What Entrepreneurs Need To Know When Selling a Business

What do you need to know about selling your business?

There are many factors involved in selling a business. Being prepared can make the process far easier, and will unlock a lot of value in the process. 

Understanding selling a business is vital for all entrepreneurs. It is crucial knowledge if your business ever stumbles or runs into a crisis. Having the option to sell instead of to simply fold and close the doors can make a massive difference in the financial and emotional outcome, and what’s possible for you next. 

While you may never plan to sell your business, it is wise to begin accruing the extra value in your business that can be yielded in an exit. If you are successful you will almost certainly end up in an M&A deal or going public. Don’t end up far behind the game in understanding the dynamics and what makes or breaks value in these situations. 

Understanding the process, steps, and details, will not only reduce the stress involved but can add many zeros to the deal, as well as other pivotal terms which will dictate what is next in your life. So, here’s what you need to know now.

Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.

Ways To Sell A Business

There are two parts to this. The method of how you will actually go about selling your business or getting it acquired. Then, secondly, the type of transaction structure that it will be done through.

Methods Of Selling Your Business

The possible and optimal methods of selling your business may vary depending on the times and market conditions, as well as the size and type of business you have, and its metrics. 

A small local or online business may use a business broker to list, advertise and manage the sale. 

Larger businesses or startups with big potential are more likely to benefit and find much more value in using an investment banker or M&A advisory firm. 

If you have been growing fast, putting up solid numbers, and have been gaining attention in the media, then larger corporations and various types of funds may seek you out to add to their own portfolios of companies.  

Transaction Structures

As I share in my book, Selling Your Startup, there are a variety of deal and transaction structures for selling your business. 

Mergers can see your company combined with another of larger or equal size. Or sometimes even a smaller one. This can be valuable for creating a stronger and aligned entity, with more efficiency, profitability and a stronger position in the market.

Strategic acquisitions can be similar to mergers. Though your acquirers may keep your business as a separate entity. Even if they intermingle some backend functions, and benefit some control over multiple businesses in their surrounding space. These can be some of the largest transactions, where buyers are willing to pay premiums based upon their forecasts and models for the value that can be gained once your company is acquired and the benefits roll in over a matter of years. 

Strategic acquirers can have many different motivations. This can range from acquiring critical metrics to support their own data reporting. Such as growth, users, revenues, and profits. Or it can be about increased efficiency and profitability in the supply chain. Such as acquiring manufacturers or logistics components of their industry. 

A financial acquisition often involves a fund that is looking to acquire your finances. They are looking for returns, yields, and cash flow. They want to acquire profitable businesses with a proven track record of performance that they can rely on. This is often more likely to be the case for selling a more mature business, which may have peaked, has strong accounting records, and has focused on profitability. 

An asset sale is another way of structuring your M&A deal, or even liquidating your company. It can have advantages in taxes for your buyer. It may also make more sense if your business has significant tangible assets. 

If you have partners and cofounders, and they want to keep on running the business when you are ready to move on, you may also just consider selling them your shares.

Alternatives To Selling Your Business

Selling your business may not always be your preferred option. In spite of challenges, crises or receiving huge inbound acquisition offers, you may prefer to keep running it. You may not find a buyer who has the same values and vision as you do, or who is experienced enough in this that you are confident that they will be best for unlocking the full potential of this mission. 

Alternatively, while you might like to sell your business, the process may be interrupted by changing economy, industry or market factors. Or you may just not pass the due diligence period, because you weren’t prepared enough. 

In these situations, what are your other options?

Having a backup plan, or simply alternatives can give you more negotiating power, even if you do end up selling. Or it can help you get to where you need to be for a greater exit. 

Equity Fundraising

A great equity fundraising campaign could help you bring in more capital to keep going, and to grow and achieve new milestones, while buttoning up your data and organization. 

At the same time, this strategy could help you bring in more experienced partners and board members, with great connections. This can open new doors for growing your business, as well as to sell it for even more later. 

Keep in mind that in fundraising or selling your startup, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Borrowing

Instead of giving up equity and ownership to fund your business, you could also opt to finance your business with loans and lines of credit. 

