How to sell your business is a question that has crossed the minds of most entrepreneurs and business owners. When people find out that I exited my previous company, Vodien, for $30 million, they would invariably ask me about how to sell their business. When we were running Vodien, one of the things that we wanted to do was to keep financial transactions above board and to have everything equitable and fair. As such, Vodien was designed very efficiently as a proper business, which made a company acquisition very straightforward. In fact, when we had decided to go ahead with our exit, the entire process from due diligence to completion took less than 2 months.
Unless you’re a hot startup, you’ll find that nobody is going to eagerly chase you down with a premium offer. Instead, you’ll find that you’ll need to design your company to be as attractive as possible to your potential buyers, and on top of that, you’ll need to be the one reaching out and building relationships with your potential buyers.
How To Sell Your Business By Preparing For An Exit
One of the things that founders have a common misconception of is that a buyer is going to come to you, agree on a price, take your whole company, and you can leave for St. Tropez on the next flight out.
Unfortunately, that’s never going to happen. Buyers are human, and buying a business is like any other purchase that we make in our lives. When we buy an iPhone, we expect it to work right out of the box. We don’t want to have to call up the factory to ask where the screen is or be happy with only being able to make phone calls successfully 75% of the time. That’s just like what happens when someone buys a business – it should run smoothly even after the acquisition.
The first thing that business owners need to do when preparing their businesses for an exit is to clean up their businesses and ensure that they are spotless. That means that there are no convenient cash loans to the owners, purchases of forged rims for the owner’s BMW, nor unjustified “entertainment” expenses at fancy restaurants.
While growing and scaling up your business in the initial years of your business, you will not be thinking of an exit or how to sell your business. However, when your business is of a certain size, it’s prudent to start looking ahead with a 1-2 year window. If you expect to exit in that window, then you should seriously start considering expenses and investments that you’ll be making. For example, expanding your office, or hiring wantonly, or increasing advertising and marketing spend. These costs affect your burn rate and consequently your EBITDA, which is used when determining your acquisition value.
The Two Different Types of Business Buyers
When figuring out how to sell your business to someone, the good news is that there are generally only two different types of buyers: financial, and strategic. The financial buyers are typically your private equity firms, funds, or anyone who’s looking at your financial performance much more than anything else.
The strategic buyers are much more interesting because they would be the ones who value your company for much more than it’s merely financially worth. The following are just some examples of what can be of strategic value:
- Intellectual property: patents, trademarks, copyrights
- Domain expertise: technology/manufacturing know-how
- Human resource: specific skillsets and experience in your team
- Geography: presence/leadership in certain regions
I find that strategic buyers are the ones who would value your company higher, especially on assets that might not necessarily translate into direct financial value. As such, I highly recommend focusing on an exit to a strategic buyer if you’re able to.
Identify Potential Buyers For Your Business
To find a strategic buyer, it was a process that took us many months. Firstly, we had to identify who could be potential strategic buyers. I found that strategic buyers typically fell into 3 categories.
Direct competitors: These are the most straightforward. You’ll be looking at the companies who are your direct competitors, but bigger. These could be companies in your country who’d gain market share after acquiring you, or companies in other countries that might be interested in expanding into yours. When I was running Vodien, we had many discussions with other hosting companies from not just within Singapore, but from all over the world. Any one of these companies would immediately see strategic value in acquiring us.
Complementary business types: These are businesses that aren’t selling the products and services that you’re selling, but are serving the same market. With a strategic acquisition, these buyers can expand their value chain horizontally with your business. In the example of web hosting, it could be web design companies, because anyone who designs and builds a website will need web hosting.
New business divisions: These are businesses who are in a slightly different industry or segment but can still get value from acquiring you. Vodien was a web hosting company which served 40,000 SMEs or SMBs. This was a target market for many businesses — some examples would be corporate secretarial firms, Internet service providers and telcos, and SaaS businesses targeting small businesses (payroll SaaS, accounting SaaS, and so on).
Develop a Dossier Of Potential Buyers
If you haven’t realised by now, everything that you do in business should be systemised. This process of identifying and connecting with potential buyers should be systemised too. I recommend creating a spreadsheet with all the companies that you’ve identified, and put in all the information that you find on them. This includes points of contact, projects that they’re working on, news that they’ve announced, and so on.
A good way to keep track of what everyone is up to is to use services such as Google Alerts or LinkedIn. You’ll want to be alerted whenever your potential buyer is mentioned in the news or tagged in a post. When you get alerted, you can either send a congratulatory message or a message about something related that your company can provide value on. This keeps you on top of mind in your potential buyers and ensures that they don’t forget you.
Build Relationships With Your Potential Buyers
Fun Question Of the Day: how to sell your business to someone? Well, we very quickly realised that no one was approaching us and that we had to start building up relationships with potential buyers. Unless you are the market leader, or your buyers are specifically looking for a company of your profile, you shouldn’t assume that buyers will approach you. Instead, you’ll need to be the ones who build up relationships with your potential buyers.
This step isn’t as difficult as you think. You already have a list of companies that you have identified as potential buyers. Now you’ll need to contact them. CEOs of smaller companies are more accessible. CEOs of larger companies typically aren’t very accessible, and you might have to approach one of their lieutenants. You’ll need to pass through several gatekeepers, but it’s not impossible.
It’s also not very productive to think that the first meeting with a company will be a fruitful discussion about them acquiring you. A much better approach is to have them realise the value that your business has. The best way to demonstrate this is to actually work with the company together on a partnership or joint venture. That’s also a great way to get into a company; once someone in the company knows you, it’s so much easier to get an introduction to someone else you might want to connect with.
How To Sell Your Business
At the end of the day, learning how to sell your business is an art form. Since exiting your company is a transaction, both the buyer and seller are looking at gaining something. When you can find and position yourself to be something that your buyer absolutely must get, you’ll be having the upper hand. The thing that you can do to boost your chances of an exit and your company’s valuation is to increase the pool of interested buyers.
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