Selling your business is an emotional rollercoaster. It is a unique mixture of fear, uncertainty, excitement, arrogance and eventually relief. Knowing the appropriate time to feel each of these emotions comes from experience, and understanding what to expect may be helpful when you eventually sell your company.
Over the years I’ve realized that receiving your first letter of intent or “LOI” is a very confusing part of the business sale process. Experienced sellers (there are not many of these) realize there is about a 40 percent chance that a LOI will actually result in the sale of your company. In fact, the majority of LOIs never actually turn into a closed deal. There are many reasons for this, and how you approach, think about and react to your first letter of intent will dramatically impact your opportunity for a successful sale.
As evidence, let me present the most recent annual report from Riverside Company, one of the best mid-market buyout firms in the country.
As reported in their 2009 annual report, Riverside Company submitted 63 LOIs yet closed on just 15 of those transactions (23.8 percent):
- 4,228 Deals Considered
- 1,315 Companies Screened
- 347 Company Visits
- 63 LOIs Submitted
- 15 Deals Closed
They are very good buyers and know how to close deals, yet less than 24 percent of their LOIs resulted in a happy, wealthy seller. The tough economic climate of 2009 was a contributing factor, as was Riverside Company’s extreme discipline as a buyer. Regardless of the specific reasons, this example is instructive for any entrepreneur who is considering a company sale. There are a few important lessons to glean from this report about the process of selling your company.
Most acquiring companies, private equity firms or buyout firms have a network of professionals they rely on for deal flow; Riverside relies on them almost exclusively. In 2009 Riverside developed a complete screening memo for 1,315 companies and submitted a LOI to less than 5 percent of those companies. A professional introduction or “friend of the firm” is always the best way, and often the only way, to present your company if you want any serious consideration.
Selling your company is a humbling process. You’ll talk to dozens of buyers who are not interested, and many of those who are interested will tell you “your baby is ugly.” I often talk with CEOs or entrepreneurs who tell me they get calls about buying their business “all the time” as if that adds credibility or value to their company. The problem is that it sometimes leads to arrogance, which is always a problem when selling a company.
Again, if you consider the Riverside numbers, only 8 percent of the deals they considered created enough interest even to arrange a management meeting (that is, a visit to the company). Calls of interest are always gratifying, of course. The key is to stay humble or the process will do that for you.
Minimum Deal Size
Riverside actually visited 347 companies in 2009. These management meetings are often preceded by a phone call to determine if a visit is warranted. If it is, there are expenses for hotels, meals and airline tickets on top of Riverside’s existing infrastructure to handle their deal flow.
Understanding these dynamics helps to realize why many investors require a minimum of $1 million to $2 million of net earning (EBITDA) to take a close look at a company. There is almost the same amount of due diligence for a $10 million purchase as there is for a $150 million transaction.
I spoke with a client just yesterday who confessed he is excited to receive a pending LOI and completely distracted by the possibilities his deal represents to him personally. He finds himself thinking more about the sale than about how to grow his business, which is quite normal. Once we get past the LOI stage, he’ll have to produce plenty of due diligence materials, which will also require time and attention.
Experienced buyers recognize this and will use human nature to their advantage when timing their transaction process. Time is most often on the side of the buyer, and good buyers will often use that advantage to wear you down mentally and emotionally.
Selling your company is a long process with many ups and downs, timetables, information requests, accountants, lawyers and advisors. If you want to sell your company for maximum value, be sure to have a good team of advisors who will let you know when to get excited. (Hint: It will not be when you get your first LOI.)