So you think you are ready to sell your Tech, eCommerce or Internet Business — or — you have been thinking about the potential to sell your business successfully over the next 6-12 months. But you aren’t sure what the process looks like, what to expect and you cannot imagine adding even more workload to your already hectic life, balancing a family and a growing business?
Small to Medium Sized Businesses and those Businesses that are considered in the Lower Middle Market tend to be very private sales, so it is not always easy to identify what you should expect in the M&A process – the real hidden secrets are hard to find. This paper helps to lay out those hard to find secrets and lift the veil so that you know what to expect when selling a business. And a business owner that puts her blood, sweat and tears into a business should be excited and rewarded when she sells – not let down or surprised.
There is a great deal of growth in the Technology & Internet (Digital) Sector today. Companies in this sector include Software Companies, eCommerce & Amazon Companies, Hosts & Registrars, Social & Search Paid Media Firms, Affiliate Networks, Social Media Companies, Internet Companies, Tech-Enabled Consumer Product Manufacturers, and so much more. Because this Sector is booming and achieving unprecedented growth with every year that passes, worldwide, and even in the middle of a Pandemic, it is causing many people to consider taking chips off the table and beginning the process of strategizing on an exit.
In addition to those entrepreneurs that are seeing high levels of growth in their companies, there are also those that will be retiring that need to exit their companies in the coming years. In fact, in the next 20 years, it is expected that more than 3 million businesses will be sold as a result of retirees who own and operate around 3.5 million businesses across the United States. So for all of these companies that will be sold in the digital sector over the next 20 years, it is critical that business owners make an informed decision about their future and with whom they work with to sell their business. A professional business broker can make a huge difference in the actual value a company receives at market, as well as the negotiated de al structure. One of the first things that you should do as a business owner is rely on a strong team of trusted advisors that starts and ends with the broker you choose to run the deal.
Here are the Top 5 Things we believe every business owner should know about the Selling Process before they embark on the creation and execution of an exit strategy:
There is not a “set value” for a company
For most first-time clients, this is mind-blowing. Many clients think that there should be a single, known value that everybody agrees is realistic for a company, based on EBITDA, Growth, Category, etc. They think you should be able to open a book, point to a reference page, and peg their valuation.
Wrong – Dead Wrong. In reality, there’s a value “range” for every company and no company has a single value. And that value range can vary greatly, depending on a number of factors, including whether the deal could possibly go through the SBA Process or into the Capital Markets, what the growth rate looks like year over year and/or month over month, the existence of concentration and other risk profiles, the infrastructure behind the company, the age of the company, the category the company operates within, and so much more.
Additionally, something else that can broaden the range of a company’s value is the buyer profile. There are “financial buyers” and “strategic buyers”. We have sold companies at very high multiples to strategic buyers that financial buyers wouldn’t touch. A strategic buyer is one who operates in the same field, industry or business model as the company for sale. Merging with a company in its same space gives it a strategic advantage as well as the opportunity to reduce overhead as a combined unit.
Unlike a financial buyer, who needs investors and/or lenders to back the transaction through debt or equity, a strategic buyer looks for companies that can be integrated into their operations. Higher multiples might make sense in that scenario since a strategic buyer can use the current assets, customer base and/or systems to create synergies between the two combined/merged companies. Because of this discrepancy in strategic and financial buyers, this too can create wide value ranges when considering an Enterprise Value for a Company.
I am an Entrepreneur, NOT an Employee.
We see a lot of confusion around this one as well. Many sellers think that if they allow themselves to be included in the transition of a business after closing, that they could end up becoming an employee of the buyer. While it is possible that an employment or consulting agreement is created to manage the relationship of the buyer and seller after closing, it is by no means a traditional employment scenario. In other words – you won’t have a “boss”.
