When it comes to selling your business, it’s crucial to understand the process and take steps to ensure that you get the best deal possible. Once you sign a letter of intent (LOI), the balance of power in the negotiation shifts heavily in favor of the buyer, and you may find yourself committed to the sale, even if the terms aren’t ideal.
To avoid this scenario, there are seven key things you can do before putting your company up for sale and signing an LOI. By following these steps, you can minimize the chances of your deal dragging on for months and becoming watered down:
Secure Your Customer Contracts
Acquirers will want to know that your customer relationships are stable and reliable, so it’s important to have long-term, standardized contracts that include a clause stating that the obligations of the contract survive any change in company ownership. This ensures that customers won’t be able to terminate their contracts upon the sale of your company, and that the acquirer will be able to continue receiving the benefits of those contracts.
Cultivate Reference-able Customers
When acquirers are looking at your company, they will want to know why your customers do business with you instead of your competitors. That’s why it’s important to cultivate a group of customers who are willing to act as references and speak positively about your company. These customers should be satisfied with your products or services, have long-standing relationships with your company, and be willing to speak on your behalf.
Align Your Management Team
During due diligence, acquirers will want to interview your managers without you in the room. They want to find out if everyone in your company is pulling in the same direction. That’s why it’s important to make sure your management team is aligned and all working towards the same goals. This can help ensure that there are no surprises during due diligence and that the acquirer is confident in your company’s ability to operate effectively.
Get Audited Financials Before Selling Your Company
An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm. This can help demonstrate that your financial statements are accurate and that your company is in good financial health. It’s a good idea to have your financials audited at least a year before you plan to sell your company so that you have time to address any issues that may arise.
Disclose Risks Upfront
Every company has some risk factors, and it’s important to be transparent about them from the start. Disclose any legal or accounting issues before you sign the LOI, so that the acquirer is aware of them upfront. This can help avoid surprises later on in the process and can help you build trust with the buyer.
Negotiate Due Diligence Period When Selling Your Business
Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. However, you may be able to negotiate this down to 45 days or even 30 days with some financial buyers. If nothing else, negotiating the due diligence period can alert the acquirer to the fact that you’re not willing to see the diligence drag out past the agreed-to close date. This can help ensure that the process moves forward quickly and efficiently.
Communicate Other Interested Parties
Explain that while you think the acquirer’s offer is the strongest and you intend to honor the “no shop” agreement, there are other interested parties at the table. This can help you maintain some leverage during the negotiations and can help ensure that the acquirer is motivated to move quickly. However, be careful not to overplay your hand, as this can backfire and lead the acquirer to walk away from the deal.
By taking these seven steps, you can protect the value of your business and ensure that you’re well-positioned to negotiate the best possible deal when the time comes to sell.