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— A VPA Perspective

The Do’s and Don’ts of Marketing Your Business for Sale

Summary

What founders should and shouldn't do when marketing their business, specifically:

  • Evaluating transaction types
  • Building a buyer list
  • Communicating with buyers
  • Negotiating NDAs

When the time comes to market your business to potential buyers, process matters.

The goal of any transaction is to maximize the final outcome for shareholders, both in terms of valuation and deal structure. The process (who you market your business to and how you engage with those buyers) will have important repercussions for the final outcome of your deal.

When does marketing begin and how does it play out?

You won’t be ready to go to market until after you’ve framed the core message of your business. An investment banker specializing in sell-side transactions can help you properly frame your business and prepare your marketing materials.

Preparing your marketing materials in advance will enable you to promptly respond to inquiries from buyers. Once you have those materials ready, you can begin marketing.

The marketing process should involve a wide swath of buyers as part of a structured sales process. Running a structured process will enable you to keep buyers engaged throughout the transaction. To help you reach an efficient and successful outcome, you should apply the following guidelines at each stage.

Exploring Transaction Options

At the most basic level, a transaction can be one of three types:

  • A minority sale (shareholders sell less than 50% of the business)
  • A majority sale (shareholders sell more than 50% of the business)
  • A full sale (shareholders sell 100% of the business)

Many founders approach the sale of their business with a specific transaction type in mind. For example, they come into the process thinking they will only entertain a minority deal. What these founders don’t realize is that to yield the best outcome, you should explore all transaction options.

What founders should and shouldn’t do when exploring transaction options

Do explore all transaction types (e.g. minority, majority, full sale). Even if you’re leaning one way, considering all transaction types is important because:

Competition yields better outcomes. Keeping all your options open is important because there is a direct correlation between how many interested parties there are (competition) and the final terms of the deal (valuation and structure). Including all deal types means more participants.

Transaction terms may alter your objectives. Even if you come into a transaction dead set on a minority deal, what if there were a strategic buyer willing to pay a large multiple for a full sale? That premium valuation isn’t something to ignore, but you would never know the opportunity was there if you ignored strategic buyers altogether.

Founders often change their mind when they see the full menu of options. Despite a strong preference for a transaction type, in our experience, entrepreneurs are fluid in their thinking. Seeing the full menu of transaction options enables more informed decision making and at times leads to a different result.

Often, founders worry that being open to all transaction types will turn off some buyers, specifically financial buyers/investors. The worry is that investors will see that founders are entertaining the option for a full sale, which presumably sends the message that founders aren’t interested in growth opportunities or in the long-term success of the business.

Don’t let the worry of alienating specific buyers keep you from running a competitive process. Instead, do reserve the right to consider all your options and focus on the outcomes. A good way to take this approach is to focus your marketing message on finding the right transaction with the right partner, emphasizing partner fit and shared vision.

Another way to alleviate investors’ fears when you engage with strategics is to reference this engagement as a "courtesy call" to a long-time partner or relationship in your industry.

Instead of focusing on the percent of the business being sold, do draw more attention to outcomes for specific goals, such as:

  • Finding the right partner
  • Personal liquidity
  • An opportunity to remove non-value-adding investors
  • Additional capital on the balance sheet

Building a Buyer List

If your company has achieved impressive revenue or employee milestones, you’ve likely already had financial buyers expressing interest over the phone or via email. This inbound interest can fill some of the lines on your buyer list, but these buyers alone hardly constitute a robust buyer list.

Deciding who to include in your buyer list is important as you will have to dedicate resources to answering the questions of and engaging with each of these buyers. As much as possible, you want to guard your time and focus on the opportunities with the highest potential.

As you work with an investment banker to build your buyer list, you will want to utilize the following tactics.

What founders should and shouldn’t do when building a buyer list

Don’t restrict your buyer list to buyers who have reached out to you. While these buyers might be viable options, inbound interest is usually the result of a spray-and-pray marketing strategy on the part of a private equity firm in which the firm’s representative reaches out without necessarily qualifying the target (you).

Additionally, firms that conduct cold outreach have a strategy to source proprietary dealflow (read: non-competitive dealflow), making them more likely to be buyers that are looking for value rather than competing to win.

Do create a buyer list that is broad enough to ensure a competitive process. We generally recommend starting the process with a targeted list of ~30 strategic buyers and ~70 private equity investors.

Do’s and don’ts of working with strategic buyers

Strategic buyers tend to present a higher risk and reward. Usually, strategics can ascribe higher value to an asset due to potential synergies. However, they also may compete in your space, so divulging information while marketing your business to them carries risk.

Do limit what you share with strategics to only the information you feel comfortable sharing. You can do so on a case-by-case basis, adjusting your marketing materials for each buyer. When interacting with direct competitors, do ensure your data is anonymized and heavily redacted, but don’t do so to the degree that they can’t reasonably evaluate the opportunity.

