It’s likely the sale of your business will be the biggest transaction of your life – by far. If you’ve built a successful company, selling it will eclipse the purchase of any home or car by a long way. The stakes are high, and this isn’t just about the financial rewards: it’s about the legacy you want to leave behind.
Preparing for the sale of your business is a time-consuming, arduous process – but one that’s necessary for you to achieve a successful outcome.
To maximize the value you realize from the sale of your business a comprehensive sale readiness process is vital. During this period, you’ll work with a series of advisors to help prepare every element of your business for sale, from bringing your financial statements up to scratch to planning for life after the transaction has closed.
It’s a journey that can feel overwhelming for many business owners. But with the right approach, there’s no reason to be daunted by what lies ahead.
In this guide, we’ll walk you through the various elements of preparing your business for a sale. We’ll cover a wide variety of topics, from building out your team of advisors to an in-depth look at the steps you should take to get your business’s finances in order.
By following the process outlined here and working with trusted advisors, you’ll be positioning yourself for a successful outcome that helps you realize your financial goals.
G-Squared Partners: A Trusted Sale Readiness Team
At G-Squared Partners, our Sale Readiness team has supported dozens of M&A transactions, some exceeding hundreds of millions of dollars in value. Our experienced professionals assist with a variety of financial matters, from cleaning up a business’s books to leading the due diligence process on behalf of the seller.
Our services are fully customizable and are tailored to the bespoke needs of every client and transaction. Our trusted professionals help business owners and executives retain focus on the day-to-day running of their business while building for a successful outcome.
To learn more about our Sale Readiness Services, contact G-Squared Partners today.
Why Is It Important to Prepare Your Business for a Sale?
Every business owner should have some inkling of how they want to exit their business – even those who aren’t considering selling any time soon. Whether you plan to pass your business down to the next generation, find a strategic buyer in your industry, or sell your company to a private equity fund, at some point, there will come a day when you no longer own your business.
Preparing for that eventuality is vital, and it’s a process that takes some time. Business owners who plan for the eventual sale of their business tend to realize a far more favorable outcome than those who do not.
By failing to plan for the sale of their business, entrepreneurs expose themselves to all kinds of risks. The most obvious is the financial risk: perhaps you banked on the sale of your business funding your retirement, only to discover it’s not as valuable as you thought. Or maybe the value the valuation the market places on your business is wildly different from the value your board believed you would achieve.
Regardless of your intentions, embracing a comprehensive sale readiness process ensures that you enter the process of selling your business fully aware of its likely value.
On a personal level, a period of preparation for a sale gives business owners the opportunity to plan for life after the transaction. The sale of a successful business typically results in a major cash windfall for owners. By taking the time to build relationships with trusted tax and wealth advisors, entrepreneurs can plan for the effects of this and put in place various strategies to offset the potential tax impacts of the sale.
Maximizing the Transaction Value
Remember, the sale of your business is a huge deal – the biggest of your life by far.
If you wanted to run a sub-four-hour marathon, you’d spend months training for the event, spending countless early mornings and evenings putting in the miles. If you hadn’t trained, you’d either stumble across the line in a terrible time or not even finish the race. Selling a business is exactly the same thing: the more you prepare, the better the outcome will be.
A comprehensive sale readiness process maximizes the value business owners will receive from the sale of their business. By investing the time to clean up your books, invest in growth drivers, and optimize every element of your business to be appealing to potential buyers, you can potentially add millions of dollars to the eventual purchase price. It’s a scenario where the juice is unquestionably worth the squeeze.
Preparing for a Smooth Process
The sale readiness process is the first step in a long journey toward selling your business. But by investing the resources to transform your business into a sale-ready asset, you can lay the groundwork for a far smoother transaction process. That’s not to say there won’t be bumps along the way – just that with the right preparation, there’ll be less of them.
Once your business finds an interested party, there’s a lengthy process to finalize the sale agreement. This can take several months. Buyers will want to conduct comprehensive due diligence. By preparing for this, you can streamline this step of the process, helping progress the sale toward a conclusion and minimizing the potential for any last-minute, closing table negotiations after an unexpected discovery late in the diligence process.
