What Affects How Easy It Will Be to Sell My Business?

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

Industry

• Industry attractiveness – The more attractive your industry, the easier it may be to sell your business.
• Acquisition activity – The more common it is for your competitors to grow through acquisition, the easier it will generally be to sell your business.

The Business

• Value drivers – The stronger your business’s value drivers, the easier it should be to sell.
• Potential deal killers – The more deal killers in your business, the more difficult it will be to sell.
• Quality of financial statements – The higher the quality of your financial statements and controls, the easier it may be to sell your business.
• Financial trends – The stronger your business’s financial trends, the easier it will be to sell.
• Strength of employees – The stronger and more cooperative your team, the easier it will be to sell.

The Seller

• Level of preparation & cooperation – The more time you invest in preparing your business for sale, the easier it will be.
• M&A advisor – The more skilled and experienced your M&A advisor, the easier it will be to sell your company.
• Cooperation of partners – The more partners you have in your business that have a say in the deal, the more problems you can run into.
• M&A team – The more experienced your M&A team is, the easier the sale will be for you.

The Process

• Marketing for buyers – The more effective the marketing strategy to sell your company, the quicker your company will likely sell.
• Terms of the LOI – The stronger and clearer the terms contained in your letter of intent, the easier the transaction will be to close within a reasonable period. 
• Time between sign & close – The longer this time period, the more challenging the process can be.

The Buyer

• Buyer’s personality & experience – The buyer’s personality, level of cooperation, motivation, expectations, and alternatives all greatly impact how easy or hard your transaction will be. 
• Type of buyer – The type of buyer you choose will also impact how easy or difficult your business will be to sell.
• Financing – How the buyer plans on financing the acquisition will have a tremendous impact on the timing and difficulty of the transaction.
• Due diligence requirements – The more thoroughly the buyer performs due diligence, the more difficult it will be to sell your business and the longer it will take.
• The buyer’s team – The presence of any challenging personalities on the buyer side can significantly slow down the pace of the deal and increase the difficulty of selling a business.

• Third Parties – The presence of any third parties that have veto or other power over the transaction can add a layer of uncertainty. 
• Proposed Deal Structure – The simpler the deal structure, the quicker and easier the transaction will tend to be. 

Action Steps

Preparation

• Maximize your value drivers and minimize deal killers
• Retain a firm to prepare a quality of earnings report

Seller

• Educate yourself on the process and set realistic expectations
• Hire an experienced M&A advisor and M&A attorney

Timing

• Sell your business when financial trends are strong

The Process

• Prepare a potential buyer list before you begin the process
• Negotiate as many terms as possible in the letter of intent
• Minimize the period between signing the LOI and the closing
• Keep the deal structure as simple as possible

The Buyer

• Vet the buyer before you accept an LOI to assess their level of cooperation
• Be mindful of the advantages and disadvantages of the type of buyer you sell to
• Probe into the buyer’s sources of financing 
• Ask the buyer for a due diligence checklist before you accept an LOI to determine how thorough they will be in due diligence
• Ask the buyer who is on their M&A team and assess how cooperative they will be

Third Parties

• Identify any third parties that can delay the process and plan ahead or mitigate where possible.

Introduction

In the long history of trade and commerce, no two businesses ever were created equal. This makes generalizations about selling one almost impossible. Still, as an owner, you’ll want to know how difficult the sale be before you invest your time.

In this article, we uncover those factors common to most business sales and lay out the primary factors that impact how easy or difficult the process will be. We also provide specific action steps you can take to simplify the process when it comes to pulling the trigger.

Industry Matters

Industry Attractiveness

One of the most important factors that impact how easy it’ll be to sell your business is how attractive your industry is perceived to be.

Tech and life sciences, for example, are viewed as highly attractive candidates for acquisition because they’re so scalable. On the other hand, many construction-related industries aren’t considered desirable because their value may be tied inextricably to the owner or uncertain long-term projects. 

Similarly, buyers are often wary of small retail businesses as rates, slowdowns, and online shopping continue to devour the high street. 

Acquisition Activity

The frequency of acquisitions in your industry and the presence of acquisitive buyers massively impact the likelihood of a sale. The more common it is for your competitors to grow through acquisition than through organic growth opportunities, the more other buyers and sellers will take note and follow their lead. 

Some industries aren’t highly desired by buyers, but acquisitions may still go on because organic growth is comparatively slow. Even if your industry is not considered particularly attractive, with a high level of acquisition activity it may be fairly easy to sell your company while your competitors languish without much growth.

Business Matters

Value Drivers

The stronger your value drivers, the easier your business will be to sell. These positive attributes are always welcome to buyers and may be difficult to replicate. 

