Here They Are: The Hallmarks of a Transaction-Ready Company
You may have a strong desire to sell, and you’ll know that in your gut. But less instinctive is whether your business is ready to sell.
There are certain preconditions to selling your business. That’s not to say it will be impossible to sell your business if they are not in place, but they will present serious challenges.
Here are what we consider important preconditions:
· The Hallmarks of a Business Desirable to Strategic and Financial Investors
o Strong proven growth
o Solid growth prospects
o Good profit margins
o Proprietary value (something that makes it not a commodity)
o A solid employee and management base and structure
o Solid processes and procedures
o A high employee retention rate
o Good reporting and accountability mechanisms, and, no, audited financial statements are generally not required
o A solid record as good member of the community
o A low risk profile
o Professional representation in all dimensions (e.g., offering materials, legal and accounting representation)
· No Existing Litigation or Potential Litigation. Obviously, no buyer wants to walk into the middle of something that may drag them into court.
· Ability to Sell. There may be parties that have the right to block your sale, or whose consent is required before you sell. These may include other shareholders or owners of your business, landlords (check your lease), lenders (check your loan documents), or regulatory authorities.
· Informal Agreement of Key Employees. If you have key employees that might quit if you sell your business, it will behoove you to get at least their informal agreement that they support your selling the business and won’t quit upon a sale.
· Time to Manage the Sale Process. Selling a business takes a lot of time. We think it’s an approximate 50% full-time job over the course of 3-6 months. You can save a lot of money selling your business yourself, and very likely do a better job than others might, but you must have the time to do it right. If you don’t have the time right now, do you have other resources that can cover what you are currently working on?
· Sufficient Liquidity to Cover the Cost of the Process. We recommend you prepare a realistic estimate of the cost of selling your business and ensure you have sufficient liquidity (i.e., cash) to cover the expenses. The largest expenses will be:
o Broker or investment banker commission (i.e., success fee) (if you choose to use one) – For companies below the lower middle market, the fee will likely be 8% to 15% of the selling price. For companies worth over $20 million, the cost will be about 3% to 5%, with a declining percentage as the value of the transaction increases. And most intermediaries charge a retainer fee to be paid during the sales process, sometimes credited against the success fee and sometimes not.
o Legal fees – which can run into the hundreds of thousands and should be negotiated heavily and strictly managed.
o Tax advisory fees – which should be significantly less than legal fees, but still strictly managed.
GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market. Visit us here.
For a short video clip on this topic, click here.