In previous blogs, I’ve discussed how you can prepare to leave a business you’ve built using various exit strategies and preparation methods, such as appointing a corporate finance advisory; stabilising finances over a period of five years; and setting personal objectives for the future. Continuing this theme, then, I want to get down to brass tacks regarding the actual sale preparation by focusing on three key themes: selling the future, balancing negotiations, and knowing your buyer. Hopefully, this help to build up a better picture of what needs to be done by the seller in the ‘legal’ stages of selling a business.
Sell the future, not just the past
You might have heard that when selling your business, it’s important to provide a detailed five year financial history (including audited financial statements) to potential buyers. This isn’t wrong, and a lot of preparation activities take place in light of this; you must stabilise profitability over five years, you should hire a corporate finance advisory with the final sale, etc. It may feel slightly underwhelming, as if you are only building the company for its retrospective value at the point of sale.
However, you aren’t just selling the past. Buyers see businesses as valuable because of what their pasts signify about their potential futures. It might feel demoralising to be building a stronger company for different future owners, but, actually, you will reap the benefits as well, because a bright future is obviously much more marketable.
That’s why, alongside a detailed financial history, it’s vital to establish a two to three year sales forecast for your company. Gilmore Lewis suggests the most accurate forecasts utilise an array of data from multiple sources, not just data from a financial history. These sources frequently include: the business’ current sales pipeline; its historic run rate; its field forecast; and sales management discretion. The aim is to build up as accurate a forecast as possible based on past data in order to establish a marketable future for the company. That’s why he suggests:
“Accuracy of forecasts can be measured by providing actual results side by side with previous time period forecasts. This can provide a level of visibility into the accuracy of the forecast as well as the individual contributors.” For more information on developing accurate forecasts, read Gilmore Lewis’ excellent article How to Develop an Effective Sales Forecast.
So, to return to preparing the business for sale, it’s good practice to develop regular quarterly or annual forecasts for the business, and this is hopefully something your company has already been doing. This allows you to judge the accuracy of past forecasts by comparing them with the actual financial history of outcomes. Now, fast-forward to the sale itself. This information will ultimately strengthen your negotiating position, as you are now able to present not just a financial history and a forecast for the future, but also evidence to verify just how accurate your forecasting methodology is. Working with the future in mind in your medium-term sales prep will therefore make your short term preparation much easier – in fact, stronger.
This brings us to the issue of negotiation, as forecasts and financial histories are ultimately what will support your negotiating position with any potential buyers. Negotiating tactics are frequently presented in popular media as almost back-handed or otherwise ‘hard and fast’ ‘moves’ aimed at more or less manipulating the other party into accepting your position.
However, I want to dispel this myth, as negotiating is rarely this simple – plus, sticking to such methods can seriously damage not only your professional relationship with a potential buyer, but your negotiating position itself. For example, saying something is “non-negotiable” is more likely to scare a buyer off than convince them of your terms. The end goal of a negotiation is, ultimately, to maximise outcomes for both parties involved. Although a negotiation may only confront you from one angle, the other party is seeking to benefit from buying the business just as much as you are seeking to benefit from its sale. Therefore, a little empathy with the other’s position (their angles, goals, and value) can go a long way. You want to aim for a deal that will benefit the other party as well as your own – a negotiation should not be seen as adversarial.
This raises two important issues that you should focus on in the early stages of integrative negotiation.
First, you need to have a clear position on what your objectives are within the sale. This will includes personal profit or recompense of some kind, but also things like the speed of transition between owners (eg for the benefit of employees and managers who will stay on afterwards) and various legal or contractual terms. It is especially your terms – rather than price – which can come to make or break a negotiation. It is here that you firmly establish a reservation point, or limits of your party’s terms beyond which you will not go. Between your reservation point and theirs lies the space in which negotiation and bargaining takes place.
You can think of your reservation point as your “walk-away” point – the stage at which you know a buyer will not meet your terms or needs. This isn’t something you want to use as a ‘threat’, but you need to demonstrate that you are prepared to walk away if necessary. From here, you can properly negotiate and deploy tactics such as ‘expanding the pie’ – giving away small losses that the other party will receive as a boon, in order to make your terms more appealing to theirs (read more on the MIT site about these terms here).
Second, as we’ve already discussed, you need to provide any potential buyer with complete and transparent information about:
- what it is you seek to gain from the sale, and
- the specifics of the business’ financial history, statements, and projections
Knowing your buyer
The flipside of this is knowing your buyer. You should establish profiles of their histories and angles (whether the buyers are a group or individual); you want to try and build up as clear a picture of the other party as possible in order to understand their terms and where they will (or won’t) accommodate yours. This puts you on stronger ground when laying down your terms and negotiating the details.
Although the negotiation process can be hard, it should take place within a collaborative environment to include both your own team as well as the potential buying party. It’s worth considering adding an intermediary or business broker to your team, which might already include a corporate finance advisor and a legal team. Their role is to support you by facilitating the sale; by helping to build your selling package; and by maintaining a well-researched awareness of potential buyers. They can also help with the legal aspect of negotiations, having the ability to draw up confidentiality agreements and being involved in due diligence.
By preparing your business for sale in a way that is transparent, collaborative, and forward-looking, you will already be well on the way to getting the best deal possible out of a future sale. Although an intermediary can help a smooth business sale in myriad ways, it is ultimately down to you as the head of the business to pull the whole thing off.