So you’ve done the deal! All of your hard work paid off! Now what? In my last blog, we started discussing the need to begin increasing shareholder value. Once you’ve gone through the figures and done the cash flow and profit management tasks, the next thing is to get the business ready for sale.
Enter the Virtual Data Room
A virtual data room is a fancy-sounding name for a repository of all the company’s key documents, which people doing due diligence can access. Having an up-to-date data room will shave months off a transaction, so it is worth putting in place and getting right at the beginning.
What goes in there? Well, if you google “due diligence questionnaire,” you’ll find loads of different online resources about the things you need to have in a due diligence pack. While “the virtual data room” sounds glamorous, it is just an online document storage system that holds all the data needed.
You can use Google Docs, Dropbox, or any type of cloud storage provider. Each of the questions in the due diligence questionnaires becomes a folder stored online, containing, for example, the company’s:
- Accounts
- Bank statements
- Contracts with suppliers
- Contracts with customers
- Contracts with employees
- Insurance documents
- Leases
- Loan agreements
- Anything else relevant to the business
You might find several questions on the due diligence questionnaires that aren’t relevant to your business because these questionnaires are designed to cover everything from the power company to a corner shop. My advice is always to put something in the folder. Perhaps it asks for a copy of your professional indemnity insurance certificate, but you’re a small retailer, and therefore, you don’t need professional indemnity insurance. Simply include a letter signed by the company’s directors, explaining that you don’t have professional indemnity insurance because you don’t provide professional advice and it’s not needed.
Due diligence can drag on for a long time if your information isn’t readily available. Ensure you address each question to eliminate any potential questions an acquirer could ask that could delay the acquisition process. Anything you can do to create a path of least resistance when it comes to due diligence is critical.
If you have all this information ready and waiting, you will be head and shoulders above the competition. You will look organized and efficient. And as they say, “How you do anything is how you do everything.” Get the information ready upfront, so there are no surprises. Maintain your virtual data room so that when you’ve got an inquiry, you’re ready to sell.
Now you’re ready to start the sales process and look for potential buyers.
Time to Sell
Pretty much every reason you can think of for not selling your business is probably a reason to sell your business.
In the beginning, when you’re looking for deals to acquire a company, you’ll find not many people want to help you, particularly when you’re looking for distressed deals. There might be a bit of professional jealousy; after all, as I mentioned earlier, nobody wants to give you the dusty painting they found in the attic and then find out it was a Picasso.
However, when it comes to selling a business, there’s social capital associated with knowing people who sell businesses. People like to share; they want to help you find opportunities. When it comes to selling, you’ll find many people share information around. Knowing people who are selling businesses makes them look good. Start telling everyone you’ve ever met, email people, and put it on social media that you have this business for sale.
Initially, people will inquire about the business, so send them an executive summary, a one-page description of the company, and some highlights. If they’re interested at that point, you might ask them to enter into a non-disclosure agreement and then give them a full information memorandum. The next step is providing an indicative term sheet and giving them access to the due diligence folders. It’s just like a normal sales and marketing process, but with quite a few extra moving parts.
When Is the Right Time to Sell Your Business?
Many moons ago, I owned two companies at the same time. One was a call center business that was incredibly profitable. We had a three-year contract with the world’s largest insurance company, AIG, and we were making over $200,000 per quarter in net cash. It was a really great business. I had another business in the telecom space, which was doing okay but wasn’t increasing shareholder value year after year. My conventional thinking at the time was to sell the telecom company, which was limping along, and to keep the cash cow call center that was generating all the cash.
I went through the sales process on the telecom company, which took a while, and by the time I had sold it, the call center company had failed due to issues with AIG. (We had many problems with them, as I’m sure many other companies did as well.)
My reason for not selling was that I had a three-year contract with the world’s largest insurance company.
My reason for selling should have been because I had a three-year contract with the world’s largest insurance company.
If you’re a business owner and you’re thinking that next year is going to be your best year ever, then sell it now. If next year is going to be your best year ever, the buyer is going to love your business. De-risk the deal, sell the business at what it’s worth today with an earn-out linked to its performance next year. So, when it doesn’t actually do what you expected to do because, “Hey, this is business, and when has it ever done exactly what you expected it to do?” You get the upside if it succeeds, and you don’t have the risk of the downside if it fails.
Don’t Obsess!
People get obsessed with the business that they’re in. They think it’s the last business they’re ever going to have. They want to sell it for $50 million, and if they can’t get $50 million, they don’t want to sell their baby.
This is my perspective. For the first twenty years of your life, you’re pretty much useless. You’re still learning how everything works. The last twenty years of your life, you’re also probably pretty useless. You’ve got this sweet spot in the middle where you have enough energy to get things done, and, from an emotional and intellectual perspective, you’re firing on all four cylinders.
If you’re fortunate, you get eighty years of life. That bit in the middle is only forty years. So, if you think about running a business for ten or twenty years, you’re talking about devoting 25% to 50% of your useful time on the planet to this one business idea.
For me, that’s quite a frightening prospect. As entrepreneurs, we’re full of ideas. We have lots of things we want to do, and we have things that we want to change about the world around us.
Are you really going to spend half your useful life running one business? Think about that until next week, when I wrap up this discussion by talking about capital events. If you want to dive deeper into the type of information I’ve been sharing in my blog, check out my latest book, Go Do Deals. It’s set to release on December 9, 2020. And, when you pre-order the book, you will immediately receive two bonus gifts.
- Merger and Acquisition Strategies for SMEs – This eBook is an exceptional starting point for those serious about entering the world of mergers and acquisitions.
- 21-Day M&A Strategy Email Course – This eight-module course expands on concepts introduced in the M&A eBook, as well as introduces entirely new concepts and terms.
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