How Involved Will I Be in Selling My Business?

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

The Process

1. Preparing Far In Advance – This step involves preparing your business for sale before you formally begin the sales process. The amount of time this takes depends on how many steps you need to take to prepare. This isn’t time-bound so it’s a low-stress stage for most sellers.
2. Preparing Before Going to Market – This step involves the preparation of key sale documents before going to market, which is primarily handled by your M&A advisor. You will be tasked with answering questionnaires, compiling documents, and reviewing drafts. This usually takes one to two months and is a low-stress step for most sellers.
3. Marketing Your Business for Sale – This step involves marketing your business to buyers, meeting buyers (virtually), answering their questions, and responding to requests for additional information. You will become involved once your advisor has located a buyer who has expressed an interest in your business. The time commitment varies based on how many interested buyers are generated. This is a low-stress stage for most sellers, although the stress levels now begin to rise.
4. Managing the Sale Process … Managing Each Step in the Sale … – This step begins when you receive a letter of intent (LOI) and ends at closing. This is a highly involved, very stressful process for most sellers. The pace should be as quick as possible because time kills deals. The more prepared you are, the quicker and less stressful this stage will be.
5. Handling the Transition – The transition process begins on the day of closing and may last several months to several years. Your time commitment varies based on what the buyer proposes in the LOI.

Action Steps

• Hire an experienced M&A advisor to prepare an exit strategy. This should contain a prioritized list of steps you can take to prepare your business for sale. The more prepared you are, the fewer problems buyers will discover during due diligence, and the less stressful the process should be.
• Prepare a buyer list in advance of the sale.
• Prepare for due diligence in advance by retaining a firm to prepare a quality of earnings (QoE) report.
• Have a plan for maintaining your emotional stability, which is key to avoiding deal fatigue.
• Compile information that buyers will request in advance and upload it to a data room.
• Retain an attorney to be on standby so they’re prepared the moment you receive an LOI. Rely on your attorney to negotiate the purchase agreement.
• Respond to information requests as quickly as possible to send the message to buyers that you’re serious about the sale.

Introduction

A critical question you should consider is how involved you must be in each stage of the process of selling your business. While this isn’t a question we commonly receive from sellers, it should be. There are moments in the transaction in which you must be closely involved and others when it’s better to take a back seat.

In this article, we’ll walk you through each step of the sale process, your role in each, and how stressful each step may be. We also outline specific actions you can take to streamline the process, minimize uncertainty, and reduce any associated anxiety.

The M&A Sales Process

We can break down the sales process as follows:

1. Preparation Before Selling – This involves any preparatory work you do before you actively begin to sell your business.
2. Preparation Before Going to Market – Here we prepare the key sale documents before going to market, such as an information memorandum (CIM) and teaser profile.
3. Marketing Your Business for Sale – This step involves confidentially marketing your business for sale and having discussions with buyers before you accept a letter of intent (LOI).
4. Letter of Intent to Closing – This step begins when you receive an LOI and ends at closing.
5. The Transition – The transition process begins the day of closing and may last several months, or in some cases, several years.

1. Preparation Before Selling Your Business

Overview

This step involves preparing your business for sale before you formally begin the sales process.

Time frame

The amount of time it takes to prepare your business for sale will greatly depend on how organized it currently is. The more steps you must take, the more time you will spend. Some businesses need minimal preparation, while others need years. This step isn’t time-bound, so you can proceed at your own, measured pace.

Stress level

Because this step isn’t time-bound, the stress associated is low for most entrepreneurs. But it may become stressful if this step requires making dramatic changes to your business, such as building a management team.

Tips

The easiest way to simplify this process is to hire an experienced M&A advisor to prepare your exit strategy. The strategy should contain a prioritized list of steps you can take to prepare your business for sale. The key word is prioritized. There are an endless number of steps a business owner can take to prepare, but the reality is that certain actions will have significantly more impact than others, and prioritizing will save you significant time.

2. Preparation Before Going to Market

Overview

This step involves certain preparatory work before you’re ready for the marketplace, such as preparing an information memorandum (CIM), teaser profile, normalized financials, buyer list, and valuation. Most of this work is performed by your M&A advisor, although you’ll be tasked with answering questionnaires, compiling documents, and reviewing drafts.

Time frame

This step usually takes one to two months. While most of the work is performed by your M&A advisor, your primary role in this step will be gathering the documents and reviewing the drafts your advisor prepares. Delays are commonly caused at this stage by sellers being slow to respond to requests for information.

Stress level

This is a low-stress step for most business owners.

Tips

The more prep work you do before formally beginning the sales process, the quicker this stage will generally unfold. One common delay is putting together the buyer list, which can be resolved by preparing it well in advance of the sale.

3. Marketing Your Business for Sale

Overview

This step involves confidentially marketing your business to potential buyers, meeting buyers (virtually), answering their questions, and responding to requests for additional information. Your M&A advisor will confidentially reach out to buyers, screen them, request that they sign a non-disclosure agreement (NDA), and then release information to those buyers in phases. You’ll become involved once your advisor has located a buyer who has expressed an interest in your business.

Time frame

This step is somewhat involved for you, although the degree and pace of your involvement depends on how much traction we receive during our initial marketing campaigns. 

If the response is slow, we may have anywhere from zero to two buyer meetings per month. If the response is good, we may have multiple meetings per week. Some buyers only request one meeting, while a sizeable portion of buyers request two. Few buyers request more than two meetings.