Following is a list of common value drivers:

• Proprietary product line
• Strong customer relationships or customer list
• Proprietary processes
• Trade secrets
• Long-term, skilled workforce
• Patented products
• Strong distribution
• A strong trademarked name
• Attractive, well-maintained facility

Potential Deal Killers

The opposite of value drivers are deal killers. These are negative attributes of your business that will dissuade a buyer. Your business may depend on a handful of customers that generate a significant percentage of your revenue; it may rely heavily on a few key employees, there may be pending litigation, your cash flow cycle may be long, or you may have high staff turnover. The more potential deal killers in your business, the more difficult it will likely be to sell.

Quality of Financial Statements

A common problem in lower-middle market businesses is inaccurate financial statements. While the majority of business owners think their financial statements are strong, few can withstand the rigors of due diligence from a sophisticated buyer who spends hundreds of thousands or millions of dollars on weeding out the weak spots. 

There are hundreds of potential problems that can occur at this stage, so the better your financial statements and controls, the more confidence buyers will have in your business and the less risk they’ll perceive.

The simple solution is to retain a firm to perform QoE analysis before you go to market.

Financial Trends

Nearly all buyers place a strong emphasis on the financial trends in your business. They will examine many aspects of your finances to gauge these, including trends in revenue, cost of goods sold, gross profit, capital expenditures, net profit, EBITDA, and so on. 

The simplest way to survive the due dligene process is to hire a firm to perform QoE analysis before you go to market.

If the financial trends of your business worsen after you accept an LOI, expect the buyer to become excessively risk-averse or entirely checked out. Likewise, if your trends are declining when you put your business on the market, expect your business to be a significantly harder sell. On the flip side, it’s always much easier to sell a business with financial trends heading in the right direction.

Strength of Employees

A significant amount of value of any business is in its workforce, and buyers place great emphasis on the strength of your staff. They’ll consider the tenure of your employees, the strength and depth of your management team, how well-trained your workforce is, their current engagement levels, and dozens of other factors. 

Buyers will also try to determine how cooperative your people may be during the transition. The stronger your team and the more amenable they can be, the easier it’ll be to sell your business.

The Ideal Seller in M&A

Level of Preparation & Cooperation

A common problem discussed amongst M&A advisors is the level of preparation and cooperation by sellers. It’s common for sellers to enter the process uneducated and unprepared, expecting their professional advisors to pick up the slack.

In our experience, a transaction is made significantly easier with the help of a well-prepared, highly cooperative seller who is willing to educate themselves on the process and listen to the advice of their professional advisors.

The amount of time you invest in preparing your business for sale will pay for itself many times over when it comes to the final price. Selling a business is challenging, and the more time you invest in the early stages, the easier it will be.

M&A Advisor

Another important component of any business sale is an experienced M&A advisor and the strategy they employ to sell your company. Unfortunately, there’s a low bar to entry in M&A, and far too many enter the field without a serious commitment to the craft. 

The more skilled and experienced your M&A advisor, the easier it’ll be to sell your company. But bear in mind that your professional advisors can only do so much to mitigate problems in your business or a lack of prep. It’s, therefore, crucial that you work as a team to adequately strategize before you begin the formal sales process.

Cooperation of Partners

When partners are looking to sell their business, it’s common for one to be on board with the terms of an LOI while another is not. One partner may feel there’s too small a minimum purchase price, while another may disagree with the length of the exclusivity period.

Discord can take many forms. Take this exchange between the partners on the verge of a merger in Mad Men:

Bert: I don’t like being in the position of having to sell off my life’s work because you have an increase in overhead. 

Roger: Bert, I know you don’t think I got my hands dirty. I’m sorry I missed the Great Depression. Still, I have served this place for the last 20 years. It’s a merger. We can still come to work in our building, in our offices, only there’ll be diamonds on the doorknobs.

Cooperation among partners is critical to a smooth sale process, and far too many transactions die an early death due to such disagreements. The more partners in your business that have a say in the deal, the more potential problems you can run into.

Your M&A Team

A team of professionals with substantial M&A experience is crucial to a smooth sale. A common error among business owners is to hire a general corporate attorney with minimal M&A in their profile. M&A transactions should form a substantial percentage of your attorney’s work – the more, the better. That way, the more efficient and cost-effective they’ll be.

Be sure to choose a highly seasoned attorney – one who’s experience in M&A makes up most of their professional output.

An attorney who dedicates less than 10% of their time to M&A is unlikely to compare to one who ranks it as a primary role and remit. One who dabbles in M&A is like a weekend golfer, while the attorney who specializes is like a professional hitting birdies on a 420-yard par four.

