In our recent blogs, we’ve discussed several ways to prepare your business for a successful sale. There are strategies that make you more attractive to buyers, important questions you should ask before engaging in a sale, and even questions to ask yourself before deciding to sell. If you’ve followed this series closely, you may have noticed a key point we’ve made several times—the due diligence process can be grueling.
During due diligence, your potential buyer will ask for all kinds of information, and you’ll be responsible for providing and explaining it at their request. This process can take months, and even then, it doesn’t always end in a sale. It’s an intense process, and it can be tempting to let the exhaustion overwhelm you. You might feel like “letting go” on the business front because the sale is pretty much in the bag at this point—right?
Wrong.
Unfortunately, the due diligence process can unearth information about your business that leads the seller to lower their offer or back out. And while you may think you’ve laid all your cards on the table in an attractive manner, that doesn’t mean your definition of “fair” or “advantageous” will jive with your potential buyer’s. You have to assume the sale could fall through at any moment.
So how do you navigate this delicate situation? The best thing you can do is keep sight of your current situation. Your job is to remember you’re still running a business—you want to make sure everything operates smoothly so your buyer has as few reasons as possible to lower their offer or back out.
Here are some tips to help you navigate the due diligence process successfully:
As we said in a previous post, selling your business is a lot like dating, and it requires compromise and well-managed expectations. You need to enter the process knowing what will make the sale worthwhile to you, but you also have to be realistic and realize that everyone has different definitions of “fair.”
We worked with a client recently who was struggling to negotiate a fair price because he thought he could get more from the sale than his buyer was offering. He was in his early thirties and about to make millions on the deal. We explained that what he thought was fair and what the buyer thought was fair were almost always going to be two different things. So he needed to ask himself—would this amount provide what he needed and wanted in this phase of his life?
We’re not saying you should settle for the first offer that comes along. On the contrary–you should know what you want (within reason) before anyone makes an offer. It’s reasonable—and to an extent, even wise—to search for the best deal. But it’s also not a simple process to review offers from multiple viable buyers. Your time is valuable, and rejecting one offer could mean months, even years more, of waiting for the “perfect opportunity.”
That said, if you’ve decided you want at least $10 million from your sale, make sure $10 million is the base offer you accept. That means if there’s an earn-out agreement, you don’t count on the earn-out money to be part of that $10 million. You want the buyer to offer $10 million up front, and any additional earn-out money should be considered icing on the cake.
During the due diligence process, your buyer might ask for cash flow statements and PNLs monthly, so it's important to continue “business as usual”—if the buyer sees things are slipping, they might offer less than their original bid or even decide to back out. It’s common for buyers to review all of your information and find something that they deem “cause for alarm” and offer less than their original offer, so you want to maintain the same standards you set when you first decided to sell your business. Again, give them as little reason as possible to value your business for less.
It’s not just cashflow that needs to be monitored and maintained. Other areas of your business, like employee retention and marketing, need to stay consistent throughout the sale. This can be hard, especially when communicating with your employees. No one likes change, and notifying them of your intentions too soon could lead to problems. They might worry about how the buy-out will affect their position, and they might look for greener pastures before a sale is ever finalized.
Consequently, you have good reason not to tell your employees about the sale early in the process. Your team is an important asset to your business, and if key employees decide to jump ship because they fear an impending buy-out, your buyer might lose interest or lower their offer.
We realize, though, that keeping the information from your team can make you feel like you’re being dishonest (or, as some of our clients have admitted, like you’re “cheating on them”).
There’s no right or wrong way to disclose the information to your team, but it is something you should think about thoroughly and early. After all, your decision will affect their futures, and you want to give them time and opportunity to consider that–but you also don’t want to risk jeopardizing your business or the sale. Think about who needs to know and when, and then create a plan for how to tell them. Generally, it’s a good idea to keep your decision close to the chest until the sale is final, but you’ll know what’s best for your company and your team.
Selling your business is a major decision, and it’s one that requires the support of many professionals. You’ll need a CPA’s guidance to help you minimize taxes on the sale, an attorney to make sure all the paperwork is completed correctly and favorably, and a financial advisor to help you assess how the sale impacts your overall financial situation.
If you’re thinking about selling your business and need guidance, we’d love to help. You can schedule a consultation with us by clicking the button below.
125 W. Romana Street, Suite 720
Pensacola, FL 32502
Phone: (850) 542-4803