Chapter 3
The Sales Process
At this point it will be helpful to understand the sales process itself. This will help to keep the chapters that follow in context and give you an appreciation for the task ahead.
The sales process usually seems a bit mystical when small business owners first encounter it. You may be familiar with some of the steps, but tying everything together and making it work can be difficult. Some of the steps seem tedious and appear to have been put there as hurdles just intended to slow things down. The process is usually loaded in favor of the buyer. If you take the time to become familiar with the process, we make some basic assumptions about your sales approach we will attempt to reverse that and make the sales process work in your favor instead of the buyers.
If your business presents a true opportunity, the first assumption we can make is that there will be buyers ready and willing to invest in it. Your goal will be to make that opportunity glaringly obvious. You will need to position your business to demonstrate its full value to a potential buyer. The trick is to make that value so noticeable that potential buyers won’t have to dig to find it.
We will also assume the following: if there is only one buyer, that buyer will drive the process and will be in control. If there is more than one buyer, the seller will drive the process and be in control. Therefore, your goal will be to find more than one buyer. This can be accomplished by effectively marketing your business to identify and attract those buyers.
After making an initial offer to buy your business, buyers often use their due diligence assessment as an opportunity to lower the value of your business, allowing them to reopen negotiations and reduce their initial offering. To get the greatest possible return from the sale, your business will need to operate at its highest possible efficiency, and you must proactively identify risks before the buyer does. This requires optimizing your business’s operation so that the buyer’s due diligence assessment is a highly successful event for you.
There will be many people who are impacted by the sale of your business. Optimizing your return from the sale will mean understanding the roles and motivations of these people. These people can include professionals you will hire to help you with the sale; your vendors and your employees, who may feel they have a vested interest in your business; and your key employees and shareholders, who do have a vested interest in your business. All of these people may feel they are entitled to a piece of your business’s “pie.”
Sales Process Tasks
While the sales process isn’t fixed and generally includes recognizable tasks, it can change from situation to situation. The sales process may not move at the pace you anticipate, but keep this in mind: you are the driver. Take control and don’t let others dictate your actions unless you believe they are required. Don’t ignore the advice you receive from professionals either! You are paying for their help, but it’s your show.
Because there are many things that need to happen at the same time, it’s easy to get lost in the sales process. Figure 3.1 shows the milestone events you should anticipate in the sale of your business. I have attempted not to repeat information in multiple chapters, except where the information was needed for context to describe the steps in as logical an order as possible. Use Figure 3.1 as a roadmap to guide you through the process. A description of each of the steps follows and includes cross-references to chapters that describe each task in detail. For now, we will focus on understanding the sales process and its goals. We will discuss the requirements for each task by putting them into context in the later chapters. Each chapter stands alone, so don’t hesitate to jump ahead if need be.
The length of each task in the process is variable depending on how well prepared you are before entering the sales process. For instance, if you already have an organization chart, then the positioning task suggesting the creation of an organization chart, will take less time for you to complete than for other business owners. You will be ahead, and that particular process will be shorter. But there are likely to be other processes that will take more time. The resources you are able to bring together to form your transition team, and the size of your business, will also impact the duration of these tasks.
There is a correlation between the level of effort you put toward positioning your business and the level of return you will achieve from its sale. Once you finally decide to sell your business, you will need to weigh these factors to establish a working schedule until you close the sale. You’re just beginning the race to sell your business. Relax, do some stretches—and let’s hope it’s not a marathon!
There is a correlation between the level of effort you put toward positioning your business and the level of return you will achieve from its sale.
Breaking Down the Steps
I encourage you to manage your business’s sale as you would tackle any major project—by establishing measurable milestones your transition team will use to target individual tasks on the schedule. If you don’t set deadlines, the sales process can easily drift from task to task. Before you realize it, time will have elapsed; you will have paid a lot of money, and you won’t have accomplished your end goal.
That beach may be calling to you, and you may be growing impatient to get there once you have finally decided it’s time to move on. Listen to the call and respond to it by establishing a working schedule that will get you to the beach once the job is done, but don’t compromise on your work or abandon the goals you established at the beginning of the project.
The use of an automated project management tool may be a good idea for a large business with complex scheduling elements. It is too easy for things to fall through the cracks. Holding weekly or monthly progress reviews and tracking assigned action items will be important. Hold people accountable for meeting their deadlines.
The Decision to Sell
This is the decision that will give you those sleepless nights. I show this as a milestone event, but it probably took some time to decide it’s time to move on. This may be the starting point for the sales process. While you know you will sell your business someday, even if you haven’t made the decision to sell yet, many of the tasks that follow can still be accomplished ahead of time. There is a benefit to improving your operations regardless. Go ahead and begin. The key to that decision is having “no regrets.” You don’t want to wake up the day after you sell your business with a bad case of seller’s remorse. Once your decision is made, be prepared to put it behind you, and don’t revisit it again. Move on.
