Insight

Sell-Side M&A Advice: Are You Ready to Sell?

Standing At Window

You may have a strong desire to sell, and you’ll know that in your gut.  But less instinctive is whether your business is ready to sell.

There are certain preconditions to selling your business.  That’s not to say it will be impossible to sell your business if they are not in place, but they will present serious challenges.

Question 1: Do you have solid books and records? 

Have your books and records well organized and professionally prepared.  Another thing we have seen quite often is how shoddy these records can be in an otherwise impressive business.  We get it…solid bookkeeping and accounting is not fun.  But when it is time to sell, good records translate to a smoother sale process and even a higher price.  If potential Buyers see shoddy records, they assume you run your business in a shoddy manner and they will either walk away or present an offer becoming of a shoddy business.

When we talk of solid books and records, this means:

  • Clear accounting records prepared in accordance with standard accounting practices;
  • Reporting that already reflects any adjustments needed to support the EBITDA, as well as the balance sheet, that you intend to use as your basis for valuation;
  • Retention of and easy access to all receipts, bank records, credit card statements, and other documentation supporting the accounting records; and
  • A clear understanding by you of the books and records, and the ability to explain and, if necessary, defend them.

You may still sell your business with poor books and records, but we can almost guarantee you will leave a lot of money on the table.

Question 2: Do you have any existing or potential litigation or liability?

The answer really needs to be “no.”  Obviously, no Buyer wants to walk into the middle of something that may drag them into court.

Question 3: Do you have an ability to sell?

There may be parties that have the right to block your sale, or whose consent is required before you sell.  These may include other shareholders or owners of your business, landlords (check your lease), lenders (check your loan documents), regulatory authorities, or any other party that might have the right to block the sale.

Question 4: Do you have the informal agreement of key employees to sell?

If you have key employees that might quit if you sell your business, it will behoove you to get at least their informal agreement that they support your selling the business and won’t quit upon a sale.

Question 5: Do you have time to manage the sale process?

Selling a business takes a lot of time.  We think it’s an approximate 50% full-time job over the course of 3-6, sometimes even 9-12, months.  The best thing you can do to avoid overwhelming yourself with the project is to hire a highly qualified investment bank – like Newport’s M&A Advisory partners – that can assume much of the burden of the process.

Question 6: Do you have sufficient liquidity to cover the cost of the process?

We recommend you prepare a realistic estimate of the cost of selling your business and ensure you have sufficient liquidity (i.e., cash) to cover the expenses.  The largest expenses will be:

  • Broker or investment banker commission – For companies in the lower middle market and below, this will generally be 3% to 15% of the selling price, with the higher percentages applied to the smallest transactions. This fee is subtracted from proceeds at closing, so you don’t need to worry about this expense up front.  But intermediaries in the lower middle market generally require a retainer, charged monthly or in a lump sum at the beginning of the process, that runs from $25,000 up to $75,000 in total.
  • Legal fees – which can run from the tens of thousands into the hundreds of thousands and should be negotiated heavily and strictly managed, ideally with a cap on total fees
  • Tax advisory fees – which should be significantly less than legal fees, but still strictly managed.

Newport M&A Advisory partners are experts at what we call “capital readiness.”  Ensuring our clients are ready for a transaction.

Check us out here.

David Traversi, Partner, Newport (david.traversi@newportllc.com)