Questions to Ask Yourself Before Selling Your Business
It’s nearly impossible for entrepreneurs to look objectively at the sale of their business. Your business might represent decades of your life. It could be the only job you’ve ever had, and it’s possible your identity might be inextricably tied to your business.
It’s not unheard of for business owners to negotiate a deal, arrive at the closing table, and then find themselves unable to sign the contract. It’s an emotionally charged experience, and there are several questions entrepreneurs should ask themselves before starting to actively market their business for sale. They include:
Who Do You Want to Sell Your Business To?
Some business owners might just be looking to sell their business to the highest bidder and sail off into the sun, but others may care deeply about the company they’ve built and what happens to it. Perhaps you’d like to sell to a group of trusted employees who have served by your side for years.
Whatever the case, understanding what type of entity you’d like to sell your business to, and how you’d like to structure the deal, plays a significant role in driving the sale readiness process.
What Will You Do After the Sale?
Depending on who you choose to sell your business to, you might be expected to continue working on the business for quite some time after the sale. It’s not uncommon for private equity buyers to include earn-out periods for entrepreneurs, or to mandate that entrepreneurs reinvest a portion of their equity as rollover shares in the buyer. You might be expected to continue leading the business for a couple of years or more, all while answering to your new boss – the person you just sold the business to.
Alternatively, you might plan to retire. But be aware that sitting on the beach and playing golf isn’t for everyone – particularly successful, highly-driven entrepreneurs. If you’d like to start a new business, you need to be sure there are no non-compete clauses or other limiting factors that hold you back from the next chapter of your story.
Do You Know Who You Want to Represent You in the Transaction?
While entrepreneurship often seems like a lonely endeavor, selling a business is a team sport.
You’ll need to assemble a collection of professional advisors to help guide you through various stages of the process, from a sale readiness team that will help prepare your financials to personal tax advisors and wealth managers to help you plan for life after the sale.
When to Start Preparing Your Business for a Sale
Generally speaking, the earlier you start preparing your business for a sale, the more runway you have to increase the value of the transaction. This is one reason why many businesses, even those that have no intention of selling anytime soon, work with outsourced CFO services to help improve the financial infrastructure of their business.
Knowledge is power. When you build a better understanding of the finances of your business, you’re much better placed to make decisions that help you consistently grow your business’s value over time. That means identifying new opportunities to drive revenue, cutting unnecessary costs, and optimizing the profitability of your business.
It’s advisable to retain a sale readiness team and start building relationships with your team of advisors a few years before you plan on actually selling your business. Proactively building these relationships is key. During the transaction, you’ll be working with these professionals on a daily basis. Ensuring they have sufficient time to get to know your business and how you operate helps everyone work better together toward a successful outcome.
Waiting too late to start preparing your business for a sale can hinder the process. Adjusting financial statements and creating forecasts in real-time during a live deal is far more challenging than pulling together required collateral and financial data in advance.
Assembling Your Team: Key Professionals Involved in the Sale of a Business
The sale of a business is a complex process that demands all kinds of domain expertise. From the investment bankers that drive the wider process to the tax advisors that help entrepreneurs manage their tax liability, there are all kinds of professionals involved at different stages of the process.
Let’s explore the role each of them plays.
An investment banker functions as the quarterback of the sale of your business, taking overall responsibility for managing the transaction and advancing the ball toward the goal line. Their responsibilities include:
- Advising the likely valuation range for your business
- Sourcing potential buyers
- Creating collateral to share with potential buyers
- Overseeing the sale process and developing the sale memorandum
- Negotiating the transaction terms on your behalf
Your investment banker is the single most important partner you have in the sale of your business. It’s their job to oversee all the other professionals involved in the process and look after your best interests.
Talk to several investment bankers, making sure to inquire about their previous experience selling businesses like yours, the resources they bring to the table, and the fees you’ll pay for their services.