Identify Your Transition Team
You won’t be able to sell your business without help. For even the smallest businesses, the sales process requires resources. You will need to put together a transition team that consists of people you trust and who bring the skills you will need. This is the first step. Your transition team will act as advisors and should be prepared to take on some of the work. Some of them, such as your certified public accountant (CPA) and attorney, need to be specialists that you consult on a part-time basis. The other sales specialists you will need to hire will also have a price. In many cases, you can pay them a retainer and delay paying the bulk of their fee until after the sale closes, (the sale is completed). It certainly won’t hurt to ask them! While you are putting this team together, do not forget to create a budget to pay for these services. We’ll discuss the role that the transition team will play at crucial steps in the process throughout the book.
It is important to keep your business operating at peak efficiency while you are preparing to sell. You will need to have your employees working at their best. The more you can limit your dependence on your employees’ time in the sales process, the better. Their ability to support the sale should be limited, although you will need their help, even if they may not understand why. Ask your employees to support activities that fall within the scope of their jobs. Improving the efficiency of the operations within their area takes time, but most employees would rather do it themselves instead of someone else telling them how to do their job. Your job will be to ensure your employees have a balance between supporting the optimization and doing their full-time job.
Ask your employees to support activities that fall within the scope of their jobs.
Position Your Business
This activity includes the optimization of your business to maximize its value in preparation for the buyers financial, legal, and operations due diligence assessments. This is one of those tasks you can do even if you haven’t decided whether or not to sell yet. If you have run a tight ship, then the amount of preparation you will require may be limited; if you have been a “seat of the pants” type of manager, you may have some real work to do. Positioning activity is discussed in greater detail in Chapters 7, 8, and 9.
Some of the suggestions made in those chapters may seem like little more than basic management practices. In the context of this book, these recommendations are aimed at making realistic improvements that will help optimize your business’s value and target your return from its sale. Some recommendations may seem overdone for very small businesses. Small businesses vary in size, but the process applies to all of them. If your business is very small, try to challenge yourself by taking the time to see how many of the recommendations can be implemented rather than finding ways to avoid them.
Try to challenge yourself by taking the time to see how many of the recommendations can be implemented rather than finding ways to avoid them.
Interview Bankers and Brokers
It’s time for another big decision. Will you hire professional help to market and sell your business—someone who will act as an intermediary between you and your potential buyers—or will you go it alone? Most business sales require the use of a professional who is familiar with the sales process and whose job it will be to help you market and sell your business. These are professional sales agents who will also serve as intermediaries to assist you during your negotiations with the buyer. We will discuss the need for these professional services in Chapter 6 and describe the role they will play in Chapter 16.
At this point, you will need to work with your transition team to conduct interviews of these professionals (this task can be done in parallel with your positioning activities). Each person or company you interview should be asked for a written proposal that includes a definitive fee schedule. As the task progresses, you will select one of the persons or companies to represent you and participate on your transition team.
Listing
After selecting a broker or banker to act as an intermediary/agent, they will ask you to sign an agreement to list your business for sale and put it on the market. Your positioning activities should be completed before your business becomes an active listing. Your agent also has work to do before listing your business so continue to work on positioning and discuss with your agent the optimum time to make your business’s listing active.
Most listing agreements are standard, but the terms they offer can vary significantly. Ask questions and don’t hesitate to challenge anything you don’t agree with. The agent may be in a rush to get a signed listing agreement, but don’t hesitate to have it reviewed by your attorney if you’re not comfortable signing it yet. The listing agreement will be for a specified time period and will delineate any special terms and conditions either of you want to include. Further information regarding the listing agreement can be found in Chapter 6.
Prepare Marketing Materials
Another activity you need to accomplish before you actively look for buyers is the preparation of your marketing materials. You must work with your agent to prepare these materials so they can be presented to potential buyers. You are paying for your agent’s expertise, so don’t hesitate to defer to them when they offer marketing ideas. Your agent will be prepared to take on this task; however, you should be prepared for this ahead of time by creating content and materials for them to use.
Your marketing materials will include a handout (see the example in Appendix A) and your draft “Book” (an example is provided in Appendix B). My suggestion is that you prepare a draft handout and “Book” for your business to present to your agent. Chapter 12 provides the recommendations for the format of your Book. By taking the time to create your own draft, you will be collecting your thoughts and driving the direction you want your agent to take. Be sure to retain final approval of these and any other materials created in your name.
