Building a Business to Sell: A Step-by-Step Guide
When you feel you’ve reached the end of your journey with a venture, it’s crucial to make a graceful and profitable exit. This ensures a smooth transition and opens the door to new opportunities and ventures.
To make a fruitful exit, you must carefully plan the process and ensure that both the business and its stakeholders are well-prepared for the transition. A well-executed exit strategy not only maximizes the value of your business but also keeps its reputation intact and sets you up for your next venture.
This article will explore key considerations and steps to building a scalable business for sale. This guide is especially useful for entrepreneurs looking to scale their businesses for sale or those aiming to revitalize their operations. Read on to learn more!
Creating a Scalable Business for Sale
Several factors such as the timing of the sale, the business’s reputation, and its financial condition affect its selling price, so thorough preparation is key to securing the best deal.
In this section, we will cover seven essential steps to build a scalable business that is not only ready for sale but also positioned to thrive in the hands of new leadership.
Define Your Exit Strategy Early
When you are building a business to sell, it is important to decide early whether you want to exit through an initial public offering (IPO), an asset sale, an acquisition, or something else entirely. Each of these exit routes requires months of planning and execution.
In today’s market, M&As are a more likely exit than IPOs, as companies in 2024 are staying private for 3.8 years longer on average than they did 10 years ago. That being said, once you open up to acquisitions, it could take over a year to find the right buyer and execute the deal. Microsoft, a mammoth of the tech world that has a dedicated mergers and acquisition team, took 1 year and 10 months to acquire Activision Blizzard.
Since 2021, global M&A deal value has been on the decline, both, in absolute terms and in comparison to global GDP. In 2021, global M&A deal value reached a peak of $6.1 trillion which was 6.43% of the global GDP. However, in 2024, the global M&A deal value was $3.5 trillion which was 3.16% of the global GDP. Thus, with a decline in M&A activity, sale opportunities are fewer and farther between. This further emphasizes the importance of proactive planning.
When you are preparing your business for sale, you should simplify your equity structure by reducing the number of equity classes as it will accelerate the process of building a consensus regarding the business valuation. By using equity management software such as Eqvista, this task can be completed within minutes.
Establish a Strong Brand Presence
Back in 2013, WhatsApp had an unprecedented 400 million monthly active users with 100 million users joining the platform in November alone. With such a large user base, you would expect WhatsApp to be one of the most profitable messaging platforms. However, WhatsApp had an annual revenue of $10.2 million and a net loss of $138.15 million.
Yet, Facebook shelled out $22 billion to acquire WhatsApp. Back then, Facebook reported that $15 billion of the total $22 billion was paid as goodwill. How did WhatsApp manage to bag such a huge premium?
The answer is brand presence. WhatsApp is widely used in developing countries due to low internet connectivity and high SMS costs. Over the years, Facebook leveraged WhatsApp’s reputation and trust to successfully launch various services in developing countries.
Building a strategic marketing plan is key to establishing a strong brand presence. When done effectively, it differentiates your brand, attracts buyers, and drives long-term success.” – Jakub Vele, Marketing Director
Strengthen Your Financial Framework
To ensure maximum gain, you must optimize your financial structure. However, given time constraints, you’ll likely only be able to implement one approach effectively. Ideally, you should prioritize revenue growth, as it directly impacts key valuation multiples.
You must recognize which revenue streams will generate the most cash flow net of expenses to allocate resources in a manner that maximizes profitability and attracts better valuations from potential buyers.
Maintaining financial health is important, as these are critical factors in valuation during sales.
Develop a Resilient Team You Can Count On
One of the concerns of a prospective buyer would be your company’s post-sale performance after you hand over your responsibilities to the new leadership. To alleviate such concerns, you should consider building a reliable team and delegating important and challenging tasks to them.
Even before you get to the acquisition stage when you are just looking to secure funds, you will notice that venture capitalists place significant emphasis on the strength of your founding team when deciding whether to invest. Bessemer Venture Partners, one of the longest-running venture capital firms, notes that while early products may change beyond recognition, the key factor behind every successful investment has consistently been passionate, analytical, and relentless founders.
