By Andrew Comer
After a difficult 2020, many small business owners are thinking about moving on to the next chapter—at Fortis we’ve heard from a number who are now pondering an exit. However, attempting to sell your business can feel scary and overwhelming. The good news is that the sale process doesn’t have to be intimidating, nor does your business have to be flawless before you start shopping for a buyer. In fact, most buyers don’t expect perfection! Instead, they’re typically looking for a business that has a strong foundation and presents the opportunity for growth.
So, don’t let yourself get too overwhelmed by the task ahead of you. Understanding the scope of what’s involved in selling a business and breaking each step into manageable pieces will make the whole experience less daunting.
Here are five of the most important steps toward selling a business:
Finding a buyer. This is where most people get stumped right out of the gate. They know they want to sell, but have no idea how to go about identifying a potential buyer. However, it’s not as tricky as it sounds. There are business brokers, M&A advisors and investment bankers who help people with this for a living. BizBuySell is a great website totally devoted to connecting buyers and sellers of small businesses. You should also network with your business service providers, such as your lawyer or accountant, as they often have connections to interested buyers. Let them know you’re thinking of selling and see if they have contacts who might be interested. The Association for Corporate Growth is another fantastic M&A resource that offers useful webinars, events and opportunities for networking with other professionals who invest in, own and advise growing companies.
Gathering your team. Hire a skilled accountant who can structure the deal in the most tax efficient way for you, the seller. You’ll also need an attorney and, in this instance, it’s best to hire legal counsel with M&A experience so that you can be confident about their ability to negotiate a sale on your behalf, help you obtain the highest purchase price, and limit your legal exposure.
Drafting a Letter of Intent (LOI). Once you’ve found your buyer, the next step is to put a summary of the deal terms into a letter of intent. In addition to the main purchase and sale provisions (transaction structure, purchase price, earn-outs, and the like) LOI’s will likely include an exclusivity provision, an agreement to negotiate in good faith, and confidentiality and non-disclosure clauses (which may also be contained in a separate NDA).
You, as the seller, will be sharing sensitive and confidential information and you may be receiving similar information from the buyer. It’s important to ensure that both parties are protected and to have clarity about what information can be disclosed, and to whom. Letters of Intent are important. Even though LOI’s are typically not legally binding as to most of the deal points, and do not represent the final terms of the deal, they do lay the groundwork for everything to come, and it is difficult to negotiate material terms after signing them without sacrificing some credibility. .
Preparing for due diligence. After signing the LOI, the buyer will undertake the due diligence process–essentially, an up-close examination of your company. The scope of the due diligence process can vary depending on the type of buyer. If you’re selling to a current client, customer, friend or family member, it is likely to be less extensive. If your buyer is a competitor or private equity firm, the due diligence can be more exhaustive because these types of buyers typically have less familiarity with your business and less willingness to handle potential issues.
The good news is that due diligence is something you can start working on right now, even before you have a deal! Think of it as doing a deep spring cleaning for your business. Do you have well-written and legally binding customer, employee, supplier and vendor agreements? Are your financials in order? Have you resolved any outstanding legal issues? Any prep you can do ahead of time will allow you to approach potential buyers with a higher level of confidence, and help make the formal due diligence process more seamless.
Although it’s best to start preparing for the due diligence process early, good advisors can help you clean up many issues and organize your critical documents even after the LOI is signed.
Locking in binding agreements. After the LOI is signed, and either during or after due diligence, the buyer and seller will negotiate definitive, binding agreements for the purchase and sale of your company. This step includes final negotiation of material deal terms, and typically requires that you as the seller make representations and warranties to the buyer about your company, such as declarations that financial statements you’ve provided are accurate, and that no lawsuits or claims have gone undisclosed. The definitive documents can also include making arrangements for key personnel to stay and run the business for a set period of time in order to ensure a smooth transition.
Selling a small business can be a complex undertaking, but if you understand the process and what you can do to prepare, you’ll find yourself ready to climb each step along the way.
