Four Things To Consider Before Selling Your Company
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I’ve learnt -and continue to learn- a lot about establishing and running a business, having started a couple of companies over the last few years- with some of them failing spectacularly, one “making it,” and another, whose fate is yet to be determined. Having said that, the most recent development in terms of the ventures I’ve worked on has been the merger of our company, Beneple, a human resources platform catered to SMEs in the Middle East market, with Finsbury Associates, a financial services company based in the UAE. Given my experience with this acquisition (which, interestingly enough, happened after Beneple had been operating for only eight months), here are my four things to keep in mind before considering the sale of your enterprise:
1. Always keep your eye on the ball- run your core business as though there’s no sale process happening in parallel.
This may sound counterintuitive, but it’s actually not. This rule also applies if you are raising external funding (which is, technically, the sale of a stake in your company), or a full exit. Throughout the sales negotiation process, it’s important to make sure that the business continues to run (and ideally, grow as well) in parallel with what’s happening in the background.
Now, it’s important to understand that this can indeed prove to be challenging, especially when trying to balance what feels like an all-consuming sales project. But doing this is critical! Because it demonstrates to the potential purchaser that they’re buying into a growing venture and ultimately helps strengthen your negotiating position. While raising capital for both my last startups, we had an average 35% month-on-month growth, which really helped demonstrate the strength of the management team and cemented our asking price as well.
Making sure your business is running profitably is also important in case the sale falls though. At the same time, if the company stutters with its operations while the founders are trying to sell it, such actions can also really hurt its sale price. A friend of mine was at the final stages of closing the sale of what was at the time his hot new restaurant business, but he dedicated so much energy on the sale that revenues slowly declined over the months of negotiations, and ultimately spooked off the buyers in the end.
2. Lock in your company’s most critical assets.
It goes without saying that “locking in” your company’s most critical assets is of paramount importance, and it has a direct impact on your negotiating position and the ultimate offer price. The assets will naturally differ from the type of business you operate in, but generally speaking, it’s good practice to tie your most important employees to the business. I remember at one startup, there was a mad rush to have all of its early employees sign agreements that would allow them to be transferred to the new acquiring entity. Any new owner could require you to stick around for a transition period (or maybe they wont), but they will want your main employees and assets to be around for the continued operations. Make sure all assets (including employees) are appropriately locked in, and don’t disrupt the company while it’s in this delicate transition.
3. Make sure you follow best practices, and do your due diligence.
Much like an interview or even a date, an acquisition process requires both parties to walk a two-way street. So, from your company’s perspective, you need to ensure that you’re doing all your due diligence when moving along this process. I’ve seen, firsthand, the benefits of having solid and well documented systems in place, and in a format that is easily digestible by the party performing the due diligence. In my last enterprise, I ran an extremely detailed and well organized process (granted this was drummed into me, having spent many hours in a due diligence room in my banking days), and this helped me demonstrate to any buyer that they are investing into the processes that are already in place (and part of the company culture modus operandi), rather than having just one individual who is holding all “the keys.” This literally impacts the final pricing.
One other thing: be as honest as possible in all your negotiations! There’s no point hiding a material aspect of the business from any potential purchasers. Disclosure of all risks in a quantifiable manner should be your goal. Also, don’t forget that in the same way a potential purchaser is carrying out their due diligence on your company and its management team, you should be carrying out your due diligence on them and what they have promised to bring to the table as well. So if the deal is a cash and equity swap, then you should be checking the long-term financial health of the purchaser and whether or not they can close.
4. Have a plan for after the sale- both in terms of finance and time.
Selling a company is a transfer of assets. Selling your passion is a transfer of emotions. It’s a subtle difference, but it’s an important one to keep in mind when thinking about a potential exit. If you’re selling for financial reasons, then you’ll need to ensure you plan financially for the future. Doing a majority equity deal today is great for your retirement planning when the acquiring company IPOs, but how do you feed yourself between now and then? If you’re “selling your passion,” then you need to bear in mind that you’ll be shifting away from working 60+ hours per week, and so, you will need to plan ahead to manage all that extra time and drive appropriately. It helps in avoiding “seller’s remorse!”
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