So you’ve decided to sell your business. You’re ready to find a broker, find a buyer, sign the paperwork, and sail off into the sunset. You’ve done a great job increasing your business’s value, and have gotten it to the selling point. So now it’s time to kick back and let it all unfold, right?
Not so fast.
Selling a business is a process that can take anywhere from 6-11 months, sometimes even longer. During that time, your business isn’t just sitting around waiting for its new owner to take over. It’s operating as usual, and one of your key responsibilities as a seller is to make sure that it continues to run successfully throughout the months-long selling process.
In this blog, we’ll discuss some of the dos and don’ts of running your business once it's up for sale, and explain why it’s important that you stay focused throughout the course of the deal.
Lets jump in.
One of the top priorities when selling a business is maintaining confidentiality. It’s imperative that you stay tight-lipped when you’re selling a business to make sure that negotiations don’t fall apart.
You only want the involved parties to know about your plans to sell because if your employees, customers and vendors, or competitors find out, it can cause your business to start crumbling in the crucial moments before a deal is finalized.
Even though you’ve built trust and positive relationships with your employees while growing your business, it’s important that you don’t reveal to them your plans to sell until the deal is essentially done. This may feel shady at first, but in the end it benefits them just as much as it does you to keep things under wraps.
If employees find out about the sale of your business, it can cause them to have concerns about job security and start looking for other work. In some cases, employees can even jump over to work for your competitors with all the experience and knowledge they cultivated while working for you. This can create a domino effect in which some of the top performers at your business jump ship halfway through negotiations.
This is bad for your employees, since the conclusions they’re jumping to about their job security could be entirely false. This is also bad for the sale of your business because if a buyer realizes that key employees are leaving just before the deal is done, they can, and likely will get cold feet and back away.
Customers and Vendors
If customers or vendors get wind of your business sale, that can also be bad news. People often associate a business sale with business failure, which is obviously flawed thinking. But as inaccurate as that association may be, the reality is that it can cause customers to take their business elsewhere while vendors tighten up terms or skip out on renewing contracts.
It may sound obvious, but you want to make sure that the news of your business sale doesn’t land in the laps of your competitors. If your competitors hear through the grapevine that you’re selling, they can use this information as leverage to steal your customers. If during due diligence the buyer sees that you’re losing customers, this is obviously a red flag for them.
As you can imagine, it’s tough to sell a business with key employees jumping ship, customers and vendors moving to other businesses, and competitors swooping in on your profits. NDAs (non-disclosure agreements) keep intermediaries and buyers legally responsible for upholding confidentiality, but you as the seller must also be smart about keeping the sale confidential until the right time.
Don’t Get Senioritis
You’ve probably heard the stories, and perhaps even experienced “senioritis” firsthand. If you’re unfamiliar, it’s the feeling a senior in college or high school gets when they’re this close to graduation and have all but checked out for the year. Unfortunately, this feeling can cause a senior to slack off right there at the end. They may start underperforming and taking hits to their GPAs, or even failing, right there at the finish line. All because they lost focus.
Don’t be that senior.
You want to keep your eyes on the prize from the moment your business is listed to the time that the ink is dry on the purchase agreement. If a buyer notices that your business is starting to underperform during the deal, it can cause them to have second thoughts, negotiate a lower asking price, or walk away entirely.
From a buyer’s perspective, this makes sense. No one wants to be made captain of a sinking ship. To keep your ship from sinking during crunch time, it’s important to maintain just as much focus on your regular operations as you do on selling.
Don’t Make Unnecessary Changes
If you plan to sell your business in the near future, it’s important that you don’t make any unnecessary changes to the way it has been operating. The old saying “if it isn’t broken, don’t fix it” is one we’ve all heard growing up, but time and time again we see it happen with business owners. Some things that you don’t want to change (unless absolutely necessary) are:
- Processes and Procedures
- Key Employees
Making changes to any of these areas can severely complicate the selling process, and ultimately extend the timeline of the deal. Remember, “time kills all deals,” so anything that increases the amount of time it takes to get a deal done also increases the likelihood that it will fall apart.