In addition, do limit what you share with strategic buyers you worry won’t be able to compete in the process. For example, small private companies interested in participating may not have adequate financial capacity in a competitive process. Sharing sensitive data with these parties yields little return for the risk you’re taking.

Do launch the marketing process for strategic buyers before private equity groups. Strategics tend to move more slowly through the process and also have slower response rates.

Where possible, for private buyers and/or direct competitors, do ask them to do upfront diligence and share information on their business to show they’re committed to the deal and not just fishing for information.

Do’s and don’ts of working with private equity investors

When considering whether to include a specific private equity buyer in the process, do consider whether your category of business will appeal to them.

Private equity firms tend to distinguish good opportunities based on business type (e.g. consumer vs. B2B, SMB vs. enterprise, SaaS vs. legacy, etc.). Private equity firms are less concerned about the type of transaction, so long as they are interested in your company.

Don’t include a firm if you don’t match their target portfolio company. An investment bank with experience interacting with the various firms can help you know which firms to include.

Communicating with Buyers

The quality of your communications with buyers can have a strong effect on a buyer’s participation in the process, as well as your final outcome.

Buyers are going to ask hard questions like:

  • If you are excited about growth prospects, why are you looking to sell now?
  • Why did your retention rate drop in X time period?
  • How much more can you grow before your market is saturated?

Correctly framing your responses is important because any misstep becomes an anchor to the buyer’s position. Having an investment banker to advise and coach you is enormously helpful.

Consider the following guidelines for communicating with buyers.

What founders should and shouldn’t do when communicating with buyers

As a founder and management team, do keep all direct communication with buyers positive. Always play the good cop, and let your investment banker play the bad cop—especially in deals resulting in a partnership post-transaction.

Do keep communications tightly coordinated (as directed by your advising investment bank) so buyers always receive a consistent message. Your credibility as a founder colors how buyers perceive all aspects of the process (e.g. financial diligence, customer contracts, management enthusiasm, etc.). Don’t taint your credibility through inconsistent communication (including non-verbal communication), as doing so can have a large impact on how smooth a process goes, as well as the final deal terms.

Do let your banker lead the deal discussion, while you focus on the business. Specifically, you should keep all communications with buyers about synergies and strategies and integration, not on the specifics on the deal. Your banker will be able to negotiate the specifics more effectively than you can and will give you back time to hit projections and maximize sales—the ultimate credibility builders.

Negotiating and Signing NDAs

As mentioned, a primary concern founders have in the deal process is disclosing sensitive information to external parties. Consequently, non-disclosure agreements (NDAs) are a much negotiated topic that can end up bogging down a process if not handled properly.

Consider the following guidelines about how to negotiate and agree on NDAs with buyers in the process.

What founders should and shouldn’t do when preparing NDAs

Do evaluate the tradeoff between protection and speed when creating your NDAs. While protecting your information is important, many founders end up getting bogged down in paperwork and spending significant resources reviewing 50+ NDAs from a robust buyer list. The stricter your NDAs, the slower the process.

Where possible, don’t be strict with NDAs with strategic buyers. Strategics are already slow moving through the process, and being a stickler about NDA terms with them can discourage participation.

Do negotiate NDAs in phases to achieve a balance between speed and protection. For example, start with a looser NDA up front, then renegotiate for a tighter NDA before opening your data room for the diligence phase.

While you do want to maintain speed, a few protective clauses you should be more scrutinous of include:

Non-solicitation. Non-solicitation prohibits strategic buyers from recruiting your key employees. Strategics backed by private equity firms generally have a harder time with tight language around a non-solicit clause, as they may have a portfolio company that unknowingly solicits your employees. In this case, you may need to loosen language.

Definition of "confidential information." To limit sharing of sensitive information, you should give a tight definition of what constitutes confidential information. The unauthorized sharing of confidential information needs to be traceable, and thus can’t include protections against verbal information.

Reverse engineering. In some cases, the information you share during marketing can be used by competitors to reverse engineer your products. This clause is fairly standard, so if an "interested" party is adamant you delete sections about reverse engineering, include them with caution. We rarely see legitimately interested buyers express concern over reverse engineering clauses.

Don’t invest in unnecessary legal resources as doing so slows down the process and adds to your costs. Instead, enable your investment banker to negotiate NDAs on your behalf.

Enjoy the Marketing Phase

When approached correctly, the marketing phase of selling your business can be exciting. You’ll receive a lot of hard questions, but you’ll also receive a lot of validation as a large list of qualified buyers express interest in your company.

The best way to ensure success when marketing your business is to involve an experienced investment bank. They will help you present your company—a company you’ve spent years building—to the best buyers in the best way.

Modified on Jun 24, 2020