A common situation that we see is when a Private Equity Group Sponsor (PEG) buys a Lower Middle Market tech company that requires the special skills of current ownership. As an example, the PEG might purchase a $20M deal using a mixture of cash and retained equity, where the seller remains a partial owner in the company after close and stays with the business to ensure the brain trust and know-how isn’t lost. In such scenarios, the PEG is made up of financiers who specialize in developing networks and relationships, raising capital and creating an enterprise-ready company that is truly built to be sold again down the road (generally 4-6 years). However, the leadership behind the PEG is unlikely to be the “owner operator” type. Normally they will purchase, say, 75% of the company in cash and 25% of the company in retained equity.
That retained equity is highly valuable to a business owner because as the merged company grows, the opportunity to have a “second exit” is exciting and highly lucrative. Generally speaking, in situations like these, PEGs will be in search for business owners that are willing to stay on to either continue to operate as the CEO of the business, or to assist in transition to focus on R&D or other high level matters (and of course to train the new CEO that would be hired). In such scenario, an employment agreement would be created that pays a salary to the seller, who in addition, can share in the distribution of earnings as they occur, pro rata. The goal of a PEG, or any other buyer, that needs the expertise of a business owner after close, is to seek out those sellers that are willing to stay on for at least 1 year.
And sellers that maintain this level of flexibility in the sale process always end up with a larger buyer pool and better deal multiples because the business risk drops drastically when a business owner will stay on after close to ensure continuity.
Selling a Company is Easy – who needs a broker?
The business of selling tech and internet companies is highly confrontational, extremely difficult and has an average failure rate of 50%, and that failure rate is when trained intermediaries are at work – when a seller tries to sell a company on her own, that failure rate goes up to 90%. Think of all that wasted time talking to buyers that are more likely tire kickers than real buyers. Did you know that 90% of all people that call themselves buyers never actually close? That’s right – only 10% of buyers ever actually close a business. The others are wannabees – and if you don’t know how to sniff them out and eradicate them from a process, they will infest your life and make you wish you were working a 9 to 5 at Wendy’s. Many buyers cannot be trusted and some will look at your business only for the nefarious purpose of gaining insight into your operation to compete with you.
It might seem easy, but the reality is that this profession (Mergers & Acquisitions) is extremely difficult and requires a highly professional, skilled intermediary that can run a deal from start to close. This includes ensuring that protective NDAs are signed, tire kickers are removed from the process and ensuring that the business owner can continue to operate her company as usual during the process. It is NOT the same as trying to sell your own house, which is actually quite easy. This involves deep negotiations, and usually you’re negotiating heavily with somebody that you need to work with after close. Things can get emotional – and quickly.
By choosing the right tech or internet business broker that has skills closing, is professional, understands the sector well, and has the patience to deal with buyer and seller personalities, plus has a strong network of lenders, CPAs, and a treasure trove of ACTUAL buyers in their CRM, then that 50% failure rate can drop down to 10%. We have had several clients come to us after trying to sell their business on their own, and every time we hear the same things: the buyers all lied to me, I received low ball offers, nobody showed up for phone calls, promises were made and never kept. And on and on – you need a representative behind you when you sell this asset that you’ve worked so hard to build – and that representative can not only CLOSE your business, but CLOSE it at the highest possible Enterprise Value. Selling a business on your own guarantees that you are leaving money on the table, maybe millions.
Brokers are all the same – right?
Wrong. This one really gets our goat. The brokerage world is an odd one. Did you know that many brokers only need a pulse to be a broker? That’s right – just blood pumping through that big dumb head of theirs – and they are ready to represent you in the most important thing you may ever do – sell your company. They couldn’t sell water to a thirsty man, but guess what, they strapped on a broker’s logo, responded to your inquiry and are ready to set the bar super low with their inexperience and ignorance.
But not every broker fits this mold. There are some special ones. These are the guys and gals that understand financials backwards and forwards, know how to negotiate effectively, can be professional in the face of battle and have closed hundreds of deals over the years. We call them CLOSERS, and while they are a rare breed, they are highly effective and certainly not the same as the mouth breathers mentioned above.
