Most business owners come to a point in their careers where they start thinking about exit planning. Planning could include everything from passing along the business to family, an employee buyout or merger or acquisition. In the event of a sale, there are some things an owner should know going into the process.
Selling a company is something that should be contemplated years before a seller wishes to be fully removed from a business. A standard expectation for an acquisition from start to finish can range from 12 to 24 months. The timeline depends on such factors as the balance sheet, extent of confidentiality, industry, operations and size and as well as price.
Not only can the selling process take a substantial amount of time, but an owner might want to start prepping his or her business for sale anywhere from one to three years before engaging any brokerage services. Buyers — and lenders — look for clean, stabilized and strong financials in a business and typically look back at least three years of performance. This makes it important to maximize sales and profitability for the years leading up to a sale while keeping the company books as clean as possible.
Another important consideration in a sale is understanding the fundamentals of valuing a company.
Sellers have the option of executing this analysis themselves or hiring a business broker or Certified Valuation Analyst to assist with these services. All companies have different internal and external factors that affect value, so it’s crucial to look at all variables when arriving at a final number.
For example, one of our recent closings was Bookcliff Gardens, a nursery and landscaping company. The sale involved a lot of moving parts when it came to the valuation, including assets, cash flow, equipment, improvements, inventory and real estate.
Another recent transaction we closed was Columbine Caregivers, a home health care agency that was valued on brand name, cash flow, clientele, goodwill, industry demand and staffing.
There’s no cookie-cutter way to arrive at a valuation, making it essential for a business owner to perform proper due diligence or consult a professional when going through the valuation stage.
The next step is typically the tightest bottleneck in the process, and that’s finding a buyer. This constitutes a delicate task because of the confidentiality required and vetting credible prospects. The time it takes to find this perfect fit varies based on the type of business and amount of effort put forth to locating a buyer.
Once a buyer is found, then begins the negotiation and transactional phase of the process. In a business acquisition, there are many variables to consider and negotiate with a buyer, each possibly having long-term implications for both parties. These various factors are far more involved than other asset or real estate transactions, and it’s important to perform sufficient due diligence or lean on proper representation during this process.
This period typically takes 60 to 90 days, depending on the buyer’s financing plan. Traditional lending routes take the longest to complete, including conventional loans, private equity and small business loans.
Other routes for financing typically lead to quicker closings, including cash transactions, gradual buyouts and owner carry purchasing.
Once officially closed and funded, a transition period that typically occurs between the buyer and seller is essential to give the buyer any support and training to successfully operate the business while sustaining the culture, quality and reputation of the company. This period will vary, but averages from 60 to 90 days.
Selling a business constitutes a diverse and impactful process for everyone involved. While it can be a long and involved, it’s important to go about the process the right way to foster a successful transaction that offers a win-win scenario. For more information about this process, feel free to reach out to schedule a private consultation.