You should surround yourself with accomplished accountants and other veterans, too. The more experienced your team, the easier the sale will be for you.

The Sales Process

Marketing for Buyers

When your M&A advisor takes your business to market, they’ll essentially launch a confidential marketing campaign. The firmer the strategy, the more it’ll drum up interest, and the quicker your company will sell. You can contribute to an effective campaign by starting a list of potential buyers well before you begin the sales process.

Terms of the Letter of Intent

Sellers commonly overlook the importance of the letter of intent. Many brush over the exclusivity clause, for example, unaware that buyers often use this as leverage to renegotiate the deal later on.

Many sellers view the LOI as unimportant because it’s non-binding, not realizing this is the last stage of the transaction in which they have leverage. The LOI sets the pace and tone for the remainder of the negotiations. Signing a weak LOI with vague terms is like letting the buyer determine exactly what hand they can start within a poker game.

Sellers often rush to sign the LOI and try to talk their advisors out of squabbling over what they perceive as minutia.

The stronger and clearer the terms of your LOI, the easier and faster the transaction will be to close, and with inclusions all the more acceptable to you. The weaker and fuzzier the terms, the harder it’ll be to sell your business in the way you want.

Proposed Deal Structure

Another ingredient of any successful transaction is the deal structure. The simpler the structure, the quicker and easier the transaction can be. The more complex or creative the structure, the more challenging the deal. The inclusion of creative devices, such as earnouts, commonly causes delays while the parties work out a solution that meets their needs. 

Negotiations over net working capital, allocation of the purchase price, and representations and warranties in the purchase agreement can all cause delays. The more moving parts to the transaction, the more challenging it’ll be to close.

Time Between Sign and Close

The period between signing the LOI and closing the deal can significantly impact the likelihood of closing successfully. The longer this period, the more that can go wrong and the more challenging the process can be.

The Ideal Buyer in M&A

Buyer’s Personality and Experience

A commonly overlooked factor that can impact the arduousness of a transaction is the buyer’s personality. Their level of cooperation, how motivated they are, how realistic their expectations, and their available alternatives to the deal can all affect how easy or hard your closing will be.

Faced with the choice between a difficult deal structure but a highly cooperative buyer or an easy deal structure with the buyer from hell, seasoned M&A players would choose the first option all day long. A difficult buyer can make every step of the process a nightmare, or they can turn minor issues into monumental obstacles that consume all your available resources.

Given the choice between a difficult deal and a difficult buyer, an experienced M&A advisor would choose the first option every time.

Unfortunately, the buyer’s personality is one of the most difficult factors to anticipate. But there is one method you can use to determine how cooperative they’ll be. The best way to learn what someone is made of is how they respond to a challenge or confrontation. Throw up a few challenges to the buyer before you accept an LOI. Feel them out with a small test or two. If they dig in their heels and blow up, this probably isn’t someone you want to spend the next four months, or several years, alongside.

Type of Buyer

Another component that affects how easy or difficult a business will be to sell is the type of buyer you decide to sell to. Here is a short description of the benefits and drawbacks of selling to each:

• Wealthy Individuals – Individuals are hit or miss and perhaps the most idiosyncratic of the group. Some individuals are easy to work with, knowledgeable about the process, and highly cooperative; while other individuals can be a nightmare to work with, may be unfamiliar with the process, and uncooperative. The biggest advantage in selling to an individual is that they tend to perform much less thorough due diligence than institutional investors.
• Family Offices – Family offices are generally easy to work with and may value the relationship more than other financial buyers due to their longer holding times. On the downside, family offices can move at their own pace if they don’t have a team dedicated to making acquisitions.
• Private Equity Firms – PE firms are more likely to obtain the financing to acquire a business, but because they may not know your industry as well, they’re more likely to perform thorough due diligence. These are professional buyers, so they tend to deal with sellers in a straightforward, no-nonsense way. They also commonly require the seller to stay for an extended transition period, which kills many deals.
• Strategic Buyers – Strategics are less predictable because their M&A experience varies considerably. But, because they know your industry well, they’re likely to perform due diligence quicker than those who don’t, although they’ll also spot any serious concerns more easily. If you’re dealing with a principal, they may become more emotional and less objective than a “professional” buyer.
• Independent Sponsors – The level of M&A experience among independent sponsors also varies. The biggest drawback to selling to an independent sponsor is they may not be able to raise the funds to complete the transaction. Otherwise, the more experienced they are, the more efficient the transaction will tend to be.
• Search Funds – Search funds may also be unable to raise the capital from their investors, and because this is likely their first acquisition, they tend to be more risk-averse than other buyers. So, they may perform more thorough due diligence than average and may propose excessive deal mechanisms designed to minimize risk.
• Competitor – The biggest downside to selling to a competitor is that you must often share confidential information, and any refusal to do so will slow down the process. If you have an adversarial relationship with this competitor, it could well spill over into the transaction and slow it down further.
• Employees – Few employees or management teams have the capital to acquire a business, and this is a considerable risk any time you sell to your employees. The biggest advantage is that they know your business inside and out, so due diligence will be minimal, and they won’t feel the need to propose excessive mechanisms in the purchase agreement to minimize their risk.

