Someone wants to sell your business… Watt was that?

Are you a successful entrepreneur? Then sooner or later, someone will ask you if you want to sell your business. I still clearly remember the first time this happened to me. Like many of my customers, I was flattered. And the question got me thinking. What do you need to be aware of when answering this question? In practice, a lot of entrepreneurs struggle with this. That is perfectly understandable.

Text: René de Jong, Owner in 1982

Unfortunately, things often go awry when someone responds blindly to this request. In most cases, the prospective buyers are seasoned pros. They know exactly how to manoeuvre themselves into a favourable position, ensuring that you will not be able to sell your company under the most ideal conditions. In another scenario, the deal could also fall through. That not only means that you have lost a lot of valuable time, but that you have also shared a great deal of sensitive business information. All of this can be avoided.

Don’t get blinded by the selling price

I’d like to start with an important lesson that I had to learn myself: the selling price is not the most important thing. The sales conditions are.

Many business owners value their businesses too highly. The media is full of success stories, so it’s not at all surprising that high valuations may creep into your head. The blinding effects of the selling price happen because the potential buyer calls out an indicative price that is not based on sufficient insight into your company. Please be aware that buyers rarely know much about your business when they knock at your door. Buyers often only see your business from the outside and don’t have access to figures such as turnover, profit percentages, customer turnover and absenteeism. So it’s understandable that they can’t make a decent offer, right?

The transaction type
In addition, the final deal consists of much more than just the price. What type of transaction does the buyer have in mind, for example? Is it a share transaction, an acquisition of assets and liabilities or a percentage of the shares? Furthermore, what is the cash at closing, are you stuck with an earn out (requiring you to achieve targets for a few more years in salaried employment) and how will the deal be financed? And what kind of guarantees, liabilities, indemnities, penalties and securities do you need to take into account? All of these aspects are crucial.

I once witnessed an entrepreneur receive an indicative offer of €3.8 million. After three months of negotiations, he only received €2 million directly in his bank account. Another 1 million euros would be spread out over five years in the form of a vendor loan. The remaining 800,000 would then be linked to a two-year earn-out. On top of that, he had to sign an extensive equity retention statement and guarantees that would ultimately affected the final price. As you can imagine, the deal fell through! A lot of time and energy had been wasted.

Many business owners value their businesses too highly. The media is full of success stories, so it’s not at all surprising that high valuations may creep into your head. The blinding effects of the selling price happen because the potential buyer calls out an indicative price that is not based on sufficient insight into your company. Please be aware that buyers rarely know much about your business when they knock at your door. Buyers often only see your business from the outside and don’t have access to figures such as turnover, profit percentages, customer turnover and absenteeism. So it’s understandable that they can’t make a decent offer, right?

The transaction type
In addition, the final deal consists of much more than just the price. What type of transaction does the buyer have in mind, for example? Is it a share transaction, an acquisition of assets and liabilities or a percentage of the shares? Furthermore, what is the cash at closing, are you stuck with an earn out (requiring you to achieve targets for a few more years in salaried employment) and how will the deal be financed? And what kind of guarantees, liabilities, indemnities, penalties and securities do you need to take into account? All of these aspects are crucial.

I once witnessed an entrepreneur receive an indicative offer of €3.8 million. After three months of negotiations, he only received €2 million directly in his bank account. Another 1 million euros would be spread out over five years in the form of a vendor loan. The remaining 800,000 would then be linked to a two-year earn-out. On top of that, he had to sign an extensive equity retention statement and guarantees that would ultimately affected the final price. As you can imagine, the deal fell through! A lot of time and energy had been wasted.

‘The blinding effects of a potential sales price is where it often goes wrong.’

Put all of your energy into your exit strategy
This moment in your journey as an entrepreneur is absolutely crucial in determining the success of your exit. If your passion has fizzled out somewhat, this will have a negative effect on the sale of your company. It is best to work on your exit strategy while you are still full of energy running your company. Five years is an ideal time frame for working on an exit strategy. You can easily devote two years to proper preparations, one year for the actual sale and another two years for the earn-out.

People often forget that the entire sales process is incredibly time-consuming. You can easily lose three months if you accept someone’s proposal straight away. You have to submit countless documents, receive hundreds of questions and have to sift through a lot of contracts. It is for good reason that serious business sales can easily take 9 months. If you think you have found a short-cut with one buyer and expect to be ready to go in three months, you will often be disappointed with the price or conditions. My tip: Always stay in control and introduce structure into the sales process. Even if someone unexpectedly knocks at your door.

Your ideal exit in 7 steps

If you are genuinely interested in selling your business, take control of it yourself and follow these steps:
1. Start by mapping out your ideal exit strategy. Have a specialist perform a valuation and work out a deal structure. Think about the payment method, guarantees, liabilities, indemnities and fines that you think are acceptable.
2. Then take a step back and look at your business through the eyes of a potential buyer. Is your business truly ready to be sold or will the interested party find issues that will irrevocably affect the deal? Think about the financial, commercial, operational and technical side of your business.
3. In some cases, it may be better to put a buyer on hold and get a few matters settled first. At this point, it is also a good idea to decide whether you want to talk to just one party or whether you want to put your company up for sale to a broader audience. Currently, the takeover market is working overtime. It may make sense to inform other parties about the sale in addition to the party that knocked on your door. In both cases, it is best not to let yourself be tempted by an indicative offer.
4. Have the parties sign a confidentiality agreement and provide an information memorandum including a financial plan. Be particularly careful if a competitor is involved.
5. Ask for an offer in the form of a non-binding proposal. It is not just about the selling price, but it also concerns all the conditions mentioned previously. The aim is for you and one party to work towards a letter of intent, which it is best to have reviewed by an M&A attorney. This step is often forgotten when someone knocks at your door and your inexperience is taken advantage of.
6. Once you have signed the letter of intent, it is time for the due diligence process. The interested buyer now has the opportunity to examine the books and to turn your company inside out. This often takes 6 to 8 weeks. The outcome will then affect the final guarantees and conditions. The better your affairs are in order, the fewer unpleasant surprises you can expect. The buyer will also prepare a set of contracts. You should also consult a lawyer at this point, as this is a very crucial step.
7. Finally, you head off to the notary and it’s time to pop the champagne! You have succeeded in selling your company.

One more note…

Earlier I wrote about passion when selling your business. Too often I see business owners forgetting to set aside enough time for this. They only take action after the passion has already faded – or even vanished for the most part. And how about you? Suppose someone knocks on your door today asking you to sell your company. How would that make you feel? Would you give it some serious thought? Or would your heart actually skip a beat? If so, then start thinking about your exit strategy now. Because please remember… you can only sell your company once, and if you do it well, once is enough.