Anatomy of the Sale of a Business

By John O’Connell Executive Chairman ScaleUp Group

At a recent CEO Forum session this subject was discussed in the light of a recent very successful sale. Whilst much of what was said is confidential, there are some general principles well worth reinforcing when preparing to sell your business.

The Ten Commandments of selling your business?

1. Know your value. Vital to understand what your added value is to the prospective buyers, such as time to market, the synergy of products, leveraging distribution channels and so on, and base your valuation discussions on that – not on, for example, how much it might take them to create the same functionality your business is offering – a frequent approach of buyers seeking to reduce the purchase price.  

2. Competition. Create a sense of competitive tension between prospective buyers – real or imagined.  Using a specialist adviser who has done this many times helps in this perception as well being the third party to manage the process, shielding hard-pressed executives as much as possible.

3. Be the Buyer, not the Seller. Be a ‘reluctant bride/bridegroom’  if possible, who is not having to sell but having the option still to continue independently. (When I sold Staffware I always had in mind that we had only recently concluded we could ‘hit the high spots’ independently, instead of selling out.)

4. Be the best in class. Know the key ratios which buyers will be assessing you – and make sure you ‘comply’ with best practice – or have credible reasons why you do not! (Typically for SaaS businesses these include Growth rates of ARR; Net and Gross retention rates  (net should be more than 100% meaning existing clients are buying more from you, year by year);  CAC – customer acquisition costs and so on.

5. All together? Ensure your key investors, especially any Funds, are fully aligned especially in terms of valuation expectations and timescales.

6. The whole team? Likewise, understand early on which of the key executives are ‘in’ or ‘out’ and why so that expectations can be set of the prospective buyer, early on, rather than late in the day which can be very destabilising of the deal.

7. Why now? Have a credible explanation as to why the business is being sold now, such as the retirement of the Founder and if this is the case, a convincing succession plan.

8. Who owns what? Tidy up all of your records re your Cap Table – especially Options which have caused many a delay or even collapse of deals through incomplete, sketchy documentation.

9. Tax! Understand the tax implications of the proposed consideration.

10. Deal or no deal? Consider if any form of earn-out is acceptable at all. These are often legal minefields and delay achievement of any synergies of combining.

Finally, remember if it is a bigger corporation buying your business, the people you are dealing with during the transaction may well not be the executives responsible for making it work, post-deal. So document everything which is agreed ‘upfront’, as your opposite numbers will have probably moved onto another deal!

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