One of the most daunting parts of selling your business is the preparation. For entrepreneurs, the need to run the business far outweighs the required time to gather diligence items. Preparation to a long list of tasks, however, is key to selling a business. Buyers each emphasize their own business metrics, so it is best for an entrepreneur to organize all available data for easy access during the transaction process. While there is no single checklist for selling your business, the below items highlight common items and metrics.
Start with the big picture: Despite lengthy diligence from both the investment banker and the buyers, nobody will know the business like the founders. Entrepreneurs must have the ability to explain the business and convey its position concisely. The background story is not necessarily that important to buyers. They are looking for what the business can and will be able to do. Buyers look for the problem that the company fixes or the gap in technology that the business’ technology fills. Understanding your company’s position in the market and how you stack up against competitors will give you a better sense of potential acquirers’ technology gaps and how your business is positioned uniquely to add value to other market participants.
Understand your business: Owners should understand their business from the inside out. Founders often make business decisions without following a specific plan. Rarely are businesses ready to sell when they are going through a pivot or strategic change. With the exception of “acqui-hires,” buyers look for entrepreneur led businesses that have a strategic direction and have had time to prove that business model as viable. Having an organization chart with clear roles and responsibilities is paramount. Buyers need to understand how the company is structured. Knowing your competitors and industry are key, if for no other reason than to know opportunities for growth of your business. Additionally, all buyers ask about issues with the business. Understanding certain pitfalls is key to any sale or acquisition, as you will need to be able to speak to them and get the buyer comfortable with these issues. Finally, have a clear idea for your valuation expectations. Look at recent acquisitions of competitors in the space and publicly traded companies’ valuations – these comparative valuations are more reasonable than an Instagram-like multiple. Know the number for which you would feel comfortable walking away from your business.
Get to business specific metrics: Business specific metrics vary by industry but general metrics are comparative. Keep in mind that buyers see many potential acquisition opportunities (every business has competitors, no matter how unique the technology or service is), so they will use data for comparative purposes. To start, buyers will look at financials. Understanding the scale of a potential acquisition is important. Buyers look at Revenue, Growth, Gross Margin, and Operating Expenses most closely and cash flow, often viewed as Earnings Before Interest, Taxes Depreciation, and Amortization (EBITDA), and EBITDA Margin to a lesser extent – having your books in order clearly is important. Buyers will also look for industry specific metrics and trends over time. Among others, these include customer churn rate and pricing ability for software businesses and traffic, search engine page ranking, and customer acquisition costs for internet businesses. For freemium models or initial free trials, buyers look for high conversion rates or how many customers become paying users and how much they are paying. In parallel with financial information, buyers will look at metrics such as customer acquisitions costs versus lifetime value of customers, conversion rates, unit economics, sales pipelines, and other industry specific key performance indicators.
Preparing your business for a sale or an acquisition is daunting, but taking the time to prepare upfront allows you to gather this information over time, rather than scrambling when the time comes. The majority of businesses are sold, rather than bought, but if a buyer does come knocking, you want to present your business as buttoned up, rather than disorganized. Additionally, preparing your business for a sale well before you are ready to sell will help you get into the weeds of your company and can help you plan for the future.