The most important questions to ask when selling your business

Thinking about selling your business? We’ve got the answers to every question you’ve always wanted to ask.  

Creative Business sat down with William Lieberman, the founder of The CEO’s Right Hand – a fellow New York-based consulting services firm that specializes in advising executive teams. Leveraging William’s background in M&A, the firm also helps founders and CEOs sell their businesses – navigating them through the entire transaction process, start to finish.

Whether it’s the aftermath of the pandemic, the prospect of a recession, a sudden boom in business, the desire to retire or an approaching life milestone, there’s no shortage of reasons that owners consider selling their business. But the prospect of level-setting expectations, preparing your business, and going to market can feel murky and daunting.

Below is a recap of our Q&A discussion with Lieberman earlier this month.

Q: I’m ready to sell their business…what’s the first step?

A: The first step is to identify what your goals are – what you’re trying to achieve through a transaction. If you need to exit quickly to purchase a vacation home or pay a large tax bill, then the focus should be on expediency from the onset. If your goal is to maximize your monetary value – say if you’re getting ready to retire – then the focus will be on getting your business in the best shape possible to position it for the highest sales price.

Q: What’s my business worth?  

A: Right after you gain clarity around the purpose of your transaction, the next step is to do a quick and dirty valuation. We’re not talking about an exacting financial evaluation, but more of a realistic range of what you can expect relative to your peers in the market at that time. If an owner is not aligned on the valuation, it may not be the right time to move forward with a sale.

Q:  What if I want to get more from the business? 

A: Whether our initial valuation is aligned with what you had in mind or not, we always advise owners to start preparing way before we go to market to enhance the value of their business before a sale. There are a lot of strategies and changes owners can make to do this, whether it’s shifting your business model and reorienting around annual recurring revenue or getting longer-term contracts in-place (12+ months). Minimizing customer concentration risk is another key step a lot of small businesses have to take before going into a transaction process.

Q: Are potential buyers worried about supply chain issues? 

A: Supplier risk is definitely something that comes up during transaction conversations. You want to make sure that you have diversified suppliers and back-up suppliers. You need to be able to demonstrate that you can build inventory and fulfill orders if you want to be attractive to buyers looking to scale your business.

Q: How closely will buyers scrutinize my executive team or senior talent? 

A: This is an important one that many owners haven’t prepared for. If you are the primary person that’s been running your business, driving sales and managing key customer relationships (as most owners are), then that may worry potential buyers who wonder what will happen to the business when you leave. A robust executive team that overlaps with your skill sets and relationships will give potential buyers more confidence in your business’s continuity. A president or heir apparent can be a key asset to help you sell your business and enable your own eventual exit.

Q: What information do I need to compile and where does it all go? 

A: As owners get ready for a transaction, we help them build a data room. This will include everything needed to support the due diligence effort, from payroll records to incorporation documents, contracts and more. It’s a big undertaking but you want to make sure you are providing potential buyers with everything they could possibly need to know about your company.

Q: What do I need to do to prepare my financials? 

A: The most important advice I share with owners about their financials is to make sure they’re telling a story. When it’s all together, your numbers (including historical data) – whether it’s EBITDA, ARR, retention, headcount, infrastructure – should all support the business story that you’re selling.

Q: I’ve got the perfect buyer in mind – is it okay to just target them? 

A: Identifying a pool of ideal buyers is an important part of the process. It’s okay to have a target or “dream” buyer, but you want to map out at least three to five companies that make sense given your company’s market, size, competitors, market share, etc. Having multiple prospective buyers in the mix positions for you for a more competitive bidding process. Think of it like selling your house. You don’t want to do a transaction with the first person that makes you an offer. Ideally, you’re looking to create a “bidding war” situation or even just the perception of one to ensure you receive the highest offer possible and have other interested buyers as a fallback.

Q: Are there different ways to structure the sale? 

A: Yes! Oftentimes, owners think the only option is to sell their business, 100% outright. In reality, however, we encounter several different transaction structures. Rarely, are owners paid a one-time lump sum and able to walk away the next day. Buyers often structure a percentage of the payment as an equity rollover, exchanging some of the value of your company for shares in the acquiring company. You might also have an earn-out, whereby a percentage of your proceeds is paid out over one or two years and contingent on your continuing to work at the company and hitting certain milestones (e.g. revenue targets).

Q: What is the common misconception owners have about selling their business? 

A: People almost always think that they’re going to get more money from the transaction and it’s going to go faster. In reality, this process is long, labor-intensive and uncertain. About half of all potential transactions never close. Owners decide to walk away from the deal. Buyers decide to walk away from the deal. You may only get a fraction of your pay-out upfront and you may not have anticipated how much of your earnings will go to taxes.

Q: What is the most difficult part of the process?

A: Aligning expectations – it’s one of the very first steps but it’s often the most difficult. Your business is your baby. You’ve likely poured years of sweat, equity, and resources to get it to the place where it is today. You are naturally going to place a high value on it. We work with owners to help them understand and recalibrate around valuation, timelines, deal terms and, ultimately, the idea that they will no longer have control over the trajectory of their business.

Q: Is there anything an owner can do to ensure the process is successful?

A: This is a complex and nuanced process. Owners that are willing to enlist all of the advisors that they need – tax accountants, attorneys, bankers, consultants, etc. – and then listen to them and execute on their advice, are far more likely to have a successful transaction process.