creating a paradigm shift, the competition is the status quo, and how and why will you overcome it?

Who makes up the team?   In virtually every communication to investors that I reach out to on behalf of clients, I lead off by opening with the stellar team that has been assembled by the founder? Why?  Because every investor tells the same story–they back the jockey and not the horse. A weak to mediocre team with a stellar product may get funded, but I have seen, many times, serial entrepreneurs with half baked plans get funded almost immediately after an exit and the startup of a new venture. To that end, provide a brief synopsis of the team (or virtual team that will become the real team upon funding), to clearly articulate and demonstrate deep industry expertise, core competencies, and past experiences that are relevant. An investor should feel that your team has the depth and breadth of knowledge in the space you are in, and feel that, given the past experiences of the team, it is surely one that can execute to plan.

Funding to date and the amount you are currently seeking.  Describe how much money you have raised to date. This can, indirectly, be a great indication as to your innate abilities and ability to execute on future plans. If you have bootstrapped or achieved significant milestones on a meager or reasonable amount, this should provide an investor confidence in your ability to stretch the dollar and therefore maximize his or her return on the currently contemplated investment. How much are you looking for, and where will the company be once you have burned through the investor’s investment? Will it take you to product launch, or will it take you to break even? If projected to take you to break even, be sure to include this. Again, anything that you can describe that has the effect of diminishing the risk profile may make yours a more attractive investment. No investor is looking to help you build a bridge to nowhere, so be sure that the amount of funding that you are looking to raise will take you to some endpoint, whether its customers, break even or some meaningful value inflection point where you will do a follow on.

Exit Strategy. You may or may not want to include an exit strategy. For the most part–its always the same. M&A or IPO, and investors know the drill. However, if you have identified potential acquirors, where your solution might be a natural/accretive event, then I would advise that you include it. Also, if you have clearly identified companies in a particular industry/vertical that would benefit immensely from an acquisition of your technology, definitely include it. You should not convey a desire to build and flip, but demonstrate a thoughtfulness as to who the acquirors might be and why. If any competitors of these acquirors have made acquisitions of your competitors with an inferior solution for hundreds of millions of dollars, this too is sure to whet the appetite of any investor.