Note: Entrepreneurs with smaller businesses should work with a business broker instead of an investment banker.
Attorneys oversee all legal elements of the deal, from drafting the buy-sell agreement to helping navigate issues around the intellectual property of the business. They’ll communicate directly with the buyer’s attorney, hashing out the legal terms of contracts to ensure all terms are agreeable to both parties.
Before negotiations start, attorneys will also make sure that your business is buttoned up in a legal sense. They’ll ensure you’ve fulfilled all regulatory and compliance requirements and help you address any legal liabilities that could derail the sale.
Some attorneys play a role in the negotiation process, helping ensure you achieve the best possible outcome from the sale.
Sale Readiness Team
If an investment banker is the quarterback, a sale readiness team is the offensive line. It’s their job to proactively tackle and block any issues that threaten the sale.
That entails compiling accurate financial statements for your business, producing a multi-year forecast that shows buyers what the future could hold, and developing meaningful, data-backed KPIs that help potential buyers understand how your business has performed.
At G-Squared Partners, our sale readiness professionals often function as an outsourced finance team, helping to manage all the financial intricacies of the transaction, from supplying data to investment bankers to leading the financial due diligence process with the buyer.
Structuring the sale of your business to be tax-efficient is an important concern that can be overlooked by many entrepreneurs. There are several questions that a tax advisor can help you consider, including:
- Will the proceeds of the sale be taxed as ordinary income or as capital gains?
- What are the terms of the sale?
- All cash transaction
- Seller financing
- Earn-out period
- Equity rollover into new business
- Will the sale of the business be structured as a sale of the business’s assets or a sale of the business’s stock?
These issues, and many others, can often prove a sticking point in negotiations. Often, sellers want to pay minimal levels of tax on the sale of their business and seek to structure the transaction with this in mind.
Of course, this is likely to be unfavorable to buyers, who may propose alternative solutions. The support of an experienced tax advisor is vital in understanding the implications of how the sale is structured and arriving at a deal structure that’s acceptable to both parties.
The sale of a business is likely to be a significant liquidity event for the business owner, who could receive tens of millions of dollars on the day of closing. Having a plan in place to effectively manage these funds is imperative to safeguarding this wealth and ensuring that the business owner can build a lasting financial legacy for generations to come.
Business owners should engage wealth management and estate planning professionals to help create a financial plan that protects and grows their wealth in a sustainable, tax-efficient manner.
Deep Dive: Preparing Your Business’s Finances
At G-Squared Partners, our expertise lies in sale readiness: the process of preparing a business’s internal financial infrastructure for a successful transaction. In essence, we function as an outsourced financial team, managing every element of a business’s financial infrastructure through the transaction.
Managing a live M&A process demands a significant amount of resources – resources often far in excess of what a business’s existing finance team is equipped to manage. Sale readiness teams like G-Squared Partners plug these gaps, helping businesses accomplish important tasks that move the transaction forward.
Below, we explore the key steps required to effectively prepare your business’s finances for a smooth sale process that maximizes the transaction value.
Compiling Financial Statements
Among the most important pieces of documentation in the sale of your business is the business’s financial statements in the three years directly preceding the transaction. Buyers rely on these statements to evaluate the financial health of your business, assessing everything from changes in assets and liabilities to your business’s ability to generate free cash flow.
Depending on the sophistication of a business’s financial team, it might be necessary for your sale readiness team to work to restate these financial statements to avoid any issues in the due diligence process. This is particularly important if existing financials are not GAAP-compliant financial statements.
As part of this process, your advisors will identify potential questions buyers may ask about your financials, dig deeper into issues that will be flagged in due diligence, and help you create a compelling narrative around the meaning behind the numbers.
Key Performance Indicators (KPIs) are high-level metrics that provide a quick snapshot of how a business is performing. Some top-line KPIs are obvious: buyers will definitely want to understand your business’s revenue, growth rate, and profit margins. Others take more work to clarify and track: KPIs such as customer retention rate and employee turnover are also important metrics for buyers to understand.