There are many sources of this non-dilutive financing today. While it will mean repayments, you don’t have to give up decision-making control. In the long term, it can prove to be far more profitable too. 

Mergers & Partnerships

There are various creative ways to merge or partner with others to grow your business more efficiently. This can be sharing resources, bundling products, new distribution channels, and more. 

By lowering your overhead, cost of goods sold, and time friction, you may be able to grow a lot faster and more profitability, without having to take in outside money and take on debt or new controlling partners. 

Acquire Other Businesses

You can flip the script here, and start acquiring other businesses instead. This could be as a part of your strategy to build up to a bigger and more profitable deal for selling your own business. Or to just grow, dominate your space, become more profitable, and be able to better defend yourself against larger competitors, and scrappy new startups. 

IPOs & SPACs

Going public is another option. It opens the door to far more capital and liquidity. Traditional IPOs may be more complex and time consuming than some acquisitions. Though you can still emerge as the CEO. Or you may leverage new SPAC deals to streamline the process of going public and tapping into public markets. 

How To Get The Most Out Of Selling Your Business

Selling your business can be a big deal, with a lot on the line. Many zeros, and your reputation and future freedom and success lies in the details. No matter what the situation is, entrepreneurs have a lot of control over the price, terms, and process. At least, if they understand it and are proactive. 

Know Your Objectives

You must be clear on your priorities in advance. What are your ultimate objectives in potentially selling your business? What is motivating you to sell? What are your top one to three must haves to make a deal worth it to you? What are your top one or two absolute dealbreakers?

Having this clarity in advance will go a long way towards streamlining everything and ensuring you get what you really want, and not ending up with a handful of regrets for the rest of your life. It will fast track all of your decision making, and make negotiations much easier. 

Shortlist Your Ideal Buyers

Great startup businesses are built on products for a specific market and customer. Trying to be everything to everyone is almost inevitably an expensive and dangerous path. 

The same applies to selling your business. Only a few buyers are going to be a good fit, and have the capacity and experience to pull off this deal. Don’t waste your time with the thousands of others. 

Beat this by starting with a shortlist of the ideal buyers of your business. 

Do your research. Check the boxes. Curate the deal for your target buyers and invest your time with them. 

Get Pro Help

You may have incredible business acumen, talent and a high IQ. You may be the best in the world at your field. You may have sold a million units of your product. Though you probably haven’t sold a dozen businesses yet. So, it just makes sense to get some pro help with this. 

There is also so much on the line. It’s not just about the price. Even though that difference can be in the billions. The terms will also negotiate what you are allowed to do, or must do for the next few years of your life. As well as what legal and financial liabilities you may have. They will limit and constrain you, or empower you to even bigger and greater things, fast. 

So, from accountants to attorneys, bankers and M&A advisors, get the best help you can. They will easily pay for themselves.

Understand The Process

This is the one area of business that the vast majority of entrepreneurs know the least about. That puts them at a distinct disadvantage going into this process. 

Learn about the process, steps, contracts and what you can expect. 

This can help you slice months off of the transaction, stay in the right headspace, and achieve the best outcome. 

Create A Powerful Pitch & Pitchbook

Your pitch and pitchbook will greatly determine the sense of urgency that buyers have to act, as well as the value they put on your business, and how much power you have in negotiating the details. 

Every slide and minute of your presentation can be worth millions, or even billions. Invest in it appropriately to get the best possible returns. 

Optimize Your Business

Of course, even with the best pitch in the world, buyers are then going to want to verify your claims and data. They need to dig into due diligence to evaluate the risks and prove the value. 

Know what metrics and details mean the most to them, and their impact. Optimize your contracts, math and operations in advance.

Summary

What do entrepreneurs need to know when selling a business? This is a big moment. One of the most impactful and pivotal in your life. Both personally and professionally. You want to know how to ace it for the best possible outcome. 

This involves getting to know the different methods for selling your business, the different deal structures that you can use, and the alternatives to selling.

You also want to have a firm grip on the process and know how you can optimize your business for the ideal end results.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.