Questions Frequently Asked by Sellers
Q: Why is confidentiality important?
Buyers want to buy stable businesses. If employees learn that their employer is for sale, they may seek other employment to protect their income. Customers may begin to favor other sources for your products or services. Key suppliers may seek alternate channels to the market. These events can quickly erode financial performance or destabilize a business, which translates to increased risk and lower value. It is important that your constituents stay committed at this time when your business needs to look its best.
Q: How does Exit Strategies maintain confidentiality?
Maintaining confidentiality is nearly always important. Exit Strategies has the experience, industry-best practices and vigilance to carefully manage confidentiality. As a result, our clients’ employees, customers, suppliers and competitors nearly always learn of the sale when announced by our client at the appropriate time. We incorporate some or all of the following into our sale engagements to maintain confidentiality:
- We are the point of contact with the market and gatekeeper of sensitive information
- You approve "blind" ads and summaries sent to buyer prospects
- Buyer prospects sign confidentiality agreements and answer qualifying questions. Only screened buyers receive confidential details.
- You pre-approve contact with industry buyers
- You approve Confidential Business Review content
- You approve the timing and format of ultra-sensitive (e.g. client) details
- Certain buyers may be required to submit non-refundable deposits before having access to key constituents or ultra-sensitive information
- You choose the timing of announcements to key constituents and the public
- We reinforce confidentiality with the parties throughout the process
- We keep the sale process moving, which minimizes the opportunity for leaks
Q: When should I tell my employees?
We assist you in selecting the best time to notify employees and other constituents. In our experience, it is usually best to notify them just before transaction closing. Of course, if there are key employees whose employment is required by the buyer, they may need to be introduced earlier in the process.
Q: Is there one best strategy for exiting a business?
No. The right strategy depends on your goals and circumstances. Your best strategy may be to transfer to family, management, an Employee Stock Ownership Plan, private equity investor, industry player, consolidator, or an individual or investment group not involved in your industry. These options have advantages and disadvantages, based on your personal and financial goals, and timing needs.
Q: When should I create an exit strategy?
Usually, the sooner exit planning begins the more options available to you to meet your objectives. Timing often depends on a) the condition of the business in terms of transferability and value relative to your needs, and b) how you wish to transfer the business. If your exit strategy involves a third party sale, ideally you will start preparing 3 or more years in advance. However, any preparation time is better than none at all.
Q: Is there an optimum time to maximize value?
From a valuation perspective the very best timing is usually when the business is solidly profitable and trending upward, and future growth is expected. This places you in the strongest negotiating position. Selling during a period of economic growth can increase selling price. If your industry is consolidating and strategic buyers are making acquisitions, it may be time to sell. Selling during a time of low interest rates and good credit availability allows buyers to borrow and pay more. Lastly, it is always better to sell before you are forced to do so for health, personal or financial reasons.
Q: When should I begin the selling process?
Generally, you should start 1-2 years before you want to be completely out. It can take a month to a year or more, depending on the business, to properly prepare a business for sale. It takes 9 months after going to market, on average, to close a transaction. Plus, the buyer may want you to stay on for a transition period.
Q: I want the highest price, right?
Not always. Business sale transactions involve many elements of value to a seller. The selling price is often only a part of the overall value received. It is important to understand the total financial package when evaluating a deal. The financial elements of a transaction can include cash down payment; principal and interest on notes; liabilities assumed by the buyer; the sale or lease of premises if you own them; employment contracts and consulting fees; non-compete agreements; retained current assets; royalties and licensing agreements; a percentage of retained ownership; and "perks" for you or your family. This total financial package is the true measure of a transaction’s value to you.
Q: How long will it take to sell my business?
On average, businesses sell in 9 months, from initial marketing to closing. We’ve sold businesses in 90 days, and two years. It is important that the business be priced properly. Some sellers overprice their business, operating under the premise that they can always come down. This strategy usually backfires, since most serious, qualified buyers won't invest their time looking at overpriced businesses.
Q: How long should I expect to stay on board?
The length of time sellers stay involved with the new owner varies from a few weeks to a few years, depending on the business and the owner's role in it, the buyer, other management left in place, etc. Ask your Exit Strategies advisor what to expect in your circumstances.
Q: What can I do to help sell my business?
