The successful sale of a business can be rewarding and ultimately, life-changing. The process, however, is not simple and requires a deep understanding of your personal and professional goals.
Like many entrepreneurs, your business might be your identity and you might have a strong sense of self that is closely attached to your company, its people, and its product. With that in mind, you might imagine how the process of selling your business can oftentimes feel very personal and emotional, which makes the decision even more difficult.
I personally did not have a robust plan to sell my business, and many entrepreneurs can likely relate. As opportunities were coming in, the initial excitement was coupled with a sense of panic. Navigating this process was completely out of my wheelhouse and not something I had planned.
There are certainly a few key things I wish I had known before selling my business. That’s hindsight for you, isn’t it?
Hiring a consultant
Before you start having conversations with potential buyers, find a banker or a consultant that has a long history of doing transactions in your industry. The complications of this process require an expert, especially if this process is new to you.
I specifically went with a consultant who had sold numerous agencies. They helped develop our overview deck, present our financials, and ask the hard-hitting questions during discovery calls. They also helped research the buyers, from their financial snapshot to previous transactions.
I was also given a look at the varying ways you can set up a sale, from selling your ownership completely to partial transactions. Be aware that you will either have to pay this person hourly or a percentage of your sale. Most M&A bankers expect around 3%.
Valuing your business
Valuing your company comes with a pretty standard industry formula. This was news to me. Sometimes you will see a multiple of your revenue, but mine is considered a “service,” so we were looking at an entirely different formula. The value of the company was based on our EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This number allowed the prospective buyers to not only see our revenue but our operational efficiency.
Yes, they were interested in how much money we made as a company, but more importantly, they wanted to see how we operated and spent money. Any accounting professional can find this number for you, but you need to ensure your books are well updated or the process will be an absolute headache. Luckily, we had been using Quickbooks Online for years, and our revenue and spend were appropriately documented. With that number calculated, the prospective buyers provided an offer which was a four to five times multiple of EBITDA as the purchase price. It was much smaller than I had anticipated.
Looking back, if selling my company was the top priority, I would have focused on margins and operating lean. Your EBITDA will thank you.
Calculating the costs of selling
Your valuation might seem promising, but it’s integral that you consider the costs of selling. Not only are their fees associated with consultants, bankers, and attorneys, but there are hefty tax implications. Even with sales including shares on top of cash. Depending on where you live, you need to be mindful that a large percentage of that sale price will not be going in your pocket. With that in mind, you really need to determine the number that would make it worth it to you to give up ownership in a company you built from the ground up with blood, sweat, and most certainly, tears (I know I had a lot).
Finding a specialized attorney
Once you’ve agreed to high-level terms of the sale, you will be presented with a 100+ page purchase agreement and depending on how your sale is structured, an employment agreement. I can not emphasize enough the importance of hiring an attorney who specializes in mergers and acquisitions. From listing hundreds of disclosures to exclusivities within your employment agreement, there are plenty of clauses only a very experienced attorney would be able to understand. Don’t forget the cost here. An attorney in this space can cost upwards of $1,000 per hour for this type of contract negotiation. Your bill will likely be in five or six figures or more.
Being prepared for change
After a sale is completed and paperwork signed and sealed, the real work begins.
Have a plan for sharing the news with your team. In my case, selling to a publicly-traded company meant I only had a finite window of time in which I could share the news. I created a presentation of what this sale meant to the team and how, from an operational standpoint, things were going to change.
Your staff will likely be fearful of this news, no matter which way you explain it. Most employees think that an acquisition means overhead cuts. In some cases, that may be true. Make sure this is part of the discussion you are having with prospective buyers. I made it clear that I wanted to retain my team and our autonomy, including the use of our company name.
Realize that things will change. You no longer “own” the company, depending on your structure, you’re an employee. You won’t be able to make the decisions you once could. In most cases, you will also have to combine forces and onboard new HR, accounting, and operational infrastructure. This will take time and will not happen overnight. Trust the process and keep open communication and dialogue with your team. It’s also safe to say some team members won’t be happy with the changes, be prepared for that.
I am thrilled with the acquisition of my company. It was the right decision for me. Do note, I went back and forth on the decision for weeks with many sleepless nights asking myself if this was the right choice. If you’re a solo entrepreneur, having the support of other executives and resources feels like a large weight off your shoulders. Don’t take the decision lightly. Weigh the pros and cons and be prepared for the inevitable.
Ali Grant is the founder of Be Social which was recently acquired by Dolphin Entertainment.