How to Position a Company for Sale

As with many questions, the answer to this question is not earth-shattering but implementing the answer in an effective manner can be a challenge.  The answer is to position your company in the best light; present it to the most likely buyers who will see the most value and create a sense of urgency.

Position your company in the best light.  The first thing you should acknowledge when selling a business is that there are no secrets.  Once a letter of intent is accepted by the seller, the buyer will have the opportunity to conduct extensive due-diligence on your business.  Most business owners do not appreciate how detailed, expansive and intrusive this due-diligence process can be.  The seller should also expect that any deficiency in their business, whether they know about it or not, will most likely be uncovered during due-diligence.  So, it is best to acknowledge these deficiencies upfront; fix them if you can and deal with them openly if you can’t fix them.

Selling a business is nothing like selling a house but sometimes a familiar analogy is instructive.  When selling your home, it is normal to clean it from top to bottom, keep it tidy throughout the sale process, take care of any deferred maintenance, spruce up the landscaping, etc.  It is the same with a business.  Clean up the facilities, take care of any deferred maintenance, update your procedure manuals, have job descriptions for key positions, make sure all your business and financial records are accurate and up today.  The list of things to do is extensive and will be the topic of a separate post.

Once you have done what you can internally to address any concerns a prospective buyer may have, your investment banker (M&A Advisor) will prepare a comprehensive offering memorandum.  This is primarily a marketing document but it is also an opportunity for you and your advisor to disclose and address items before they become an issue.  For example, if you have one customer that is 20% of revenue, normally a big negative for most buyers, this must be disclosed.  At the same time, this can be addressed by disclosing that the risk of the loss of this customer is minimal due to a long term “take or pay” agreement with them, if that is the case. 

Positioning your company in the best light is the job of the offering memorandum.  This document must be comprehensive and accurate.  At the same time, it should accentuate the positive attributes of your business while simultaneously mitigating the areas of concern, if possible.  This document is critical to implementing an effective marketing campaign.  Your advisor must be skilled at creating a compelling memorandum in order to effectively position your company for sale.

After preparing your business and the offering memorandum the next step is making sure the opportunity is presented to the most likely buyers.  If the seller's goal is to maximize value then presenting the opportunity to both strategic and financial buyers is critical.  If selling a majority stake so the owner can “take some chips off the table” but continue to own a minority position and continue to run the business, then the target audience would be limited to financial buyers, i.e., private equity funds.  Having an advisor that has the research capabilities to identify active strategic buyers in your industry and that has relationships with an extensive group of private equity funds is critical.  You also need an advisor who is committed to reaching out to these potential buyers to raise the profile of your offering.  There are many competing opportunities out there for these potential buyers and it is your advisor's job to raise the profile of your offering above the rest.

The last step in the process is to create a sense of urgency.  This starts with a coordinated process of presenting your company to all the likely buyers at the same time and then quickly following up with these potential buyers to determine who is interested and who is not.  This coordinated distribution of the memorandum allows you and your advisor the ability to set a limited time for evaluation by these potential buyers and the ability to set a deadline for the submission of offers.  By controlling the deadline for offers, your advisor has created a sense of urgency and an auction process where one offer can be compared against another.  This process will frequently lead to a second round of bidding among the top offers.  Once the best offer is accepted, buyer due-diligence begins and you are moving toward a closing.

In order to have an effective transaction, it is critical to position your company in its best light with a professional offering memorandum; present your company to the most likely set of buyers and create a sense of urgency and an auction process.  Engage an experienced M&A advisor to assist you in positioning your company for the best possible sale.

Alan D. Austin, CFA