Financing

How a buyer plans on financing the acquisition will also impact how challenging the sale will be. If the buyer is paying cash, then the transaction won’t be contingent on financing at all. Unfortunately, this is quite rare. 

Most buyers obtain financing through a variety of sources, such as banks, investors, or mezzanine lenders. Professional buyers tend to have existing relationships with lenders, and the risk is lower. But this isn’t always the case. Independent sponsors raise capital on a deal-by-deal basis from their investors as opposed to PE firms who raise funds. 

Financing is particularly difficult in a down economy or when interest rates are high. If either is the case, you can expect your transaction to be challenging.

The more moving parts to an M&A transaction, the more challenging it’ll be to close.

Due Diligence Requirements

Another factor to consider is how thoroughly the buyer is likely to perform due diligence. Due diligence can be greatly extended if the buyer isn’t familiar with your industry or if they’re overly risk averse. While it may take less than a few weeks if you’re selling your business to your employees, it could take several months with a PE firm or search fund. The more thorough the buyer’s due diligence, the less certain the process for you.

The Buyer’s Team

An unfortunate unknown in many transactions is the personality of the buyer’s professional advisors or their partners. A challenging personality can throw a monkey wrench into any deal and grind it to a halt. The buyer could have an aggressive, inexperienced attorney who feels they need to “win” every minor negotiation and not concede any points.

Likewise, the buyer may have partners that swoop in at the final hour and attempt to renegotiate the terms of the transaction. The presence of any challenging personalities on the buyer side can significantly slow down the pace of the deal and make it far more laborious.

The Hard Way: Third Parties

Any third party with a veto or other power over the sale of your business can add a layer of uncertainty. Nearly every transaction has third parties involved, and these can include landlords, franchisors, professional advisors, business appraisers, lenders, or governmental agencies. 

Landlords commonly kill deals if the location of the business is critical. Many are opportunistic and take advantage of the situation by extracting concessions from the seller, or by attempting to raise the rent if the market has improved since the lease was first signed. Franchisors can act similarly and attempt to reduce the size of a territory or change the terms of a franchise agreement, therefore killing a deal. 

Professional advisors can cause complications if they lack experience, as do informal, behind-the-scenes advisors. Delays are also common with governmental agencies when the business has significant licensing requirements. The presence of any third parties always adds uncertainty to a transaction.

The Easy Way: Action Steps

In general, the following action steps can make your business easier to sell:

Preparation

• Maximize your value drivers
• Minimize the impact of any deal killers
• Retain a firm to prepare a quality of earnings report
• Build a strong staff and management team

Sellers

Sellers

• Educate yourself on the process and set realistic expectations
• Hire an experienced M&A advisor and M&A attorney
• Ensure you have the cooperation of your partners

Timing

• Sell your business when financial trends – yours and the industry’s – are strong

The Process

• Begin preparing a potential buyer list before you start the sales process
• Negotiate as many terms as possible in the letter of intent
• Minimize the time period between signing the LOI and the closing
• Attempt to keep as simple a deal structure as possible

The Buyer

• Vet the buyer before you accept an LOI to assess their level of cooperation
• Be mindful of the type of buyer you sell to, and the advantages and disadvantages of each 
• Probe the buyer’s sources of financing to determine the likelihood they can obtain capital.
• Ask the buyer for a due diligence checklist before you accept an LOI to determine how thorough they will be in due diligence.
• Ask the buyer who is on their M&A team and assess how cooperative they will be

Third Parties

• Identify any third parties that can delay the process and plan ahead or mitigate where possible. 

Conclusion

By seeing your business the way a buyer does, you can take an objective view of its attractiveness before you begin to sell. Whether it’s bulletproofing your financial statements, mitigating customer concentration, or increasing the depth of experience in your M&A team, there’s much you can do to offset the buyer’s perception of risk.

On the flip side, you may have difficult choices ahead in terms of buyer type and personality, the potential for conflict among your partners, or trends in the industry itself.

It’s time to turn that objective light on the M&A transaction.