From the October 2004 issue of Entrepreneur

"I sold my business" is a magical phrase for entrepreneurs. Just saying the words conjures up images of wealth, leisure and exciting new challenges. For many entrepreneurs, it's the goal, the reward, and the ultimate validation for years of struggle.

While selling out isn't every entrepreneur's objective, perhaps it should be, says Ned Minor, a transaction attorney in Denver and author of the book Deciding to Sell Your Business: The Key to Wealth and Freedom. "Eventually, every business owner will leave their business," says Minor, "either sitting down at the deal table, or feet first on a stretcher."

Let's face it; the idea of working until your last breath is not what got most of you into business for yourselves. And yet, if you aren't already planning a more graceful exit, you may end up with the one planned for you.

On Your Mark

It's never too early to start thinking about selling. "The day you start building a business is the day you should start designing your exit," says Minor, who has counseled thousands of business owners through the process.

Dan Freedman, a serial entrepreneur and now CEO of San Jose, California-based Jasomi Networks, agrees. He sees himself not as a software entrepreneur, but as a business builder. No matter what industry he's in or what product he makes, he says he's always in the business of selling his business. "If you view the company itself as the product and the acquirers as the customers, you're on the right track," he says.

After building and selling three different software companies, Freedman, 39, takes a very strategic view of business. "When you're starting or growing a company, it is always a huge amount of work," he says. "The only question is, Are you going to get a huge return, an OK return or a horrible return? Each outcome is possible from the same company."

Jasomi seems well-placed for a huge return: The company has grabbed a 40 percent market share and, according to Freedman, will post 2004 revenues "in the low eight digits."

Scale and Strategy

What does a salable company look like? It's salable if it's scalable, says Minor. Of course there are small-and-steady businesses sold every day, but the big bucks come looking for a business that has huge growth potential. "Every buyer thinks he's smarter than the seller-that he can double the size of the business," says Minor. "And we encourage him to think that." A business will fetch the best price only when buyers believe they can take advantage of significant future growth potential.

Selling a company's future upside means proving your previous growth and validating your future growth strategy. Start with two years of audited financials to show the veracity of your historical growth. Then be prepared to explain your business strategy and how it fits into the overall market. If your growth has been fueled by acquisitions, show the buyer how that works and how many more acquisition targets are still in the market. If your growth is through new product development, be prepared to reveal details of your R&D pipeline and your ideas for future product lines.

As an intermediary, and sometimes a buyer, Andy Agrawal stresses the importance of a strong, clear strategy. Agrawal, managing partner of VisionQuest, an investment banking firm in Fort Lauderdale, Florida, says that a strong strategy will attract an entirely different kind of buyer. He differentiates between "financial" buyers, who are looking at your income statement, and "strategic" buyers, who are looking at the overall value of your business.

"Financial buyers will typically pay a lower price-they'll have a fire-sale mentality," says Agrawal. "So you need to find strategic buyers and paint a picture for them. Show them a great customer relationship, a great piece of intellectual property, an advantage in time to market, or a key employee. Show the strategic buyer how one plus one equals three."

"You have to understand why an acquirer might want to buy your company," says Freedman. Big companies sometimes must act quickly in the face of market pressures or trends. "I've seen companies bought for many millions of dollars just to justify a press release...or to backfill for a previous press release that left an unfulfilled promise."

Always Have a Backup Plan

Plan B

Why settle for just one buyer when you could have two? For Freedman, having a Plan B is a vital step in the sale process. "The stronger the Plan B you can put together, the stronger your Plan A will become," he says. Having a strong and visible alternative makes any acquirer sit up and take notice. "There needs to be tension to the deal. Each side wants the other to think that they're about to walk away-it's the tension that gets the deal closed."

The best buyers, according to Freedman, are large, high-flying public companies with broad, strategic agendas and cash to spare. He should know: Two of the companies he built are now happily part of IBM and McAfee.

Selling to a public company has other tangible benefits. Since many transactions leave the seller with a fistful of stock-or worse, a long-term payout-a publicly traded acquirer makes an eventual cash payout more assured.

Team Conditioning

No matter who is buying your business, they'll want to buy more than your personal network and capabilities. In the words of Minor, "Make your business look like it's worth the asking price." This is especially true if you're planning to leave the business after the sale.

"Build a strong management team that can carry on when you're gone," says Minor. A strong team, clear policies and procedures, and a broad customer base are the underpinnings of value. The business should not just run without you, but be positioned to grow without you.

Of course, employees-especially key management-can also become a liability during a sale. "Make sure that key [employees] are incentivized to stay on," says Agrawal. "It's critical to minimize disruption."

Keeping employees around during a transition period takes more than just financial incentives. Communication is also key. Carefully timed communication, that is. Since sale transactions are notoriously volatile and demand confidentiality on both sides, Minor says employees should never be told of a sale until the deal is closed. He unapologetically prepares sellers for the moment when a key employee will ask, point-blank, "Is the company for sale?" The best response, he says, is a misleading fib. "It's vital to keep the transaction confidential, even if it means apologizing to your employees after the fact." Since most sellers are ethically and legally bound by nondisclosure agreements in advance, obfuscating the truth is nearly unavoidable.