Create a List of Potential Buyers
At this point in the sales process you may have been thinking about potential buyers—friends, competitors, businesspeople who are acquiring other businesses or expanding, and those people you think might be potential buyers. Make your list of potential buyers, or work with your sales agent to review their list, but do not communicate with anyone on your list about selling your business just yet. If you haven’t done so, now is the time to discuss specific sales strategies with your sales agent.
If you and your agent agree that your best path to a sale is a public approach, then go ahead and put a “For Sale” sign in the window and start talking up your business. Make sure to give the contact information for anyone who expresses interest to your agent though. To all requests for information, your response should be:
“Here is my agent. You will need to speak with them.”
You want the agent to be your intermediary so you will always be in the position of negotiating through a third party. If your agent is openly advertising your business, then your business listing should be posted on a public, multiple listing “Businesses for Sale” website. Prepare to hold one or more open houses and let your agent filter the calls.
If you have decided to take a more stealth approach to selling your business, give your list of strategic prospects to your agent and don’t do anything else with it. Don’t reach out to anyone on the list. Don’t try to “feel them out.” Let your agent do the job you are paying them for.
Your agent should be doing industry research and developing their own list of potential buyers. They will begin contacting the people on the list once they have vetted them. If one of your competitors mentions to you that they heard a company in your industry is for sale, simply ask them to let you know if they find out who it is. Even if, at some point, someone correctly guesses your business is for sale, don’t engage with them.
“Gee Jim, I have it on good authority that your business is for sale.”
“You will have to talk to my consultant” (hand him your agent’s card) “about that before you spread any rumors.”
Your agent will ask the buyer or other interested parties to sign a nondisclosure agreement (NDA) before divulging any detailed information. In Chapter 6 we will establish some specific sales goals that will drive your marketing efforts.
Qualify and Down Select Buyers
At this point your agent will review a potential buyers list with you, and you will share your initial thoughts about who is a potential buyer and who is just “kicking the tires.” Your agent will want to know about any buyers you already know or have insights into. After discussions with the potential buyers, your agent will bracket the potential buyers to see who has a realistic understanding about the value of your business (for example, if a potential buyer thinks its worth $800,000 and your price is $3 million, there is no reason to continue speaking with them). Your agent will also want a list of any potential buyers you have already spoken with or, in the situation where you might have had a prior listing with another agent where they may be an existing commission commitment. DO not assume that, because you terminated the listing, you have no further commitment when it comes to potential buyers they may have introduced you to. Be sure to read all listing agreements carefully if you decide to change agents.
At some point, your agent will invite a select group of potential buyers with real interest to submit a written offer (a proposal) with a draft letter of intent attached. The down select process can become iterative if you receive competing proposals. Ultimately you will ask all potential buyers for their Best and Final Offer (BAFO).
Assuming your effort to prepare and market your business has been successful, and you have achieved your goal of finding two or more buyers (if not, see Chapter 6), it’s time to carefully review their offers to decide which one you will accept. Your agent should already have done a background check on the potential buyers and verified that they have access to the resources needed to close the deal. Everything you do from this point on should be reviewed and approved by your transaction attorney and reviewed by your CPA.
Letter of Intent (LOI) and/or Purchase Agreement
You will now receive a copy of the draft letter of intent (or another form of purchase agreement) from the potential buyer. The LOI should reflect all of your negotiated terms and conditions and the buyer’s purchase price and payment schedule. The LOI states the terms under which the sale will be executed. Alternatively, your attorney can prepare the agreement or a purchase contract, as long as it accurately reflects the verbal agreed-upon terms. The principals from both parties must sign the LOI, and the buyer now provides the good faith funds to be escrowed. In general, the LOI is a highly conditional agreement (for instance, it will require performing due diligence). The documents required for the closing are complex and must be written and negotiated by the transaction attorneys before the closing. The LOI defines the terms of the deal while the closing documents are being prepared and due diligence is being performed. Even though it is conditional, the LOI allows the seller and buyer to declare their intentions while moving the deal ahead.
Signing the LOI means the “potential buyer” has now become your “buyer”—but don’t start packing just yet. There is still work that needs to be done. Keep in mind that a signed LOI is not the end, but the beginning. This is where all of your preparatory work will come to light. Congratulations! The good news is you now have a buyer.
Signing the LOI means the “potential buyer” has now become your “buyer”—but don’t start packing just yet.
The LOI is not a definitive agreement. It has conditions—for example, the successful completion of due diligence; verification of the detailed financial analysis; and the release of all those little details now that there is an actual buyer. Your deal is not closed until these steps have been satisfactorily met. There will be more discussions before you reach your final terms, conditions, and final renegotiated price.
The letter of intent is a legal document and should be prepared by an attorney. No example has been included in this book because I’m not here to give you legal advice. The length of the LOI is variable and can range from a brief statement to pages of detailed terms that must be met by both parties. All terms must be carefully studied and understood. If you don’t agree with the terms, don’t sign the LOI, no matter how eager you are to complete a deal. It takes much longer to work things out in court than it does to negotiate them in an LOI.
