Preparing to Sell Your Business

TS: Glad you guys are back on. And this is the best part, right? A company has decided they wanted to sell. Great. Awesome. This is fantastic. So what is the first step in the process?
AW: I think it's an overused phrase. But since we're financial types, I think the important process for any company considering a sale is to be diligence ready. We all know the due diligence process and what that involves, and it's a purchaser going through reams and reams of data on the company that are provided in a data room. So it's making sure that your financial records, your legal records, your contracts are all up to the scrutiny that a potential buyer would expect during a due diligence process. And I think that's the first thing, you have to get ready. You don't just wake up one morning and say, "I want to sell my business." You make that decision, then I think you get ready to enter the process. And it does take some time. You want to make sure you're ready for the scrutiny of due diligence. And I've always said that companies trade at a multiple of EBITDA. I think companies that are prepared to sell can almost get another half a turn of value because of the fact they're prepared.
LS: Yeah. I would agree with Alan. There's so much that goes into this. And Tim, our team, we use a little tool as our businesses are starting to consider this, and it's called our beginning prospectus tool. Because many of the business brokers will develop a prospectus on the business, but we like to get our business owners thinking about this really on, really early on in the process. And so we ask questions such as, why should anybody part with their cold hard cash to buy your business? What is it about your company that makes it unique? What is it about your business that means that it has the potential to grow, to thrive in the future?

What is it about your leadership team that somebody should invest in these people and keep those people on board? Tell us a little bit about your products and services and why this would get any potential investor. Because if somebody's buying your business, they are investing in that business. What's going to get an investor really excited about this? And we really try to get our business owners to think about this from the perspective of what somebody buying the business would experience. Because unfortunately, I think a lot of business owners think about the business historically.

"Oh, we built it from this and we've got all these great clients. And this is... I've got great relationships with all of our vendors." Well, that's not quite so important to somebody investing in the business unless, of course, you want to stay and nurture those business relationships, right? So they're going to want to know what your role is going to be. So we try to start out by getting our business owners to think very broadly about their business as they begin to prepare for this, as Alan was saying, the whole due diligence process.
AW: I was just going to add one other thought to what it Lisë just said is about the fact that certain sellers of businesses, their business could be worth more in the hands of a particular buyer than others. And I think it's the seller, as we said, developing that story of why this business has value and why it has value to a particular group of purchasers.
TS:Now, one thing that is something to consider too, obviously COVID's been a major component of a lot of this stuff, right? So is there anything else, at least with the first steps in this process, that might have changed during this COVID process? Or just out of curiosity?
AW: I think you bring up a really interesting point, Tim, because I think a lot of buyers of companies are looking at the performance of a company over the last two years. And has the performance been impacted either positively or negatively by COVID? And what would happen to that performance two years from now where, God willing, COVID no longer exists and doesn't have the impact on the business it's had in the last 20 months or so? So a lot of the due diligence processes that buyers are going through is analyzing the business in a non-COVID period. And also, what are the permanent changes in that business that COVID has brought about? And some of those changes might be positive, and some of those changes might be negative. But I think they all have to be analyzed and looked at.
LS: Yeah. I think you're right, Alan. And I find investors are taking a look at businesses and saying, "The world of work is changing." And so we're learning a lot of lessons from this experience, we're learning about the demand, and then sometimes the desire for virtual workplaces and so on. And I think that investors are starting to stand back and say, "How well will this company weather these changes in workforce, the changes that in some cases are going to be inevitable?" So to Alan's point, how well did they do over the last two years? And then how well might they do going forward? And then what's the potential of this company to be able to flex? Because the impacts of how business is done has been changed, I think, to some degree forever. We've opened our employees that are mines to a different way of working. And how businesses are going to be able to carry the positive lessons learned forward, I think, is going to be of interest to investors in the future.
TS: I couldn't agree with you more on that as well, too. And definitely, the whole stratosphere changed, and the workforce now clearly is a big impact on this. So now let's say hypothetically, as we're going through this process, everything's all copacetic, all good to go. What does a company look to do, or how do they look to be acquired if they're out there in the market to try to sell themselves?
AW:Well, I think the first step is surrounding yourself with good advisors. And I can't emphasize that enough, whether it be a quality accounting firm, a good law firm that's actually been involved in transactions and understands how transactions get done, and hiring an investment banker. And the reason I suggest hiring an investment banker is an investment banker has the responsibility for selling your business while you continue to run the business on a day-to-day basis. Remember, the timeframe of selling your business could run 9 months to 18 months. It could take a while, even in this very frothy environment.

And I've seen so many businesses that the deal has fallen apart at the 11th hour because the company performed so poorly in the last year where the CEO of the company was spending more time worrying about how he was going to spend the proceeds from the sale of the business and which car to buy and which beach house to buy. And he or she lost sight of the company and performance really faltered. So I think in a really well run process, the investment banking team has the responsibility for putting the offering memorandum together, putting any financial models together, getting in touch with potential buyers, helping to negotiate that process, participating in due diligence. And the owner of the company will continue to run the business the way they have it, the way they have historically. And I think that's really, really important.
LS: Yeah. And I'd say also, be careful. Be very careful out there. So many of our businesses are getting calls every day from people who are saying, "I'm prepared to buy your business." They're naming outrageous prices. They're making all kinds of promises. And it's really tempting to say, "Oh, I've got this one. I don't need to pay the services for having external advisors help me out. I mean, this is such a great deal." Buyer beware, seller beware. It's really tricky. So please make sure that you get advice before you start to cut any sort of a deal. I just heard some story about a company in the Midwest who those guys sold the business without getting advice and was really excited and delighted by the price that he got, only to find out after the deal was closed that his tax obligations took every penny of profit. So get advice.
AW:And that's really a good point. Because at the end of the day, it's not what you sell the business for, it's how much you keep. And it's so important to structure the deal in a way that's beneficial for you. I mean, most sellers are looking to do a stock deal. Most buyers would prefer an asset deal and the writeup of assets that brings along. But there are ways for both parties to accomplish their own objectives. So you want to begin having those discussions early on as you're developing a letter of intent rather than at the back end when it might be too late. But it's so important to get great tax advice on structuring. It could save you millions of dollars that could go into your pocket.
TS:Lisë and Alan, thank you again for being on this series. And thank you for listening to The Bottom Line, part of the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next podcast where we will cover due diligence.