16 June, 2011

Private business exit: Q13a. How do you manage the sale process? Part I

In  my series on selling a mid-size privately-held business, we’re ready to move on to the actual sale process.  Let’s remember here that we’re trying to sell a mid-sized business, which I define as 50-500 staff. Selling a coffee shop or a small IT development business might follow similar principles, as might selling a major listed corporation, but there are some differences in approach, complexity and regulatory processes. Likewise, I won’t today cover selling shares in the business by way of a public offer - that’s a very special process, requiring a separate series all by itself.

Agent or DIY
Most businesses are sold via an agent, such as a specialist business broking firm (less useful, the larger you are), merchant banks (either boutique firms or arms of major banks), or chartered accountants. If you’ve never sold a business before, you’ll probably do best if you engage a reputable agent. The process is fraught with legal pitfalls, and a good agent will help you avoid them. The sales process can be incredibly distracting for you as the owner. A good agent will make all the necessary phone calls, follow up, and manage the process with the buyers for you. Above all, a good agent should be able to bring in potential serious buyers that you couldn’t reach. There is also an argument that using a good agent adds credibility to the business being offered for sale. As always, check their success and reputation, negotiate hard on fees and duration of mandate, and watch out for clauses which enable them to be paid if you achieve a sale without them.

However, just like selling a house, you can do it yourself, especially if you know the most likely buyers (you may just need some help with parts of the process). With the benefit of hindsight, we could have sold my old company Deltec ourselves, with the help of top gun lawyers on the negotiation. The agent (a major CA firm) added little to the process or to our own capabilities.

Open or targeted buyer promotion
In an earlier question, we looked at which buyers you might target, Most mid-sized businesses are sold by targeted promotion to the most likely buyers; just like any sales process, you qualify your prospects early to avoid wasting time and effort on unlikely ones. A targeted campaign also means you can better control who gets to know about the sale and your business secrets. There’s no point alerting competitors who aren’t likely to be buyers, or spooking customers, suppliers and staff.

However, some businesses may appeal to a much wider audience, in which case a wider campaign might be initiated to attract more interest. Business broking firms and receivers often use newsletters and newspaper ads to attract potential buyers for small or distressed businesses, which are more affordable.

Competitive bidders or single negotiation
At each stage in the process, you are likely to be faced with this one. Do you go into negotiation with one party, or invite competing bids? Gut reaction says that you get the best price in an auction, but it isn’t a hard and fast rule. You might avoid the expense, time and complexity of an competitive bid process if you go into negotiation with the most likely buyer right from the start, reserving the need to go to market as a fall-back. And some major buyers refuse to enter auction processes, only doing one-on-one deals. A key requirement is that you have a very good idea of what the business is worth (to them and to you), so you can extract the maximum value.

Public or secret
I’m assuming here that you’re not in receivership or statutory administration, where going public about looking for a buyer is common. Under other circumstances, I’d normally keep secret from nearly everyone (including staff, suppliers, and customers) the fact that all or part of the business is actually for sale, until the deal is done (subject to shareholder approval requirements).  Generally the noise that is created once the news is out is very distracting and may even damage the business.

Secrecy isn’t a rigid rule. You should keep your other major shareholders and your board in the loop, and supportive; it will be hard to sell if they’re not! I’d usually inform my trusted inner circle of executives, who’ll have to prepare documentation and present the business to potential buyers, and incentivise them to help achieve a successful sale.

Even if the business is not yet for sale, I always remind staff occasionally that the shareholders have the right to sell the business at any time, and I usually brief staff on the need for external investors when growing the business. In some situations, the business is overtly set up to be sold with staff incentivised accordingly (for example, some technology start-ups or a promising new technology development that doesn’t fit with the core business).

Shares or assets
Many people assume that selling a business means you’re selling shares - it simplifies the transfer to a new owner. However, share sales are often accompanied by warranties, guarantees and claw backs from the sellers, which protect the buyers from hidden nasties, such as potential liabilities for past product defects, tax claims, property right disputes and the like. Some buyers only buy assets (such as plant, stock, and intellectual property) to avoid potential problems, while taking over other contractual obligations such as staff, property or customer contracts. Buyers should go into the process with an open mind, - you just factor it all into the price negotiations. My experience is that more asset deals than share deals get done in mid-size business sales.

To be continued. That’s enough for today. This one’s turned out to need more space than I envisaged! In Part II, we’ll look at planning, preparation, coordination and execution.

First posted October 6th, 2008 

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