You’re going along, building your empire and running your company when all of a sudden, there’s a knock on the door. You open it to find someone asking to buy your business. You’re honored, flattered even. After all, someone just showed interest in the thing you’ve poured your blood, sweat and tears into. But in addition to the spring in your step, you also feel an ulcer coming on … what’s next? Where do I go from here?
Yes, the above situation is slightly exaggerated. But someone reaching out, completely out of the blue, with an offer to buy your business does happen. So it’s best to be prepared. Selling your business is more than a tour of the office, a handshake and exchanging a check. It’s complicated, often messy, and intense. We’re talking six months (yes, you read that right) of data gathering, negotiations, analysis and emotional upheaval.
Now, before you freak out, let’s take a step back and walk through the process. Consider it like a relationship.
First, let’s talk about the parties involved. The buyer is the person who wants to buy your company (clever right). They really want to date the seller (that’s you). Other parties can include financial advisors, transaction advisors, banks, lawyers, etc. (otherwise known as the peanut gallery).
Step One: Getting to Know You
Once interested, a buyer will need information to determine the price they are willing to pay. After all, they want to be prepare for the date, not just fly blind. It’s up to you as the seller to decide how much information to give them and when. While this question is enough to constitute its own blog post, here’s the short answer: NOTHING.
You should give a potential buyer NOTHING until they sign a non-disclosure agreement (NDA). This is a legal document that protects your information as the seller and ensures the buyer is only going to stay on the up and up (read, use the information you give only to formulate their offer).
Only after a NDA is signed should you (with the help of your trusted business advisor), formulate a plan to give the buyer the information they need to understand your company. Note, this does not mean just giving them everything they ask for, but instead enough for them to submit a range of value offer.
Step Two: A Promise
After preliminary due diligence (using the information you have supplied them with as well as other research), the buyer will typically give a range of value in the form of an Indication of Interest (IOI).
Consider it like this. You’ve had some initial dates and things went well. The IOI is like a promise ring in your relationship with the buyer. It’s not always done or necessary, but it signals you’re ready to move to a more serious place, without making any concrete plans related to time, date or dollar amount.
Step Three: Opening Up
If you like the indication of interest made by the buyer, you accept the promise ring and let your guard down a little more, allowing yourself to be more vulnerable. This means you give the buyer more access to information surrounding your company. This information may include key contracts or agreements, customer lists or more detailed financial information.
Step Four: The Engagement
This vulnerability or sharing of information allows the buyer to see a cohesive picture of your business and hone in on a more precise value. These terms are then laid out in the Letter of Intent (LOI). The LOI can be compared to the sparkling rock that accompanies the proposal in a relationship.
At this point, you both largely agree to the terms put forth. The LOI typically covers the purchase price, the structure of the deal, whether it is an asset or stock sale, the escrow parameters, the working capital allowance and other details that your advisor can help you understand. As a note, while the LOI is a very intentional document, it’s non-binding.
Step Five: Going to the Chapel …
After negotiation, review of legal terms and final due diligence, it’s time for your big day. Cue Canon in D and begin your walk down the aisle because you’ve made it to the marriage portion of the journey. Known as the Purchase Agreement, this binding agreement is agreed upon by both parties and will be a road map for how thing play out once the deal is closed.
This blog illustrates high level the transition through the selling journey. There will be bumps along the way (similar to a relationship), but it’s important to remember a few things as you go through:
- Know your end game. This business is yours and you’ve put a lot of hard work into it. So know what you want from your business and a potential sale, as well as what you don’t.
- Engage the peanut gallery. Don’t enter this relationship alone. Get advice from trusted business advisors and people who have gone through these situations before. They’ll help you navigate the bumps along the way and make sure you go down the aisle with confidence.