Most founders who have operated a business for multiple years dream about exiting in the future. However, the process and experience of selling a company can be intimidating and complex! After 10 years of amazing performance, I sold both businesses in 2021 to be financially free. In this post, I describe the high-level process of selling my business to private equity, my approach to the process and helpful questions to consider for other business owners.
Disclaimer: Due to confidentiality, I cannot disclose specific financial details or parties involved in the transaction. Additionally, the insights below represent my unique deal experience and may not represent generalizations to other types of deals.
Time Period and Process
For my deal, the entire end-to-end sale process took ~9 months from hiring my team to closing and receiving the wired funds for the purchase. I wanted a quick transaction as there’s a greater likelihood for deals to fall apart when processes run long. My advisors warned me that some deals could take up to 2 years! Since every deal is unique, I describe the major phases of the deal process below.
Month 1-2 (Internal Planning & Advisory Team)
At the beginning, the first step is to ensure all critical business and financial documents were up to date, which included the following:
- Client contracts
- Purchase orders and invoices
- Employee agreements, NDAs and non-compete agreements
- Vendor contracts and services
- Patents and intellectual property registration / filings
- Financial statements for last 5 years
- Revenue and margin forecast for the next 12-24 months
- Technology and information architecture details
- Business continuity and security processes
- …much more!
After getting all my critical documents in-place, the next step was to hire my team of bankers, CPAs and lawyers. All parties played invaluable roles throughout this journey.
Bankers
I interviewed 3-4 investment banks. This process was similar to interviewing a real estate broker to sell my home. They educated me on my specific market, analog valuation multiples for my type of business and why I should hire them. The right banker will not only ensure a smooth process, but also provide access to specific buyers and strategic advice during bid negotiations.
So how did I decide? I decided by evaluating the average value per transaction and the number of deals they’ve done in my immediate space. Additionally, they had to have deal experience around my desired acquisition price, experience over the last 5 years, and established relationships with my potential buyers. Ultimately, I had realized that while everyone had a good story, I could only make a decision that I would not regret based on a banker’s track record. I did not interview large investment banks (e.g., Goldman Sachs or Morgan Stanley) because they did not do a lot of deals in my space and their fees were extremely high.
M&A Lawyer
I hired a M&A lawyer that was a senior partner with over 30+ years of experience. He also had his own in-house tax lawyers that worked with my CPA on tax implications for different deal structures and scenarios. My lawyer helped me interpret all the terms & conditions of the sale in layman’s terms, negotiate and act as a liaison with the buyer’s legal team. Most importantly, he protected me from potentially unfavorable terms from the buyer side legal counsel. They advised on everything from the purchase agreement, confidentiality NDA agreements, non-compete agreements, as well as other deal forms for government reporting.
While my legal fees were expensive (~$450K), their expertise and around-the-clock support was worth it. My lawyer was extremely crafty and adept at wordsmithing a few clauses that ultimately allowed me to retire earlier than expected AND qualified me for earlier payouts!
Accounting CPA Firm
Fortunately, we did not have to hire a new CPA since our firm already had significant M&A experience. Our CPA addressed all questions and requests from the buyer’s auditors. They also provided several forecasts and simulations on different deal structures and tax treatment scenarios. Finally, they filed all the necessary forms with federal and local state tax authorities.
A great CPA firm will dedicate a full-time team of senior staff, have prior deal transaction experience and have familiarity with your type of business. They will need to deeply understand your firm’s financials, P&L reporting, cash flow, prior tax returns, AR/AP trends, forecasting and the overall business operations. They will be the first point of contact in addressing multiple requests from the buyers’ auditors. Since my CPA has been with me for over 7 years, they were well-versed in my business.
Month 3 (Pre-Sale Materials & Valuation Research)
After hiring my team, we created executive presentation materials to share with potential buyers. These materials provided a comprehensive overview of the business covering the following:
- Company history and management team bios
- Market opportunity and unique areas of differentiation
- Business model, products and services
- Client acquisition and retention strategy
- Product and services roadmap
- Financial overview (revenue, EBITDA, gross margin, bookings)
- Employee & talent strategy
- Legal entity structure and capitalization table
The entire process of drafting to finalizing the materials took 2 to 3 weeks. We sent these materials to buyers to gauge their interest and later, used it as a focal point during management meeting discussions.
In parallel, my bankers shared with me the valuation multiples based on recent deals of similar companies. These deals showed me benchmarks on what I could expect from potential buyers. The valuation multiples vary based on industry, type of firm, mix of type of revenue (e.g., recurring subscription revenue vs. one-time) as well as EBITDA margins. The market generally values tech firms higher than other service-oriented businesses because their revenue mix skews more heavily towards a recurring subscription-based model with higher profit margins.
Separately, different types of buyers may also have different approaches to valuation multiples. Some private equity only deals tend to pay lower multiples compared to strategic buyers (e.g., competitors) because the value they could bring would largely be financial (e.g., cost cutting and operational efficiencies). Whereas, strategic buyers may value companies at higher multiples because they may be more focused on the growth story and achieving higher revenue and profitability as a combined business. For me, my deal was with a strategic buyer that happened to be financially backed by private equity – so win/win.
Month 4-5 (Buyer Universe, Outreach & Meetings):
After developing the materials, I worked with our bankers to define the scope of the buyer universe. I provided the team with my criteria for the type of buyers, a list of preferred buyers as well as buyers that I did NOT want to consider. We also discussed my preferences for private equity vs. strategic buyers.
