Buying and selling businesses is a hugely important engine of productivity improvement and economic growth. There are millions of businesses in the world and business owners are continually making strategic decisions about whether to expand (in existing or new activities), exit certain lines of business, combine with other businesses to exploit possible synergies or perhaps to downsize operations or sell a business entirely. Whether a small family business with a handful of employees, or a large multinational organisation with thousands of workers, the basic steps of the process to sell a business are broadly the same—and so are the lessons about what to focus on in order to achieve success.
The purpose of this primer is to provide a short and simple summary of how the process of selling a business works, while also highlighting some of those lessons. It is written as a basic primer for readers who are not so-called M&A (“mergers and acquisition”) professionals. There are all kinds of specialist books and articles written by experts on different aspects of this general subject area: finance books about business valuation, accounting books about financial statement analysis, legal books about business sale contracts and articles galore. Most of these materials are written for an audience of professionals who work full-time in M&A. But, funnily enough, most people in the world are not M&A professionals! And most business owners considering selling a business are experienced business managers who know their business and industry very well, but are not familiar with the typical process of selling a business. This paper aims to provide a simple outline to that very important audience, because it seems that there are relatively few such simple primers available today.
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 a business is much more time-consuming than selling an object, because there are many elements…and because businesses are inherently dynamic and fluid
When we start to consider the world of buying and selling businesses, there is a seemingly simple but very important realisation that is fundamental: unlike physical products (objects), businesses are fluid and dynamic. In the world of buying and selling physical products (or services) in our personal lives, we can pretty easily think of the increasing degrees of complexity (and information flow) required as we consider the difference between selling simpler or more complex products. At the simpler end of the spectrum, we can think about how the market works for selling an apple at a farmer’s market: the seller sets a price and communicates it publicly (on a price sign) and the buyer can pretty easily assess the quality of the product (by picking up and inspecting the apple). Further up the range of product complexity, we can think of an example like buying a used car: there are many quality and performance factors to consider (things like age, mileage, remaining useful lifetime, fuel consumption, service history, model reliability and future maintenance and repair costs). This means a buyer typically has to find ways to get more information than what’s involved in buying an apple at the market (probably through online research and quite detailed discussions with the seller). The common purchase at some time or other for most of us that is even further up the spectrum in product complexity is buying a house or an apartment. In this case there are all kinds of elements to consider (structure, plumbing, electrical system, heat and hot water systems, appliances, neighbourhood, amenities, transport links, development or renovation potential)…and thus even more information that a buyer wants to obtain and consider.
If we compare this to buying a business, it shouldn’t be too hard to see that the complexity (and need for information flow to a buyer) takes a big quantum leap from even the most complex of product sale transactions. First of all, even a very small business may contain multiple specific elements that need to be assessed (premises, employees, inventory, equipment, permits, maybe vehicles too). So there is an increase in complexity because on one level buying a business is a transaction to acquire a whole package of things. It’s usually not just one apple, car or house! But secondly, and even more importantly, the complexity and need for information flow to a buyer goes up even more so because a business sale is qualitatively different than selling a product. We aren’t just selling a package of static objects and products to a buyer, we’re trying to sell an organisation of people with a complex web of relationships with customers, suppliers and other business partners. What we use one word to describe (a “business”) is in fact a package of things, obligations, people and relationships that is fluid and continually changing. A business is a living thing in which managers are continually reacting to events, making decisions and moving forward. You don’t need to be a genius to realise that the flow of information that has to happen for a buyer to understand the important assets, operations and relationships of a business is actually pretty big, even for the smallest and allegedly simplest business.
Even a small and “simple” business is a complex web of relationships, each with its own history and dynamics.
A buyer will need to review them (eg key employees, suppliers, customers, facilities, finance providers) to make sure that a change in ownership won’t bring unexpected changes to these commercial relationships and to understand how and when they may change in future.
And, more fundamentally, a buyer will need to review them simply in order to properly understand the business’ operations, strategy and prospects. (This applies even in situations in which the buyer is already a player in the industry of the business being sold.) Matters like:
- Where is the value created? Are there key customers or distributors whose departure would torpedo the business? Are their key suppliers with possible excessive influence on supply costs?
- How does this business fit into its industry? Does it have a clear strategy?
- What are the industry dynamics? What are competitors doing? Is today’s strategy viable for the future?
Buyers need to digest a large amount of information about a business
So even in the sale of the smallest business (eg 1 to 10 employees) there is invariably a large amount of information that has to be digested by a buyer in order to understand how the business works and then how to value it.
