A Basic Primer on Selling a Business: Summary - An Overview of Business Sale Processes

So what have we learned overall in this brief review of business sale processes?

This article is part of our multi-part series - A Basic Primer on Selling a Business. See the other parts of this series here.

Selling any business is a challenging information-sharing process.

  • There is typically a whole package of assets and liabilities involved…and a business is a fluid and dynamic, living thing. So much more information has to be communicated than in the sale of even a very complex single product.
  • The volume of information that has to be communicated to a buyer is always large, even for the allegedly simplest of businesses.
  • Sellers typically underestimate the magnitude of that task, because so much of it is already in their head from years of day-to-day experience in the business. We naturally under-estimate how much knowledge has been acquired over time and how long it took for that to happen.

Pre-sale planning and preparation is absolutely critical.

  • Selling a business isn’t achieved by just sharing recent financial statements.
  • To value a business, a buyer has to make financial forecasts about the future, and in order to do that they have to understand all aspects of business operations…the underlying realities that financial statements briefly summarise.
  • The details of operations are contained in contracts (which are by definition the terms of relationships with all parties involved in the business), in company policy and process documents and in internal financial and operational reporting metrics, plus in the insights (as to strategy and key resources) of the experienced management team.
  • In relation to business contracts, buyers typically want to review as many of them as possible, and for each type of contract they will be on the lookout for a long list of potential issues. A well-prepared seller knows the issues in their contracts in advance of starting the sales process…and either fixes them in advance or plans ahead to provide the right additional information to address or explain them.
  • Careful planning and preparation typically increases the quality and number of offers received when trying to sell a business: a well-planned process gives bidders access to all the documents and information they need to review, helps develop their thinking about the strengths and sources of value in the business, and builds confidence in the reliability of the sales process, the competence of the management team and thus the prospects for the business.
  • Most processes to sell a business involve 4 stages:
    • Pre-sale planning and preparation – in which the management team of the target business plans out what information needs to be communicated, how best to communicate it, and develops a timetable and plan for assembling a large volume of contracts and business documents.
    • Initial discussions and an initial offer – usually based on limited, summary information and used by sellers as a toll-gate to evaluate the bona fides and interest level of a potential buyer, before moving into the time-consuming and costly next step of the process.
    • Due diligence and a “binding” offer – in which the potential buyer is given extensive access to business contracts and documents and specially prepared management presentations take place to explain business operations and strategy.
    • Final contract negotiation and signature – in which the seller negotiates a purchase agreement that both implements the mechanics of the legal transactions required, and supplements the disclosed due diligence information with additional promises (representations and warranties) about the state of the business.
  • For the seller, “less is more” when it comes to giving representations and warranties about the state of the business. And putting effort into planning and preparation at the outset, so that a buyer is provided with the broadest range of business contracts and documents possible, helps reduce buyer requests for these kinds of additional seller promises in the contract.

Continue reading our multi-part series:
A Basic Primer on Selling A Business