The Coronavirus pandemic of 2020 impacted business transactions in a significant way – as was to be expected. Many mergers and acquisition deals fell through because of an uncertain economic environment, not to mention the newly precarious financial standings of many companies that were considering partnerships. Statistics indicate that the number of small business deals showed a 39% fall in the second quarter of the year, soon after the U.S. government announced lockdowns.
However, experts have noted an interesting trend. Buyers are increasingly focusing on businesses that have managed to stay afloat during the crises. Lenders show more interest in financing if the targeted startup continues to have high sales and has indicated resilience in these tough times.
2020 might just bring you a great offer.
If you’re a business owner who has been contemplating putting your company up for sale, 2020 might be a good year to finalize the deal. Buyers and financiers are on the lookout for robust startups, and you might just get a fantastic offer that you can’t refuse. Pick a deal that more than makes up for the sweat equity you’ve invested. Take a look at this checklist of questions to ask when understanding how to sell your company.
Have you been preparing for a sale?
When you’re struggling to raise finances and get the company off the ground, selling the startup is possibly the last thing on your mind. However, experts in mergers and acquisitions advise you to plan a high-value sale at the onset. Starting when you first conceptualize the business, you should focus on the ultimate objective of selling it successfully. Accordingly, make sure to keep all accounting and records carefully organized.
Many business owners make the mistake of detailing their profits and earnings without listing the funds they’ve invested. It is understandable that the last thing you want to spend valuable time on during a hectic day is bookkeeping. If finding the time to manage accounts is hard, hire a certified CPA, and maintain clean records with monthly reconciliations.
Have you been thinking like a buyer?
Be aware that buyers are hesitant about entering into a deal without accurate profit and loss statements, balance sheets, and other documentation. That’s because they need a clear picture of the financials when raising funds from investors and financiers to buy your company. For this reason, you’ll want to maintain books with detailed information about every expense you incur, in every category. Years down the line, when you’re ready to discuss a merger and acquisition deal, you’ll be better positioned to negotiate a profitable deal.
Are you sure that this is the right time to sell?
Identifying the right time to enter into a deal can assure you higher prices. Look for critical market indicators like steady profits that indicate a successful business model which could attract buyers. That’s an attractive proposition and indicates the fledgling business holds the potential for future growth and success.
Of course, these figures depend on the particular industry where you work and the products and services you market. For instance, a company providing professional services will need high revenues. On the other hand, a smaller startup with an interesting product concept might be valuable even with low or no profits. Buyers may focus on the long-term gains it could generate. If the revenues are rising, that also indicates the company is growing. And, it’s the perfect time to look for bidders for your business.
Have you identified your reasons for inviting bids?
Entrepreneurs have different reasons for wanting to sell their business after dedicating their energies to building them. Identifying your goals and determining whether you’re in a hurry to sell puts you in a better position to discuss the right deal. For instance, you could be inviting bids because the company is starting to falter and the profits are not what you expected. In that case, you might be willing to accept a lower figure than your initial asking price.
On the other hand, if you have a brand new business idea that needs all your time, energy, and possibly, financing, you’ll discuss the sale accordingly. Maybe you’re thinking of retiring, and you’re open to offers, but want to get the best deal out there. Then, there are business owners who are going through an illness or family situation. Or, accept that this is how far they can get and that no longer have the motivation and new ideas to do the venture justice.
Did you get a professional evaluation of your company’s worth?
Once you’ve made the decision to sell, get a professional to do a comparable company analysis (CCA). This evaluation ensures that you don’t make the mistake of setting a price tag that is too high and unrealistic. Of all the startups that are put up for sale each year, only 5% are finally sold. Experts in mergers and acquisitions reveal that this low percentage typically results from sellers having high expectations and finding themselves unable to understand the actual value of the company.
What is the evaluation method you’re using?
Buyers evaluating your business may use different methods to assess cash-flow projections and financial history before making you can offer.
- The asset-based method checks the assets the company owns against liabilities and debts. Add up the value of all movable and immovable assets and deduct the total debts that the company owes. For instance, if the total assets are valued at $100,000, and the liabilities are $35,000, your startup’s book value is $65,000. This is the minimum asking price you can set.
- The market-based method compares your business against similar startups that have recently entered into deals for mergers and acquisitions. Using this approach gives you a fair market value or net worth and the approximate price you can set.
- The income method looks at the overall financial stability of the company. Buyers will want to know if you’re generating adequate profits to pay off your debts. Potential for future gains is another positive that can sell the business for higher prices.
Can your startup continue to operate when you sell?
One of the most critical steps when you’re starting out is to build a solid team of employees. It’s important to find dedicated, qualified, and reliable people who you can trust to handle the company operations. Train them to troubleshoot issues and manage tasks without your constant supervision. Not only will that help you delegate responsibilities and focus on other facets of the business, but you’ll find it easier to sell the startup.
Once you enter into a merger or acquisition, you’ll likely assume managerial positions for a short time until the new owner is ready to take over. Keep in mind that buyers would more readily invest in a company that can function profitably without your constant management. Instill best practices and strong company culture so that you can exit without stalling operations and hampering growth.
Have you consulted an expert broker to negotiate the terms and conditions?
Once news gets out that you’re looking for buyers, you’ll get bids from many different sources. At this point, it is advisable to work with an experienced broker who can identify and finalize the best deal out there. Experts in mergers and acquisitions help by evaluating your company’s actual value and working closely with accountants and financial planners. Rely on them to sell your company to the right owner who appreciates the monetary value and is dedicated to the continued success of your precious company.
The Takeaway
Entering into mergers and acquisitions can be a complicated process. When you’ve devoted a large part of your life toward building the company, you’ll want to get a fair return on investment for not just the funds but also the sweat equity you put in.
Take your time to identify the reasons you want to sell, and the future you see for the startup. Evaluate the bids you get and determine the best option. Even as you determine the best offer, organize the functioning of the business so that it continues to operate smoothly and efficiently. Vet the buyers carefully before signing away the venture and moving on to the next great idea for a startup.
By Russell Michelson