While centralized decision-making under a single leader allows quick action, it also creates a dependency solely on Company leadership, and ends stifling staff proactiveness.” – Colin Mc Crea, Partner (CVA, EA)
Prepare for Due Diligence
Private equity investors and companies looking for inorganic growth are interested in a target company’s strong ROI and sustainable growth potential. Hence, to facilitate due diligence, you must compile detailed financial statements with revenue and expense breakdowns and notes for balance sheet items, a clear cap table, and an overview of key contracts.
Ideally, founders should make it a habit to maintain organized records of accounts and processes from the inception rather than starting this process when preparing for a sale. This will help you keep track of key performance indicators (KPIs) and effectively scale the business.
Additionally, if you are operating in a regulated space, you must also facilitate due diligence into your regulatory status by compiling your regulatory approval notices, licenses, and permits.
Business Valuation Matters
By understanding business’s worth, you position yourself for a successful transaction that meets your financial goals or you will risk ignoring attractive acquisition offers or accepting offers that are too low.
A prime example of a business rejecting an attractive acquisition offer is PointCast, which turned down Rupert Murdoch’s $450 million bid in 1997, only to be sold for just $7 million to Idealab two years later. Conversely, Friendster accepted MOL’s $39 million acquisition offer in 2009, only for its patents to be sold to Facebook for $40 million a few months later.
This highlights the importance of understanding your business’s true value before selling, as it ensures you don’t risk undervaluing yourself like Friendster or overvaluing yourself like PointCast.
Eqvista’s valuation not only helps establish a defensible market value for the business but also enhances compliance and investor confidence, making it an invaluable tool in selling a business.
Post-Sale Considerations
After finalizing the deal, it’s crucial to ensure a smooth transition. This involves creating a timeline explaining roles and responsibilities. Conduct meetings with new leadership to help address concerns and document essential processes. Additionally, communicating changes in roles, compensation, and work environment to executives, managers, and employees is vital. A contingency plan should also be developed to align with the new leadership’s vision, mitigating potential risks during and after the transition.
If you are selling a business asset or division, you should identify how it will affect your operations, human resource needs, and financial structure. You must address any potential gaps in personnel or expertise by consulting your human resource department and discussing whether training is viable or recruiting talent is necessary.
The sale of key business assets can affect your brand identity and long-term goals. Hence, clear communication with key stakeholders and meticulous transition planning is needed.
Frequently Asked Questions
Some of the common queries among founders who wish to sell their business are as follows.
How do I know when my business is ready to sell?
Your business will be poised to sell if it demonstrates high profitability, healthy debt levels, established market presence, and most importantly, when you are ready to step away from managing your business.
Why is equity management critical when selling a business?
Equity management is crucial as it ensures fair distribution of proceeds among stakeholders. In a company with well-managed equity, it is easier to secure board approval and find consensus on business valuations because shareholder rights are clearly defined and easy to interpret.
How can I maximize the value of my business before selling?
You can maximize the value of your business in a sale by optimizing its debt levels, top-line revenue, market position, and profitability, and by selling in a good market.
What is the role of valuation in the selling process?
You must ask a valuation expert to calculate the value of your business before selling since this can help you avoid critical missteps such as overlooking lucrative acquisition offers or accepting to sell at highly discounted valuations.
How do I ensure a smooth transition after selling?
To ensure a smooth transition, you should document key processes, train your successor, retain key employees, and offer transitional support by serving as an interim chairman or advisor to provide hands-on guidance to new leadership.
Build for Success, Sell for Profit!
A common mistake when preparing for a sale is taking an unstructured approach to improving the business’s financial condition which would involve paying off all debts and liquidating most marketable assets. Instead, a company can achieve a higher valuation by addressing immediate financial concerns and focusing on scaling revenue with strong customer retention.
To minimize concerns about the post-sale transition and ensure that the deal is executed, you must build a reliable team that can function without you and under the new leadership. Also, to avoid any unnecessary delays, enabling due diligence is a vital step in preparing a business for sale.
Applying these steps will improve your business’ attractiveness and create a compelling case for potential buyers.
However, a lack of understanding of your business’s true value can lead to suboptimal decisions that can cost billions. To avoid such scenarios, get an unbiased assessment of your business’ value from Eqvista. Contact us to know more!