Your M&A advisor will reach out to buyers and screen them. You’ll become involved once a buyer expresses an interest in your business.

As well as time spent meeting with buyers, you may also receive requests for additional information, such as updated financial statements, a list of customer concentration (with customer names redacted), and a breakdown of revenue by a variety of metrics (product, geography, etc.). It’s critical that you quickly respond to these requests, to send buyers the message that you’re serious and cooperative. No buyer wants to deal with a seller who they perceive may procrastinate and slow things down.

In many cases, the documents buyers request can be anticipated, so we can prepare these documents in advance and upload them to a data room. In other cases, document requests may be more difficult to anticipate and may depend on their specific concerns.

Stress level

This is also a low-stress step for most sellers, although stress levels may begin to rise slightly as sellers begin to understand what may be required of them during due diligence, or the perceived urgency of buyers’ requests for additional information.

Tips  

• Compile information that buyers will likely request in advance.
• Retain an attorney to be on standby so they’re ready the moment you receive an LOI.
• Avoid booking any long vacations during this process. You may lose a buyer if you respond slowly.
• Respond to information requests as quickly as possible, to send the message to the buyer that you’re serious about selling.

4. Letter of Intent to Closing

Overview

This step involves negotiating the letter of intent, managing the due diligence process, negotiating the purchase agreement, and orchestrating the closing.

Time frame

You will be intimately involved in this step. Your role is as follows:

• Letter of Intent – You will be closely involved in negotiating the letter of intent.
• Due Diligence – You will be closely involved in the due diligence process.
• Purchase Agreement – You will be closely involved in negotiating the purchase agreement, although you can delegate most of the negotiations to your attorney.
• Closing – You will also be closely involved in orchestrating dozens of other tasks necessary to consummate the closing.

Time kills all deals, so the pace of this step should be as brisk as possible. Because most sellers are unprepared, most deals take much more time than is necessary, and more goes wrong than needs to.

Stress level

This is ordinarily a very stressful process for most sellers for the following reasons:

Letter of Intent

• Many sellers don’t have an attorney on standby to negotiate the LOI. Many sellers delay while they scramble to hire an attorney.
• Some sellers hire an inexperienced attorney.
• Many sellers don’t understand the important terms of the LOI, such as exclusivity, net working capital, etc., and the role they play in the sale process. Many strive to sign the LOI as quickly as possible, which throws all their negotiating leverage out the window.
• Many sellers don’t understand the principles of negotiating the LOI, get swept up in emotions, and end up focusing on the wrong elements of the transaction.

Due Diligence

• Many sellers don’t prepare for due diligence. As a result, due diligence becomes a stressful process for them, and the buyer discovers numerous issues with the business that they’ll use to extract last-minute price concessions from the seller.
• Many sellers take personal offense to the buyer’s due diligence list. They feel like the buyer is attacking them and doubting the quality of their business. They fail to understand the role of due diligence and how thoroughly most buyers conduct it.

Purchase Agreement

• Many sellers fail to rely on the advice of an experienced attorney and become emotionally involved in the negotiations.

Closing

• At this point, many sellers are overcome by deal fatigue and lose focus on many other elements that need to be coordinated to orchestrate the closing.

Tips

• Prepare your business for sale to reduce the number of problems the buyer will discover during due diligence.
• Prepare for due diligence in advance by retaining a firm to prepare a QoE report and by uploading the documents most buyers will request to a virtual data room.
• Have a plan for maintaining your emotional stability, which is key to avoiding deal fatigue.
• Hire an experienced M&A attorney and have them on standby to negotiate the LOI the moment you receive one. Rely on them to negotiate the purchase agreement on your behalf.

5. The M&A Transition Period

Overview

This step involves assisting the buyer in transitioning the business to their possession.

Time frame

Transition will be a very time-involved step for you, although the level of your involvement will depend on the following factors:

• Buyer’s Experience – The more experienced the buyer is in your industry, the less involved you may need to be in the transition.
• Your Management Team – The stronger your management team, the more you can delegate and the less involved you may need to be.
• Your Role in the Business – The more essential you are to your business, the more involved you will likely be in the transition period.
• The Purchase Agreement – Your level of involvement will also depend on what you negotiated with the buyer in the purchase agreement. If the buyer negotiated a two-year employment agreement with you, then you’ll be closely involved. If they only negotiated a two-week transition period, then you’ll be less involved.
• Level of Preparation – The more prepared and organized your business, the less involved you’ll need to be, as streamlined processes are simpler to transition.

Stress level

The amount of stress during this period varies greatly, although it’s usually a low-stress time for most sellers. Typically they’re relieved that they sold their business and the cash is in their bank. Stress can be high if there are personality conflicts with the buyer or if you run into hiccups during the transition process. Otherwise, these days are low to medium-stress for most (former) owners.

Tips

Prepare, prepare, prepare. The more ready you and your business are, the easier the transition period will be.

Summary of the Steps

Conclusion

There are many steps to securing your buyer, and you’ll need to be on hand with insight and information at short notice. The trick is to know when you’re essential to the process, and when it’s better to switch focus to the business itself. 

A buyer wants to know they’re in safe hands. Whether they’re preparing a letter of intent, pursuing due diligence, or assessing your potential for involvement post-sale, they’ll be impressed by the order of your M&A team and the delegation you’ve allowed. 

By knowing your responsibilities at each step, you can maximize your impact on a favorable sale, and sit back when it’s time for others to finesse the details and push things forward.