Once we finished defining the buyer universe, my bankers performed the outreach and sent buyers the materials. If a buyer was interested, my bankers would ask them to submit a non-binding bid which includes an initial estimate on how much they would pay to purchase my company. My bankers advised me that it is best to have around 5 potential bids in case a few get cold feet, resulting in 2-3 buyers to negotiate the final price.
For buyers with the highest bids, we granted them access to my secure virtual data room which stored the company’s confidential financial and business documents for their due diligence. Separately, my bankers also scheduled management meetings between me and their leadership team as well as their deal team (e.g., auditors, consultants, lawyers) to discuss my business and address their questions.
The first management meeting is the first opportunity to make a positive impression on the buyer and if all goes well, they could become interested in submitting a follow-on final binding bid. For me, these meetings ran anywhere from 90 minutes to 2 hours depending on the buyer. These meetings were intense and mostly focused on the following:
- Market opportunity and differentiation
- Drivers of revenue growth and margin
- Assumptions behind forward-looking forecasts
- Future competition, risks and risk mitigation strategy
- My plans for the future (e.g., “They want to make sure I don’t leave immediately following closing”)
The important part of these meetings was not only to address their questions, but also to provide a confident and clear vision of the growth story and synergies for the transaction.
I believe the keys to success for these meetings include:
- Make them believe that my company is highly valuable and scarce in the market
- Show them how we can make a ton of money together
- Share my plan on how to grow sustainably and profitably
Finally, buyers will likely request 1-2 follow-up meetings if all goes well during the first meeting before they submit a final binding bid.
Month 6+ (Bid Negotiations and Contract Signing):
Once we collected all of my final binding bids, we reviewed not only the proposed purchase price but also the following deal details:
- Amount of compensation upfront at time of closing (“Cash today means more than cash tomorrow”) vs. equity shares in the new company
- Performance milestones (e.g., company and individual) linked to future payments or distributions
- Other milestones linked to future payments or distributions (e.g., time-based)
- Terms and conditions for liquidating or receiving distributions of company shares
- Compensation such as base salary and bonus following the deal close to be an employee
Nearly all the prospective buyers tried to provide a competitive acquisition price, but they structured the deal so that they paid less cash up front at time of closing and provided more equity in the new company. This is more favorable for the buyer, but less favorable to you. These new equity shares are usually not eligible for any distribution or liquidation until 3-5 years later (standard PE holding period).
For instance, I had several bids that presented anywhere from 50% to 75% cash upfront and remaining in equity. Normally, the higher the cash upfront, the more favorable. However, I wanted to pick the right buyer who had a history of being a builder rather than ones that were solely focused on cost and operational efficiencies. As a result, I selected the strategic buyer backed by PE that gave me 65% cash and 35% in equity. The prospective buyer also presented scenarios of how my equity value could potentially 3-5X over the next 5 years. I would suggest exercising a great deal of skepticism to their forecasts because they EXPECT you to create the majority of that value for them.
Before selecting the winning bid, my CPA and tax lawyers modelled multiple scenarios for each bid based on the amount of post-tax money I would receive. Once we agreed on the winning bid, my legal team drafted the purchase agreement as well as all other documentation to support closing with the buyer’s counsel.
Month 6+ (FTC Review & Closing):
Finally, between signing and closing, I had to wait 30-45 days for the FTC to review the acquisition and give us the approval. Since I did not sell to a direct competitor, I did not experience any issues or delays in gaining the FTC’s approval. Additionally, since both companies were solely domestic and did not have international business, there were no other specific country filings that needed to occur. The FTC and other regulatory approvals could delay closing for larger and multi-national companies.
Deal Expenses
Beyond the deal purchase price, there were several expenses that would ultimately be paid and deducted from the buyer’s final transaction price. These expenses would result in less cash to be distributed at closing. Below, please find the percent breakdown of my expenses by type of expense:
Total expenses as a percent of the final purchase price was ~4.4%. Besides the common fees associated with the transaction, I intentionally set aside significant compensation to retain my key employees. As a business owner, my rationale included the following:
- Reward long-term employees for their loyalty and leadership
- Prevent a mass exodus because of the deal
- Encourage leaders to manage disruption with employees and clients
- Incentivize leaders to achieve revenue and margin performance goals
I saw this as a necessary investment. Outside of these expenses there was also additional funds that the buyer wanted us to set aside for working capital, accounts payable as well as other miscellaneous items which they returned to me after six to nine months after closing.
Final Thoughts for Selling
Selling your business is a major decision in your journey as a business owner. It is also a highly complex one where you only have one opportunity to get it right. Below, I share key questions to help other entrepreneurs think about their own situation and hopefully, inform key choices that will have not only a financial but also a quality of life impact on their future.
- What are my must-haves in order to consider a deal?
- What type of buyer am I looking for? (strategic, financial or both)
- What is the reputation of the acquirer? Are they builders or flippers? What is their track record?
- Do I want to stay with the company to help build or do I want to exit?
- How does my role change if I choose to stay with the company? What will my life be like?
- What are the terms and conditions tied to my compensation? If they provide shares, what conditions impact my eligibility for liquidation and distribution?
- What performance and non-performance goals are tied to the compensation?
- To what extent do I care about equity dilution?
- How do I manage transition and minimize disruption with clients and employees? How do I retain key employees? What message will help clients think favorably about this transaction?
I hope you found my experience and post helpful. For founders and business owners in the process of selling their business, congratulations and good luck in the process!