Following on from the first part of this article last month, in which IBIS Capital director Tim Merel explained how to decide when the best time would be to sell a company, here he looks at the specifics of how to go about it.
Starting with the basic preparation, he explains what potential buyers will want to see and runs through the 15 stages of the process, plus what it should all look like when it finally concludes.
Some people find dealing with potential buyers difficult. Some won't get back to you, others don't make an effort to understand your business, some think your business isn't worth much, and occasionally they can seem quite rude. There is a good reason for this, which makes the exit process much easier once you learn to accept it - buyers are looking for a reason to say "no" as soon as possible.
That may sound odd, but makes perfect sense when you think about it. Buyers make most of their money based on the return on investment (ROI) generated by the businesses they buy, which means they think in ROI terms for everything from business financials to how they spend their time. So the sooner they realise that they aren't going to buy your company, the sooner they can move on to something else where they might generate a return.
If you approach them in the same way, you will soon discover which potential buyers are a waste of your time too. This makes the process easier for both you and them. At the extreme, one well known billionaire entrepreneur walks out of investor meetings as soon as thinks that he won't get the support he wants. This isn't to be recommended, but it works for him.
1 Business Review
Review all your basic assumptions about the business in detail, with a particular focus on the underlying dynamics and economics of your market, competitors and business. Question everything, and do not take anything that you believe for granted. Potential buyers will be coldly analytical about your company and its prospects, will do their own detailed due diligence, and will spot any potential problems long before you see the colour of their money. Professional buyers of companies are smart people with a lot at stake, so will take everything seriously. You need to do the same.
2 Write an Information Memorandum (IM)
Potential buyers expect a detailed IM describing all aspects of your business. Preparing an IM properly is a lot of work, but forces you to take an objective outsider's view of your business. This should hopefully help to identify answers to some of the questions you may be asked, and also highlight key aspects of your business you hadn't realised before.
In terms of style for your IM and other documentation, objective, fact-based and unemotional documents are generally taken more seriously than self-serving, subjective claims. While you should be excited about your business, try to remove unnecessary adjectives. Phrases which may reduce your credibility include:
- "Unlimited market potential"
- "No competitors"
- "Unrivalled experience"
- "Huge returns"
- "Fantastic growth prospects"
- "Vast global markets"
- "Dominant market position"
Back up what you're saying with facts referenced from reputable third parties, and if that isn't possible then make sure that you connect the dots to cover probable counter-arguments. The people who read what you write have heard it all before, and aren't easily impressed.
While all IMs are different, investors expect to see:
- Investment highlights
- Sale process and timetable
- Business overview
- Market opportunity outlining the problem your business solves, who it solves it for and how it solves it
- Business model
- Business history and performance
- Growth strategy
- Business infrastructure/technology/intellectual property (IP)
- Sales and marketing
- Customer support
- Market overview
- Competitive analysis, focusing on competitive advantage (what your company does better than the competition that matters to customers)
- Financials (historic and one-year forecast)
- Key financial drivers
- Profit & Loss
- Cashflow statement
- Balance sheet
3 Write a Teaser
An executive summary of the IM should be prepared once it is complete, without any confidential information.