Selling your business can be a bittersweet process.
On the one hand, you’re rightly rewarded for building and growing a sustainable company. After all, it took years of professional and personal toil. Seeing that hard work pay off is a crowning achievement.
On the other hand, no buyer will have the same connection to your business as you do. This disconnect creates a number of challenges before, during, and after a sale. Worse, few businesses owners anticipate how difficult it can be to answer the looming question, “What’s next?”
The good news is you can overcome these mental and emotional challenges and prepare to sell your business at the same time. As long as you know what to expect.
Crossing the valuation gap
The most obvious point of contention is price. Once a buyer becomes interested in purchasing your business, common valuation methods—which buyers will then pay a multiple of—include:
- EBITDA: earnings before interest, tax, depreciation, and amortization
- Discounted cash flow (DCF): estimate of value based on future cash flows
- Net asset value: total business assets minus total business liabilities
Any differences between a buyer and seller’s purchase price create a valuation gap. Small business consultant, Peter Siegel, described this gap and its potential to kill an acquisition:
“I have seen many ‘professional valuations’ where the price just doesn’t make sense—and sellers wonder why their business for sale just sits there with no action.”
The buyer’s goal in an acquisition is to make enough money in future years to cover the purchase price and more. If your valuation too high, the buyer cannot realize this goal and the deal sours.
Keep this in mind before you emotionally respond to a buyer’s valuation. You may need to accept a lower valuation to ensure the sale of your business goes through.
Integrating two into one, maybe
Business integration is the process through which the buyer begins to operate your business as its owner. Two key considerations during the integration process include resource allocation and decision making. Ideally, the two businesses share resources as two become one.
Shared resources typically include HR, IT, ERP systems, CRMs, and other back office functions. In addition to resource allocation, the two parties also need to be clear on who makes decisions regarding strategy.
Naturally, adding decision makers invites conflict.
Integration can become so contentious, that a team of business professors published an article in the Harvard Business Review that suggested dropping integration altogether in favor of partnering:
“Partnering—our term for this approach—entails keeping an acquisition structurally separate and maintaining its own identity and organization.
“In a nutshell, the acquirer treats the acquired organization as it would a partner in a strategic alliance. By doing so, emerging multinationals are able to manage acquisitions’ organizational drivers in a nonthreatening way, reduce the unintended consequences of integration, and create an environment in which companies can easily share knowledge and best practices.”
As a leader, set a positive example for your business. Proactively communicate and plan with the buyer to minimize disruption and conflict.
Maintaining consistent communication
Was your business purchased so that the buyer could expand into new territories? This can be great news for your business and your local community. New business investments lead to more jobs, more spending, and more tax revenue.
However, prepare yourself for hesitation from your customers and employees. Your local customers trust you, not the buyer. The same goes for your employees.
Be sure to guide messaging across the board. Whenever possible, keep your customers’ main points of contact the same throughout the acquisition.
In fact, the best handoffs are hardly felt.
Visit your key customers. Make sure they understand that the acquisition of your business will not negatively impact the relationship. Reiterate each customer’s importance to your business. Emphasize the positive benefits. Answer their questions honestly and exhaustively. Bring any new points of contact or new leaders along with you. And then, do the same with your team.
Planning for succession and letting go
Succession planning is the process through which you identify new leaders and the steps necessary to transition control.
Unlike succession planning that involves no sale, an acquisition takes most of the decision making ability out of your hands.
For a business you built and grew, you might find it difficult to transition control to an outsider. You ran your business according to your values and goals. The buyer’s values and goals might not sync with your history and that might be hard to swallow.
That’s why—before you pass over control—take some time to identify the core values and business processes that you believe are required to maintain success. You must communicate these to the buyer and get the buyer’s agreement before you close the sale.
As an example, read through Tony Hsieh’s CEO letter to Zappos employees to see how Zappos protected its business and employee interests when they sold to Amazon in 2009.
Hsieh didn’t leave the future of Zappos to chance. Instead, he identified its core needs, communicated those needs, and ensured they were protected post-sale. You should do the same as you prepare to sell your business
Making the main thing, the main thing
A successful corporate development executive once told me her universal approach to all acquisitions: if the deal doesn’t genuinely benefit both sides of the transaction, it shouldn’t happen at all.
This guiding light cuts through the noise of valuations, future projections, and other theories that might make an acquisition attractive. If the two businesses lack the ability to positively impact each other through shared resources, complementary competencies, or some other intangible, the acquisition will fail.
Unfortunately, Harvard Business Review suggests that most buyers and sellers don’t adequately address the benefit to both when considering an acquisition: “[One] rule [is] confirmed by nearly all studies: M&A is a mug’s game, in which typically 70%–90% of acquisitions are abysmal failures.”
Failed mergers and acquisitions sting. Consider the losses tied to some recent failed acquisitions:
- HP wrote off $8.8 billion of its $11 billion acquisition of Autonomy
- Microsoft wrote off 96% of the Nokia handset business it acquired for $7.9 billion
- Google bought Motorola’s handset business for $12.5 billion and sold it for $2.9 billion a few years later
Successful acquisitions depend on more than numbers. Each party should be able to identify where it can add value to the other business. Wrestle with this concept, and discuss it with your buyer.
Prepare to sell your business by preparing for what’s next
“Selling your business may be the pinnacle of your career,” wrote Jeff Giesea in Harvard Business Review, “but the emotional experience is similar to retiring or quitting a job you’ve loved.”
Even if you remain on board in a limited role after a sale is complete, you’ll work fewer hours and, eventually, your relationship with the business will come to an end.
A sale can mean more free time and a big payday. But most company sales are bittersweet.
Be realistic about the true impact. It’s natural to feel depressed due to a lack of personal direction. It’s also natural to mourn.
What’s your purposes now and what will you do each day?