There will, of course, come a time when everyone learns of the transaction. Prepare in advance for that critical period. Says Agrawal, "You'll need a communication plan-a script-to talk to customers, suppliers, employees and partners."

The Starting Lineup
Getting a deal closed takes the talents of several people. Here's a list of the characters you're likely to meet on your way to the closing.
On the Buyer's Side:
CEO: The chief executive needs a vision for how the new company fits into the existing organization. He or she wants to add revenue, products or strategic capabilities, and also wants to brag about the purchase to board members.
CFO: This is the detail person and a professional skeptic. Taking a long-term view, the CFO knows he or she will take the heat if reality doesn't live up to expectations.
CPA: The buyer's CPA or accounting firm will validate the seller's numbers. The CPA will probably argue for a lower purchase price based on historical profits.
On the Seller's Side:
Investment banker: The investment banker is a professional quarterback, keeping both teams moving toward the goal. He or she keeps one eye on the sale price and the other on the strategic best interests of the business owner.
Transaction attorney: The attorney is the referee-there to make sure no one gets hurt. The transaction attorney's focus is the sale contract, but he or she can also handle communication with the buyer.
CPA: The seller's CPA should be advising the seller on the personal tax consequences of the deal and how to handle the after-tax proceeds.

Keeping Focused

Meanwhile, Back at the Office...

So far, so good: You've built a scalable company with a strong growth strategy, you have immaculate accounting and audited financials, and you've started negotiations with two big public companies. The payoff seems to be just down the road.

Hang on. While you've been focused on selling the company, who's been making sure the company stays focused on selling your product? "The last thing you want is a financial or operational hiccup during negotiations," says Freedman. Many deals have been quashed when financial results from the last month or the last quarter are off target. Even if the buyer doesn't walk away, the price is likely to take a last-minute tumble.

Freedman points out that, in a sale, the company is the product. "If you take your eye off the ball and focus only on selling the business, in the end, you won't have a great product to sell."

Diligence and Disclosure

The sale of a business is inevitably as complex as the business itself. If the business has 10 years of operating history, then it has 10 years of potential liabilities, lawsuits and bad accounting. Even for a relatively simple business, buyers want to know exactly where the business stands. That means the seller has to disclose copious amounts of documentation and give a strict personal guarantee, called a warrant or representation, that all disclosures are complete and accurate. "If there's any hair on the deal-any red flags-it's going to come out. So you're best disclosing everything upfront," says Agrawal of VisionQuest. "Don't play any games." The quickest way to unravel a deal is to leave a buyer feeling duped.

The amount of disclosure that buyers require can be mind-boggling. Putting it all together in a reasonable fashion is just one reason to consider hiring outside help. An intermediary, such as a business broker or an investment banker, can relieve you of some of the work while also keeping the buyer engaged. "We always recommend that a third-party intermediary represent you," says Minor. "Even if a large competitor makes a direct offer, I'd still bring in an intermediary who can drive the valuation up."

The seller's dream team of advisors should probably include an investment banker, a CPA and a battle-hardened transaction attorney. A good transaction lawyer will help you get the deal done, while more conservative corporate attorneys may get bogged down in the negotiations and end up killing the deal.

Selling a business is not something you do every day, and it may well be the most important transaction of your life. It's vitally important to use professionals who will push to get the deal done while looking out for your best interests.

The Final Stretch

Remember, no deal is a sure thing until it's done. Perhaps the only sure thing is that selling a business is never simple. Selling out can be the most harrowing-and most rewarding-experience in the life of an entrepreneur. Take it slowly. With careful planning, strategy and guidance, each step of the process can add value to the company and get you closer to crossing the finish line.

Greener Pastures Ahead
Selling a business can take you down the path to wealth...or the road to disaster. What better way to prepare your business than by following in the footsteps of someone who has done it before?

Joe John Duran, a chartered financial analyst, is a worthy guide. In his new book, Start It, Sell It & Make a Mint: 20 Wealth-Creating Secrets for Business Owners (Wiley), Duran draws a clear road map to wealth for any business owner. Duran was a partner in Centurion Capital, an investment management firm that he and his partners sold to General Electric in 2001.

In the opening chapters, Duran describes himself as a "quite average" kid growing up in war-torn Zimbabwe. In fact, Duran and his book are anything but average. The book is a compelling story of personal adventure, beautifully intertwined with concise advice on building and selling a business. As the book maps out Centurion Capital's many stages of growth, Duran guides readers through the key factors and decisions that shaped the company. His insights are applicable to new and growing companies in every industry.

Start It, Sell It & Make a Mint gives entrepreneurs Duran's 20 secrets to business success, with vivid examples from his own experience. Secret number 21: Buy it, read it, and make a mint!


is an investment banker and author of the e-book Finding Funding.