Buyer’s Due Diligence
The duration of the buyer’s due diligence can be variable depending on the size of your business, the depth of discovery the buyer wishes to go, and the number of resources the buyer deploys for the task. It is not an open-ended event, however, so ask for a tentative schedule at the start. It is in your best interests to keep this schedule as short as possible.
“I will be happy to support any due diligence activities you need but they must be wrapped up within 30 days.”
The buyer will likely resist. You can push back and recommend they use more people to allow them to complete their assessment sooner rather than later. Remember, while the buyer is performing their due diligence, you cannot talk to anyone else.
Different buyers use different approaches when performing their due diligence. Some are very formal, and some are very informal. You should always treat a due diligence as a formal event. The activity will generally start with a request for a list of documents that can be reviewed by the buyers assessment team. Even today there are buyers who prefer paper copies to online versions. Some buyers will then provide a list of written questions they would like you to respond to in writing (and on the record). I generally advise my clients to be direct and truthful and to only answer the questions that have been asked (in other words, don’t elaborate). This is not the time to show off your vast knowledge of why the market is dying and why you’re getting out! You have an obligation not to mislead the buyer about the market, but the buyer has an obligation to do their market research homework.
At some point, the buyer will perform their financial, legal, and operations assessments. One of the goals of this activity will be to clarify and validate the responses your team has answered in response to the buyer’s written questions, along with any claims you made in your marketing materials. Next will be the in-house assessment where the buyer will ask to spend time in your facility, observing how your business operates and getting to know your employees. After that assessment, some buyers prefer to return home to analyze the data they’ve collected, while others will be ready to immediately sit and discuss their findings.
If there are no changes to the LOI, the buyer will agree to finalize the closing documents. Your transaction attorney and theirs will begin the process of preparing the closing agreement along with any other documents that will be required to close. Typically, the buyer is not ready to go directly to closing. They will want to continue your prior negotiations.
“During our due diligence, our assessment team discovered the following items we were not previously aware of. . ..”
“As a result of these discoveries, we are going to adjust our original valuation of your business and lower our offer to. . ..”
Your choice is to accept their lower price, make a counteroffer, or refuse their new offer outright. The buyers know you are eager to get to the beach. They know you don’t want to start the entire sales process over with another buyer. So, they are highly motivated to negotiate a lower price. That is why you limit the due diligence to thirty days as a term of the LOI. This may be a good time to call that buyer who was the runner-up and ask if their proposal is still valid! This is the point where many good relationships between buyers and sellers will fall apart.
“I thought we had already agreed on this number?”
“We did, but we had assumed that all of that equipment was included in the deal. That’s not what we found out during due diligence.”
Hopefully, you can come to an agreement and won’t have to repeat the process with another buyer. This may be the point to consider looking at earn-outs, stock swaps, escrow to cover perceived risk, or other creative means to negotiate your price.
Closing
The day you have been working toward has finally arrived. Relax and let the attorneys run the show. Sign everything your attorney agrees to and, even if there is three feet of snow outside, wear your best flip-flops, shorts, and Hawaiian shirt to the event!
Remember that following the closing, your loyal employees will work for the new owner. If you plan to reward them, have the checks prepared and ready to distribute immediately following the closing, and get the new owner’s permission to address your former employees. “Thank you for your loyalty” goes a long way when you shake someone’s hand by putting an envelope into it.
Transition Support
If you are staying with your former business, you should have a good understanding of what your new boss or partner expects. This will be a good time to sit with them and start things off in the right direction. Rumors are very likely flying among the employees, so—with the new owner’s agreement—introduce the new owner, explain what your new role is, and reassure them about their future. This will help to quiet the rumor mill. If there are going to be any changes to salaries, positions, or benefits, the new owner should announce them as soon as possible. Employees are always suspicious of and never like change. Nothing is ever gained by delay. The sooner the employees know the facts, the sooner things will quiet down.
If you are exiting the business, you should plan to work with the new owner to orchestrate how this will be done. You may want to shut the door following the sale’s closing, but this is generally not practical. If you have a good relationship with your employees, you should be the one to announce the sale and do the introductions. All other announcements (salary, benefits, etc.) should be made by the new owners.
Plan to get calls from the new owner looking for information. Provide answers, but don’t let this become a burden. Unless you have a contractual reason to do so, limit your answers and the time you spend at the business. You might also be contacted by former employees looking for advice or looking to complain about the new owner. If they are not happy, be supportive, but never undermine the new owner. Make it clear you will not comment and be sure to honor any “lockup” terms in your sales agreement.
It’s time to move on.