Sellers invariably think that their business is simple and can be explained in no time to a prospective buyer. While an overview of key strengths, risks and commercial drivers can be briefly summarised, sellers always radically underestimate the amount of already-acquired knowledge they have about their business (typically the result of years of working every day on it). “This business is simple”, you frequently hear a seller say, “Anyone can understand it.” In fact, it is only simple and easy to understand to the seller because they have usually been part of it for years, absorbing knowledge and experience continuously!
The reality is that for even a small business, there is a very large amount of historically-acquired information about the business that has to be communicated to the buyer. And this takes a lot of time and effort. Of course, a potential buyer does not benefit from a total “brain dump” of every single fact there is to know about a business. Instead, the process of selling a business is about “setting out a stall” of key information that a buyer needs in order to understand how it works today…and how it will evolve in future.
It is primarily achieved by providing relevant documents (especially contracts), and supplementing those with management presentations or discussions to explain the bigger picture, including overall business strategy and what relationships or resources management attaches particular importance to.
Selling a business is fundamentally about efficiently managing the progressive communication of large amounts of information to a prospective buyer.
Buyers will want to get an overview of recent business performance and current strategy. On business performance, that means digging into the financial statements to understand and assess the business’ key accounting policies. On strategy, that means hearing management explain industry dynamics, what the current strategy is and its rationale.
Buyers will want to understand key supplier and customer relationships, as well as those with other important third parties (for example, landlords or finance providers).
Buyers need to understand the quality and experience of management and the state of relationships with employees.
Buyers have to look carefully at the state of current key assets and the nature of any significant liabilities, which can extend to considering things like possible exposure to environmental liabilities or product liabilities.
Buyers need to synthesize all this information and then use it to analyse the business’ accounting methods and financial statements, in order to build up their proposal for a fair valuation.
Most of this information is about commercial relationships…and the formal state of commercial relationships is typically set out in a legal contract: Employment contracts, supplier contracts, customer contracts, real estate leases, equipment leases, bank loan documents, rights of ownership to business names, trademarks, patents (in technology) or copyright (in software).
So, invariably, selling a business means giving a buyer access to all kinds of contracts and legal documents, as well as financial statements, internal budgeting and management accounts, product information and many other kinds of non-legal documents.
The importance of preparation in selling a business
Accordingly, probably the most important lesson in successfully selling a business can be summarised in one word: preparation. A seller has to put him or herself in the position of a potential buyer, and think through all the important aspects of business operations that the buyer will want to understand. Then the seller needs to think carefully about the best ways to communicate that information. A huge amount of it is done by making available contracts and other documents that explain operations, and that gets supplemented by specially prepared presentations, discussion and Q&A. All of that needs to be carefully thought out, and to some extent choreographed.
Unfortunately, when it comes time to potentially sell a business, typically the temptation is to do exactly the opposite: anxiousness to capitalise on what may be seen as a transient window of opportunity frequently leads business owners to rush to market with a sales process, without having thought everything through and prepared properly. And one might say, so what…if it all works out in the end, what does it matter if your process and information flow were a little “seat-of-the-pants”? The answer is that selling a business is about creating understanding of the present operations and confidence in the future—and there is no better way to undermine those two objectives than to present information in an incomplete, erratic or disorganised way. The positive side of that equation is that a properly prepared sales process (that by definition addresses key buyer concerns clearly and directly) results in a) more potential buyers actually making offers (and arguably at higher, more confident valuations), and thus b) a higher sale price (from a more competitive bidding situation).
When I worked in Business Development at GE, we continuously examined hundreds of potential acquisitions annually, while also reviewing our own lines of business and selling businesses that were no longer strategic. It was a global team, spanning all kinds of industries and businesses, and my colleagues were very thoughtful people with years of experience in buying and selling businesses. And when it came to selling a business, we had one key mantra: start slow…to finish fast. Our experience had shown us that rushing headlong to sell a business typically resulted in a longer timeline to get the deal done (because insufficiently planned information flow made the whole process of bidder education slower and longer) and usually a lower success rate (actually getting a business sold), whereas considered preparation would make sales processes actually faster overall, and usually more successful.
Continue reading our multi-part series:
A Basic Primer on Selling A Business
- Part 1 - Why selling any business is a challenging information-sharing process
- Part 2 - Case studies in selling a business as an information-sharing process
- Part 3 - The role of financial statements and the misguided view that they are all that matters
- Part 4 - What are the key stages in the process of selling a business
- Part 5 - How do people value a business?
- Part 6 - What kinds of information will buyers of a business want to see?
- Part 7 - How to handle the “bad news” about a business being sold
- Part 8 - What legal issues will buyers usually be concerned about when reviewing contracts?
- Part 9 - Summary: An Overview of Business Sale Processes