35 Steps in Selling a Business – Stage 2 of 4: Searching
8 Steps in the 2nd Stage of Selling a Business
Whether you are trying to sell your business by yourself, or you hire a professional to guide you through the process, there are four major stages of selling a business: Planning, Searching, Deal Making, and Closing. I will provide some explanation for each of the detailed steps in these four stages in a series of four discussions. Here are the steps in the 2nd stage – The Search:
Implement Buyer Search Plan: Depending on the size and type of business, the plan to find buyers requires targeting to either financial buyers, strategic buyers, and/or life-style buyers. Financial Buyers are typically “corporate refugees” – business executives who have learned many business skills while working in the corporate world, and want to use these skills to operate a scalable business of their own. Strategic Buyers are typically private equity groups looking to acquire platform investments and tuck-in acquisitions to grow for a future sale, and companies who want to accelerate their growth with acquisitions; and Life-Style Buyers are typically well-healed retired individuals who what to own a business to operate as a hobby, and have no long-term business plan. Life-style buyers are a tiny sub-section of buyers, and they typically look to purchase businesses valued under $1 million.
Contact via Internet, email, and letters: In order to sell most businesses in the lower-middle market, it requires confidentially showing the opportunity to all the potential buyers identified in the search plan. This takes a lot of hours and work – using all the communication techniques available today. This includes contacting potential buyers via: Internet – the major business4sale websites and social media [primarily LinkedIn]; email – targeted, customized, personalized messages; and letters – targeted, customized, personalized letters – which stand out due to their rarity. And, after attempting all those techniques, phone calls with references to previous attempts can take much time, but does produce results – if done at the right time in the right manner.
Maintain Seller Confidentiality: One of the most key reasons that most business owners use a business broker to sell their company is the broker’s ability to maintain confidentiality. When a buyer wants to learn more about the business [e.g. description, location, financial statements, history, management, competitors, etc.], then the business broker obtains a signed non-disclosure agreement (NDA) from the buyer. This NDA clearly describes confidential information and the buyer’s responsibilities to maintain its confidentiality. It is close to impossible for a business owner to maintain confidentiality about the identity of the business without jumping through considerable logistic hoops. The business broker provides potential buyers with an executive summary [aka “teaser”], which describes the business in generic terms, but does not provide any information that would identify the seller.
Qualify Buyers: Not all buyers are created equally. For deals involving outside financing, the bank will examine the buyer’s ability to operate the business and his/her ability to bring sufficient cash to the closing table as a down payment. And, a good business broker will also assess these abilities. There’s no reason to waste anybody’s time, and reveal confidential information about the seller’s business if the buyer is not a good prospect to close the deal. And sellers who provide any amount of financing also want to be comfortable in the buyer’s ability to successfully operate the business.
Present Executive Summary: The executive summary is provided to prospective buyers through many avenues: internet sites showing businesses for sale, business social-media sites, business broker’s website, email, phone, and direct mail outreach. Once a prospective buyer responds to any of these outreach methods, the Executive Summary is presented. If the opaque picture of this opportunity is attractive to the potential buyer, he/she will provide information which would entitle the buyer to receive more specific information about the business.
Obtain Buyer Financial Information: While many buyers are reluctant to provide confidential financial information about themselves, the experienced buyers understand the protocol of the M&A process. An experienced broker doesn’t expect/require detailed financial statements signed by a CPA or a banker, but he does expect the prospective buyer to provide a document, signed by him/her, which purports to show that the buyer has the financial ability to close the transaction [i.e. has enough cash on hand for the down payment]. Some, unsophisticated /unscrupulous buyers will say they can raise the money if they like the deal, but that’s no substitute for having the cash on hand. While it’s easy for investors to say “they’ll lend the money if the opportunity looks good”, but it’s another thing altogether to actually receive that check. And, while the buyer is trying to convince the investor of the value of this opportunity, the business owner is just wasting time waiting. Unless the broker receives a satisfactory proof of required cash on hand, the buyer will not receive any more information about the deal.
Obtain Buyer NDA and Profile: Once the prospective buyer has provided acceptable financial information and signed a non-disclosure /confidentiality agreement (NDA) and buyer profile, then he/she has earned the privilege of seeing the detailed confidential “Offering Memorandum”. The signed NDA provides the broker/seller comfort that the buyer understands the (i) nature of confidential information for this business transaction; (ii) what other people are bound by this agreement; and (iii) the ramifications of violating the agreement. And, the buyer profile is a “resume” the broker/seller uses to make a preliminary assessment of the ability of the buyer to successfully operate the business once he’s made the purchase.
Present Offering Memorandum: Once the broker has become comfortable that the buyer has the financial ability to purchase the business, has the operating experience to run the business, and has agreed to an acceptable non-disclosure / confidentiality agreement, then the buyer is permitted to receive the Offering Memorandum (OM). There are times, however, when a prospective buyer is unreasonable, arrogant, and/or unpleasant while dealing with the business broker. When that happens, and the broker believes this buyer will either never close the deal or be an unpleasant “partner” with the seller, the broker may refuse to present the OM to this buyer. After all, the OM is a compilation of confidential information about the seller’s company, and the broker’s assessment of the prospective buyer’s character can often protect the seller.
To see each of the other three stages, click:
Planning – the first 9 Steps
Deal Making – the next 10 Steps after Searching
Closing – the last 8 steps
If you’re interested in receiving a one-page PDF summary of all 35 steps in the 4 stages of selling a business, email Tom MacPherson and paste “Sequence of Steps in Selling a Business” in the Subject line.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.