But as with any profession, the problem with the world of business brokering is that the 90% of mouth breathers out there make the rest of us look bad. They are just trying to get by. Remember, business brokers are paying their mortgage, paying for that expensive car they can’t afford and living a life just like you are – and they usually work solely on success fees. Imagine if you are not good at something and the only way you feed your kids is by selling some poor schmuck’s business that trusted you with their baby? It doesn’t take a Rhodes Scholar to understand that they are going to cut corners and try to push your valuation as low as possible to make it as easy as possible to sell that business so that they can afford their lifestyle, and move on to the next schmuck.
Our advice: find a broker that isn’t interested in a quick sale, is willing to consultant and work with you over time until you are ready to sell your baby … and only with a broker focused in your area with a lot of experience closing. Closing is the key.
This is Fun – Enjoy it!
Business owners do not generally “have fun” when they are going about doing business. Business is business and they want to do it, make money, and move on. What we try to coach our clients on is the fact that this process can be time consuming and somewhat grueling if they let it, so they should do their best to try to have fun with it. Remember back what it was like when you were just starting out – bright eyed and ready to tackle the world? The problem with business ownership is that it has its ups and downs. And the “downs” tend to happen a little more often that the “ups”. Why? Because of competition, suppliers messing up orders, customers complaining about you on social media, government compliance raising its ugly head – or a treasure trove of hundreds of other things that can make business ownership painful, albeit rewarding at the same time. As they say, entrepreneurs will work 80 hours a week to avoid the 40-hour work week. But with that dedication comes some level of pain and suffering.
So when it comes time to sell your company, take a step back and remember what it was like at the beginning. You were probably super excited — we recommend that you bring that excitement back to life during the exit process because your excitement will bleed into everybody else involved in the deal – buyers, brokers, lawyers, accountants, etc. You should think of the exit process as an extension of your regular operations, but also the opportunity to realize the benefits of all the work you have put into the business. Enjoy the process of meeting new people and bask in the joy of knowing that somebody is about to purchase something that you have spent a great deal of time creating, and to continue to grow it further. That puts you in the minority and makes you special – be happy that you are special, and be happy that you are about to build wealth through the sale of your business. This is definitely something to be happy about!
In summary, the process of selling your company can induce a lot of stress, but you need to remember that as the owner you don’t have to go through this on your own. In fact, you can create your own team to back you up – and we think that should start your team with a decision on who you want your business broker to be. And this doesn’t mean that you need to have 15 different professionals working with you as you sell your company; the construction of your team will be different for everyone, but if you locate a great business broker that you trust – that broker will have contacts that can help you round out your team, save you thousands of dollars and endless hours searching by guiding you step by step through the process. As mentioned, there are many complexities involved in carrying out a deal, and having a complimentary deal specialist on your side who has knowledge in the industry or type of business you’re selling can go a long way towards easing your fears and helping you feel more accomplished and prepared for this process.
It is important to feel comfortable and to be confident in the people who have joined your team during the exit process. Deals can be very intense, and sellers will spend a lot of time with certain people on their professional team. You also need to feel that the professionals that you have hired have your best interests in mind. Business brokers might choose to take a more personalized approach based on their extensive experience in the industry. Recognize that this requires a very thoughtful approach to what is likely the biggest transaction in your life and so the goal should not only be maximizing deal value, but ensuring that you’re not making any mistakes along the way. Each individual business owner will have different reasons for deciding to depart from their company and may also have unique definitions of what a good outcome looks like for them. A good broker will care about those reasons and ensure the exit matches with their post-closing expectations.
If you would like to talk to an actual Deal Closer – a REAL business broker – about the sale of your company, we recommend that you speak to WebsiteClosers.com. Schedule a consultation with our knowledgeable business brokers today to learn more about how we can help you accomplish your unique goals. We can be contacted via email at email@example.com or by phone at (800) 251.1559. You can also listen to our podcast where you get your podcast by searching for Deal Closers.
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