Here are three ideas:
- Buyers want businesses that are stable and well run. The #1 way you can help is to stay committed to running the business while we lead the sale process. Keep normal hours, build order backlog, maintain important relationships, and meet or beat your financial projections. Keep the facility and equipment in good condition.
- Be candid with buyers -- if they like and trust you, they might buy from you! Represent your company enthusiastically, but not to the point of covering up. Resolve issues uncovered during the evaluation phase. If the company has deficiencies, address them early on, with solutions in hand.
- Buyers need sensible, up-to-date financial statements and information. Involve your CPA before and during the selling process, and respond to our information requests in a timely manner.
Q: Does Exit Strategies specialize in one industry?
No. Our expertise is in the process of selling companies ranging from $1 to $25 million revenue. We have completed many deals in manufacturing, services, construction and wholesale distribution sectors. We also have retail and food service specialists on staff. We bring successful and effective brokerage / M&A practices and methodologies to a range of industries.
Q: I understand what business brokers do, but what can't they do?
Business brokers (intermediaries) are not magicians! Most businesses are saleable if they are priced, structured and presented properly, however we can't create demand for overpriced businesses. Any broker who says they can sell your business for an extraordinary amount will likely waste your time and unnecessarily risk overexposing your business.
A broker is also not qualified to give legal or tax advice. While we are versed in the tax and legal implications related to our work, we advise our clients to seek the experienced professional counsel of experts in these areas. When necessary, we can refer you to one or more outstanding professionals. We can provide our perspective on the optimal timing to engage outside counsel to maximize your benefit and manage cost. Part of our job is to coordinate the work of accountants, transaction attorneys, financial advisors, estate planners, lenders, landlords, insurance brokers, appraisers, escrow officers, and others who are involved in making your transaction successful.
Q: What is buyer due diligence and when does it occur?
Due diligence usually occurs after a purchase agreement or letter of intent is executed by both parties. These agreements usually have due diligence contingencies that allow the buyer to validate the facts and assumptions that contributed to their offer, and assure the seller that they are dealing with a qualified and compatible party. If the parties are satisfied with the information received, they release their contingencies and proceed with the purchase. If not, the deal may be renegotiated or cancelled. Buyer due diligence varies in every transaction, but often includes (listed alphabetically):
- Bank statements
- Corporate Documents (if selling company Stock)
- Customer base
- Financial Statements
- Fixed Assets
- Human Resources
- Industry
- Insurance
- Intangible Assets & IP
- Inventory
- Leases and other Operating Agreements
- Legal Proceedings
- Licenses, Permits, Regulatory
- Marketing programs
- Other Financial Reports
- Real Estate disclosures (if sale includes Real Property)
- Sales history
- Seller Disclosures
- Suppliers
- Systems
- Tax Returns
Unlike real estate, businesses often sell without 100 percent cash at closing. Therefore, your due diligence on the buyer can be just as important. The due diligence period is also usually a time to secure third-party financing and approvals, and for the parties to formulate strategies to transfer operations.
While due diligence is often a lot of work, it need not be complicated or stressful. Exit Strategies facilitates this process for the parties. For further education, request a sample due diligence list from your Exit Strategies advisor.
Q: What is an ESOP?
An Employee Stock Ownership Plan (ESOP) is a defined contribution employee benefit plan, technically a stock bonus plan that can borrow money to acquire company stock. ESOPs can give employees as a group 30% to 100% ownership of a company. Certain government rules are intended to protect the interests of the plan participants. In return, an ESOP is granted certain tax benefits. Owners can use an ESOP to exit their company at fair market value, assure on-going management and reward employees – all without paying capital gains tax. To establish an ESOP, a company establishes a trust, into which it contributes new shares of its own stock or cash to buy existing shares. The ESOP trust is governed by trustee(s), selected by the company's Board of Directors. ESOPs take considerable time and money to set up and maintain, and are not the answer for every business or business owner.
Q: What information is needed to evaluate my company before selling?
It varies from business to business, but the following list is a good start:
- Financial statements and federal tax returns going back 4-5 years
- Financial statements for the current year, plus AR and AP aging
- Fixed asset register or depreciation schedule
- Information on the company’s services/products, staff, clientele and markets
- Business plans and projections if available
- Copies of leases and all important operating agreements
- Debt schedule
- List of intangible assets and off balance sheet liabilities
We invite you to call us with any questions or to schedule a confidential, complementary consultation.