The exact nature of the KPIs your business should track is driven by the type of business you operate. A SaaS business, for example, will have markedly different KPIs from a manufacturing firm. Your sale readiness team will help you clarify these metrics and build the reporting framework that enables you to track them.
Building a Forward-Looking Forecast
When a buyer acquires your business, they aren’t buying it for its past performance – they’re buying its future potential. Despite this, many business owners lack a clear, long-term forecast that lays out how their business is expected to perform in the coming months and years.
Work with your sale readiness professionals to compile a forecast that covers at least the next three years. Be sure to include a budget that demonstrates how costs are expected to evolve in line with your business’s revenues. While whoever purchases your business might not stick to your plan, it’s still an important asset to demonstrate the future viability of your business.
Providing Data to Bankers
As part of the process of marketing your business to potential buyers, your investment banker will produce sales collateral: a wide variety of materials that provide potential buyers with the information required to assess your business.
During this process, your banker will have many requests for information. A sale readiness professional can help answer them, providing bankers with the data required to populate a data room or a confidential information memorandum.
Managing the Transaction
Once interested buyers start to emerge, your business will pivot away from the sale readiness process and begin negotiations. This period might last months and can put a lot of strain on both you and your business.
Having the support to navigate this period is vital. Despite the intensity of the negotiations and due diligence, you, as the entrepreneur, have to ensure your business continues to perform and meet the performance expectations you’ve set. If revenue and profit nose-dives right before the sale, your buyer may pull out, leaving you back at square one.
With that in mind, many entrepreneurs retain the support of their sale readiness team until the transaction is complete. Sale readiness advisors can help with various tasks during this stage.
Supporting the Day to day-to-day running of the Finance Function
The routine processes completed by your finance team on a day-to-day basis are more important than ever during the final stages of a transaction. Tasks like closing the books on a monthly basis take on more importance than ever and there’s little room for error.
During this period, your sale readiness team can function as an outsourced accounting department, providing additional resources and leadership to support your finance department at a time when it’s likely they’re stretched thin.
Supporting the Quality of Earnings and Due Diligence Process
During the negotiation of the sale, it’s likely that the potential buyer will want to conduct comprehensive due diligence and quality of earnings analysis. During this process, the buyer is essentially verifying everything that you have told them about your business.
Key elements reviewed during the due diligence process include:
- Financial Information: including financial statements, tax returns, liabilities, inventories, and more
- Business Structure and Operations: entity structure, governance frameworks, compliance requirements, trademarks, patents, and more
- Contracts: significant contracts with customers, suppliers, partners, and more
- Customer Information: customer data, communications, and any pending or active legal issues
- Employee Information: organizational charts, employee contracts and salaries, and employee benefit plans
- Physical Assets: real estate, vehicles, heavy machinery, and other physical assets included in the sale of the business.
This can be a lengthy, time-consuming process, but it’s one that’s vital to the sale closing on the agreed terms. If any material discrepancies are discovered during the due diligence process, the buyer may reconsider the terms of your deal.
Embracing the due diligence process in good faith is vital. The experience that your sale readiness team has garnered helping you manage your financial infrastructure is an indispensable asset at this stage. At G-Squared Partners, our sale readiness team has significant experience helping clients successfully manage due diligence requirements.
G-Squared Partners: Experienced Sale Readiness Professionals
The sale of your business is an exciting time, but it’s a demanding process that requires an experienced team with rigorous attention to detail. With sufficient preparation and the right approach, a life-changing outcome is well within reach for owners of a successful business.
At G-Squared Partners, we’ve served as sale readiness professionals on over 50 M&A transactions. Our leaders have significant experience in this space and are well-qualified to guide business owners in a variety of industries. We maintain active relationships with a network of investment bankers, attorneys, and other professionals involved in M&A transactions.
Our services are entirely customizable, with expertise in everything from creating long-term business forecasts to liaising with attorneys and tax advisors. Together, we’ll help you build and execute a plan that realizes your financial goals.
Start the process of selling your business today by getting in touch with G-Squared Partners.