With the advent of Labor Day and the end of the summer vacation season, we typically see an increase in buyer activity as people and businesses focus on completing transactions before the end of the year. Many business owner’s underestimate the time that it may take to sell a business. This month’s featured article addresses the process and the amount of time that it may take to complete a transaction. Having properly prepared financial statements at all times can considerably shorten the process and enable the owner to take advantage of unsolicited offers. The team at The FBB Group, Ltd. offers complimentary consultations with business owners to provide suggestions for positioning their businesses to increase value and marketability.
There are some common questions that business owners usually have when thinking about selling their business. One of the most common questions is “How long will it take to sell my business?” While every business is different and the amount of time that it will take to sell any one specific business is impossible to predict, historical data and averages provide general guides to each step of the process to help estimate the timeline of a business sale.
Planning, Preparing and Formatting Financial Data
The first question most business owners want to know in the planning process is “What is my business worth?” This is where owner expectations and a range of value based upon market conditions meet. A Business Intermediary will look at multiple sources of information including internal P&Ls, Balance Sheets, Tax Returns, Industry Data, and Market Data to determine a range of business value.
The process of collecting information, analyzing data and recasting the financial statements to show an accurate picture of the true earnings of a business can take some time, but the bulk of the planning and preparing should be done years in advance of the sale. Business valuations usually consider three to five years of financial data and it is wise to act accordingly. Talking to an Intermediary to help identify action steps to maximize the value of your business can have a large impact on the financial outcome of the transaction. Having accurate, well-formatted financial data prepared by an independent, third party professional, is usually critical to the process. Once a business owner and an Intermediary reach a consensus on a go-to-market price, it’s time to move on to the next phase.
Generating Marketing Materials
Executing an engagement agreement with your intermediary firm initiates the process of going to market. Over the next month or more, the Business Intermediary will compile an extensive amount of information on the business, document the detailed financial analysis, and create a comprehensive presentation package often referred to as a Confidential Information Memorandum (CIM). Public-facing documents such as advertisements and a one-page business summary (Teaser) are also crafted using language intended to convey information that will attract buyers, while maintaining confidentially and not revealing the exact identity of the business.
Marketing to Obtain Buyers
The Marketing phase can be time consuming and requires an extensive amount of work responding to possibly hundreds of inquiries. While it is conceivable that the right buyer could be found almost immediately, the marketing phase can often take many months.
During this time, the entire team is active, conducting market research to identify buyer prospects, qualify and manage buyer inquiries and meetings. Buyers attracted by the marketing efforts are required to sign Confidentiality Agreements and will be financially qualified to initially verify that they have the capability to complete the transaction. This takes place before they are permitted access to the CIM.
Negotiating, Due Diligence, Financing and Closing
The Business Intermediary will solicit and evaluate proposals from buyers and assist the owner in the negotiation of the offers, which are typically in the form of an Indication of Interest (IOI), Letter of Intent (LOI), and Asset or Stock Purchase Agreement. Once the primary buyer has been selected, the owner will coordinate with his or her advisors to complete due diligence and move towards closing.
Closing involves finalizing buyer and lender due diligence, completing negotiations and working with lawyers, CPAs, and lenders to bring the transaction to completion.
After the Closing celebration, it is still not over. The Business Intermediary will help with the orderly turn-over process and provide post-closing transition assistance. Two to three months is a common time frame for a seller to stay on and transfer necessary operational knowledge to the new owner. Longer periods of paid consulting are also common in the transition phase. However, if the business is purchased with an SBA-guaranteed loan, the period of seller involvement is limited to one year.
It is important to keep in mind that the timeline of an eminent sale is one thing, but the exit planning of a business should begin the day after the business is started or purchased. Contacting an M&A Advisory Firm 3 to 5 years before an intended sale can yield advice that may help to significantly increase the value and marketability that the business brings.
Whether you’re ready to start the sales process now or you just want to know what you can do over the next 3 to 5 years to enhance the value and marketability of your business, contact The FBB Group, Ltd. today for a Complimentary, Confidential, No Obligation Consultation.
(originally published in the September 2019 eNewsletter)