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14 Steps to Maximum Value and Profit

Professional M&A (merger & acquisition) experts follow well-defined, orderly steps to sell a business. It is the only way to negotiate the best deal structure and price.

As a business owner interested in selling your company, you will probably rely on an intermediary to take these steps for you. Even so, it is wise to understand the process so you can play an active, educated role in the sale of your business.

Here are the 14 steps most often followed by professional M&A experts:

Step 1 – Value Analysis
Studies have shown that 80 percent of privately held companies are sold for less than fair market value. For that reason, this step is critical to all that follow. A proper valuation of your business should involve the analysis of many factors, such as gross sales and profit percentage, company infrastructures, product or service leadership, current market conditions, growth opportunities, market demand for that particular type of business, and many others.

Step 2 – Sell Now or Later
Two main factors will decide whether you proceed to sell your business. One is the value established in Step 1. If that value is satisfactory to you and meets your goals, you may want to proceed with the sale. A second factor is the potential value of your business. The value analysis may reveal that you could enhance the value and marketability of your business significantly, in a predictable and acceptable time frame, if you delay going to market.

Step 3 – Value Building Program
If you decide to enhance your business before selling, you may want a professional who can help you create and implement a specific program for reaching your goals. You do not want to leave this to chance or optimism alone. You should have a specific strategy, or blueprint, with measurable action items and time frames telling you how and when you will reach your goal.

Step 4 – Exit Plan
It is important to plan your exit strategy early in the process, because that will help determine the deal structure you seek from buyers. Questions to consider at this stage include: how you want to be paid, e.g. cash, stock options, etc.; how long will you stay with the company and in what capacity; and how you will protect some or all of your employees.

Step 5 – Develop a Marketing Plan
The goal here is to develop a 90-day marketing plan to find a premium buyer who can meet your desired deal structure. In order to find the best single buyer, you should generate a list of several hundred potential buyers who fit the acquisition profile your particular sale demands. This list should include several types of quality buyers, e.g. public and private companies, both foreign and domestic; private equity groups; and financially capable individuals. The plan should also include a strategy and a time to reach these buyers so that you receive their responses within a limited time frame.

Step 6 – Confidential Seller Profile
In order to narrow the field of buyers and attract those most suited to purchasing your company, you need to develop a Confidential Seller Profile (CSP) that presents a synopsis of your business. Usually one or two pages long, this summary is the first introduction of your firm to potential buyers. It is extremely confidential, and does not include specifics that would reveal the identity of your company. It does, however, provide enough information to interest prospective buyers, such as industry, type of business, revenues, recast profitability, growth opportunity and other data.

Step 7 – Confidential Business Report
Perhaps the most critical document in the process, the Confidential Business Report (CBR), spells out the comprehensive details of your business. Only buyers who have signed a legally binding Confidentiality Agreement are permitted to view this document, as it reveals full information about your company, including names and detailed ownership information. Often 100 or more pages in length, the CBR provides enough information for buyers to decide if the deal is worth pursuing and how much they are willing to pay.

Step 8 – On-going Prospecting and Qualifying
The process of finding and qualifying potential buyers does not end with the first list of buyers. It is an on-going process as new buyers appear or the acquisition parameters change. Sometimes a new buyer is identified when the CSP is forwarded to a parent company or subsidiary of the initial prospect. New investors may express interest as market conditions change. In every case, potential buyers must be carefully analyzed to verify that they have the necessary financial resources and willingness to meet your deal structure.

Step 9 – Negotiating and Deal Structuring
In a perfect world, several buyers would meet your exact goals as set out in Step 4, your exit plan. In reality, there are myriad details to work through and compromises to reach. All buyers willing in principle to meet your demands may ask for unexpected arrangements. Working through the actual deal structure is so complex, in fact, that it typically takes up to 80 percent of the time of the total sales process.

Step 10 – Letter of Intent
The sale process is conducted as a type of limited auction, in which qualified and interested buyers submit their offers within a time frame in a format called the Letter of Intent (LOI). The LOI is a formal offer based on the negotiating of Step 9. It spells out exactly what the buyer is willing to pay for the business, and the terms the buyer requires to complete the transaction. It also specifies the nature of the purchase (outright asset purchase or stock purchase).

Step 11 – Due Diligence
While the limited auction spells out the basic offer from buyers, the buyers still expect to have the freedom, if they are selected by the seller, to exclusively negotiate certain details of the transaction before moving forward to the final purchase. This is called the Due Diligence phase, where both you and the buyer investigate each other carefully to be sure the offer is right and the transaction is satisfactory to all parties. The buyer wants to verify with certainty that your business is desirable for acquisition, and you, the seller, want to be comfortable that this particular buyer is the right one to meet your goals. Because these issues are so important to both sides, this is the stage where deals often fall through if not properly managed.

Step 12 – Definitive Purchase Agreement
Commonly created during the Due Diligence process, the Definitive Purchase Agreement is developed by representatives of both parties and usually requires hundreds of hours of meetings and detailed negotiations. This is the document that legally transfers ownership of your company from you to the buyer, and is usually very complex. It is extremely important that you have an M&A lawyer review this document closely to be sure your interests are protected and you understand every aspect of the transfer.

Step 13 – Closing
Much like a real estate closing, this step involves the signing of final documents and the transfer of money or other assets to you. If you have negotiated a cash payment, you will receive an actual cashier’s check or wire transfer for the agreed upon amount. Your intermediary also receives their fee at this step, in payment for successfully completing the sale.

Step 14 – Transition
This stage depends on the deal structure negotiated. Although this step is not always needed or is quite short, many buyers will want you to stay for a transition period of six to 18 months. Some sellers agree to stay on much longer — up to five years or more — taking cash now, but remaining to help build the business using the buyer’s capital and resources. In such cases, the seller has an opportunity to share financially in the future success of the business.