M&A Q&A

“Sell my business?”

“How in the hell do you even do that?”

“Was there a class I should’ve paid better attention to in college or something?”

“I literally don’t know what I don’t know!”

“…and who do I even ask about this!?”

Welcome to M&A Q&A

Selling your business is one of those things that sounds pretty straightforward until you start asking what it actually involves. When should you sell? How big does the business need to be? What if you’re still a big part of the day-to-day operation? And who are you even supposed to call first?

How big does a business need to be to sell?

A business can be sold at any size; however, there will generally be more interest the larger the business grows. Many private equity groups target businesses with at least $2 million of EBITDA, although some may go lower depending on factors like recurring revenue, growth, and customer concentration. Search funds and individual buyers often target smaller businesses, while strategic buyers can vary significantly in what they’re looking for. But smaller businesses sell all the time. It all comes down to understanding who the interested buyers might be and why they might be interested. This includes exploring a sale to a competitor and/or considering alternative transaction structures such as selling a particular part or certain assets of the business.

What if my business has had an unusually bad year?

One unusually bad year will generally not define your business. Buyers typically look at years of data, not just one in isolation. However, buyers will want to understand what caused the downturn and whether it’s likely to continue. With the help of your advisor, you should be able to provide data to help explain and contextualize the situation to buyers. On the flip side, one unusually good year will also generally not define your business. Buyers will still look at historical data to determine what drove performance and whether it’s sustainable.

What happens if the business depends heavily on me?

Owner dependence can create additional risk for buyers, but this can be mitigated through deal terms that may require you to remain involved for a transition period following the sale. Other terms such as an earnout or equity rollover may be explored, aligning the interests of the buyer and seller for several years by tying a portion of your proceeds to future performance or continued ownership in the business. To mitigate this risk pre-sale, you could appoint a management team that can continue to run the business without significant owner oversight, document key processes and transition important relationships and responsibilities to other employees.

What are earnouts, rollovers and seller notes?

These are common deal terms used by buyers to structure how and when a seller receives the proceeds from a sale. An earnout is a portion of the purchase price that is paid to the seller after closing only if the business achieves certain agreed-upon performance targets. For example, a buyer might pay $8 million at closing with another $2 million payable if the business reaches specified revenue or EBITDA targets over the next two years. These are often used to bridge a valuation gap between buyer and seller. With an equity rollover, the seller receives a portion of their proceeds in the form of equity rather than cash, making them a minority owner in the new company. This gives them the opportunity to participate in future growth and potentially a second sale of the business; however, it means that they’re exchanging guaranteed cash at close for what is usually an illiquid, minority stake in a business they no longer control. Finally, a seller note is when the seller agrees to finance a portion of the purchase price, with the buyer repaying them over time. This allows the buyer to reduce the amount of cash/debt needed at closing while the seller receives interest income in exchange for taking repayment risk.

If selling is maybe 10 or 15 years away, what should a business owner be doing now?

If your plan is to sell your business in 10-15 years, there’s not much you need to do today to prepare for a sale outside of continuing to build a business that will eventually be easier to sell. This means building a strong business that can eventually operate and succeed without you. Focus on growing revenues, improving profitability, reducing customer concentration, maintaining clean and reliable financial records and documenting key processes. What makes a business stronger today is often what makes a business more attractive to a future buyer.

How disruptive is the sale process to actually running the business?

While a sale process will certainly take some time and effort on your part, a good M&A advisor should be able to shoulder much of the load, only bringing you in when necessary. They organize the process, prepare materials and serve as the primary point of contact for potential buyers. Most of your time and energy will likely be spent gathering documents, meeting with your advisor to answer questions about your business, helping respond to buyer inquiries and participating in management presentations. The time commitment can increase as the process progresses into final due diligence, but having an advisor manage the process should considerably reduce the burden on you, allowing you to remain focused on running your business.

What is a management presentation?

This is when serious buyers personally meet with you and your advisor to ask more detailed questions, visit your offices/facilities and generally get a better feel for the business they’re looking to acquire. These presentations are typically scheduled with buyers who have moved beyond the initial stages of the process and may have submitted an Indication of Interest (IOI), a preliminary, non-binding indication of valuation and deal terms. It’s also an opportunity for you to get to know the buyer, which can be particularly important if you, like most business owners, care about what happens to your employees, customers, culture and legacy after a sale.

I’m considering selling my business, who should I tell?

Beyond necessary advisors like your M&A advisor, attorney and CPA, the circle of people who know should generally be pretty small. Employees, customers, vendors and other outside parties often do not need to be informed until later in the process, sometimes not until closing. Prematurely disclosing a potential sale can create uncertainty and affect these relationships, especially when there is no guarantee the sale will actually occur. However, certain members of your team who are needed to provide information and participate in buyer meetings may need to be looped into the process much earlier.

What questions should I ask an M&A advisor before hiring them?

Ask them about their past experience with businesses of similar size and industry. Ask about their fee structure including monthly retainers and success fees. Ask about who at their firm will be working with you and how many other transactions they’re currently managing. Ask how they will identify and contact buyers. Ask what happens if the business does not sell.

I’m thinking about selling my business. Who should I call first?

To get the ball rolling, contact an M&A advisor. If you don’t know any M&A advisors, call your attorney, financial advisor, CPA or banker. They should be able to point you in the right direction or make an introduction. Give us a call as well. We’re always happy to answer questions, discuss the situation and even refer you to other M&A shops if necessary, all completely free of charge. As a small, family-owned business, we love nothing more than helping other business owners however we can.

If I decided I wanted to sell my business, what would the process actually look like?

Read How Your Business Gets Sold

When should I sell my business?

Read When Should You Sell Your Business?