Keep Your Systems
We’ve seen deals become unnecessarily complicated because the seller decided to change all their systems the year before deciding to sell. This created an enormous headache during the due diligence process, as both sides tried to work towards an understanding of the company’s books. In one instance, it became necessary for us to get the company that made the new software involved in order to help the buyer understand how the software was set up.
Because changes to systems can cause such a headache during a deal, it’s important that you plan the sale of your business far enough in advance to give any new systems time to settle so that they don’t create confusion during due diligence.
If you already know you’re ready to sell, then you should probably avoid updating systems altogether.
Don’t Change Processes and Procedures
If you’ve been running your business a certain way for years, then it’s likely more beneficial to you to keep things the way they are than it is to change them, especially before selling. Think about it: the way you’ve run your business has gotten you to this point. Unless advised by a broker or advisor, your best bet is to keep processes and procedures the same.
Now isn’t the time to start changing employee responsibilities, business hours, the hiring process, or anything else that could cause even a temporary disruption in your business’s normal performance. This can be especially disadvantageous if you plan on agreeing to an earnout, in which part of your compensation is tied to the future performance of the business.
Don't Change Locations
Another thing that can impede the success of a deal is when the seller is planning to move locations before the new owner takes over. This can cause problems if the buyer likes what they see when looking at your business, but they aren’t crazy about the new location you’re moving to.
If you’re planning to move to allow for expansion, let the buyer do it after closing. This lets them have more control over the business they’re purchasing, which can be reassuring to them throughout the deal.
Keep Your Key Employees
When a buyer is considering whether or not to purchase your business, your key employees are a part of the package. If you have employees who had a big hand in growing your business, and who know the ins and outs of the way the business works, that can be a huge bonus for individual, strategic, and private equity buyers.
Individual buyers rely on these employees to help them understand daily operations and advise them on important decisions, while private equity and strategic buyers rely on them to keep the business running as usual with whomever they hire to replace you.
Since these employees offer value to potential buyers, you don't want to go replacing or firing them too close to the sale of your business.
With that being said, there are certainly times when letting a key employee go is the only option, and in those cases, it’s the right thing to do. The important thing is to not let petty tiffs or resolvable issues cause you to lose one of your business’s most valuable assets right before a sale.
Be Mindful of Capital Expenditures and Improvements
A common misconception is that a business’s value is driven by hard assets like trucks and other equipment. While these assets can certainly impact your business’s value, they aren’t the driving force.
A business’s value is based primarily on earnings, so if you’re thinking about upgrading equipment before you sell, you may want to reconsider. Upgrading could be necessary in cases when you have inoperable (or soon to be inoperable) equipment, but it doesn’t benefit you to upgrade or replace anything that still has useful life.
If you’re in the process of selling and are stuck with the decision to upgrade or not, it’s a good idea to run any proposed capital expenditures by your broker or M&A advisor. They will be able to tell you if it will add value to the sale, and advise you on the right decision.
While you do want to give extra consideration to any potential upgrades, this doesn’t mean forgoing the replacement or maintenance of equipment altogether. If a buyer notices during due diligence that something will need to be replaced or repaired soon after they take over, it could become a negotiating factor on the asking price.
Operate as Usual
The main thing to keep in mind throughout the sale of your business is to just keep running it the way you’ve been running it all these years. The last thing you want to do is let the emotions of selling cause you to act irrationally and detract from all the hard work you’ve put into your business.
One of the best ways to keep your eyes on the prize is by working with an experienced business broker or M&A advisor throughout the sale of your business. A good broker has seen just about everything, so they’ll know how to advise you when issues arise throughout the selling process. If you’re curious about what the selling process looks like, or have any other questions, feel free to contact us today!