How do you sell your own company? Piotr Łagowski

In the life of many entrepreneurs, there comes a moment when after years of hard work on the development of their own business, they face the dilemma of whether to continue the works started some time ago or whether it is time to “consume” the fruits of this hard work and sell their own company. The immediate impulse for such considerations is usually the initial interview with a potential investor, or an example of a friendly entrepreneur who has completed such a transaction. Regardless of the sources of such a decision, however, there is always the problem of organising this process, because entrepreneurs are primarily focused on managing current business, and their knowledge about the sale of companies is very limited. So the question arises – how do you sell a company? In this article I would like to present a few key factors for the success of such a project.

Of course, the first question of every entrepreneur is “how much is my company worth?”. The topic of the company’s valuation for the needs of a transaction was presented in the article “How much is my company worth?” – however, regardless of the valuation, there is also a number of other important questions that need to be answered before making the decision to commence a company sales project.

Sources of my company’s value

First of all, you should ask yourself “why would someone want to buy my business?”. There are many answers, because the sources of value of companies operating in the same industry are different – for some it may be a unique technology or products, for others a strong position on the market, and for others the brand is crucial. In the case of some companies, the basic source of their value is their tangible assets, e.g. real estate. Understanding the sources of the company’s value by their owners is of great importance for the entire process, because it allows for the proper valuation and determination of the appropriate transaction structure. Only by fully understanding and quantifying the sources of the company’s value, we can draw up a proper list of potential investors who may be interested in its acquisition.

Potential problems that the buyer may encounter

Each company is not only a set of values and a source of revenue – it is also a source of costs and a set of risks. Therefore, another important question that every entrepreneur considering the divestment of the company should ask is, “What would be a problem for me if I was a potential investor who would buy my company?” Of course, every investor may perceive certain risks in a different way. You can also expect that during the sale process, investors will not identify these risks, but the rule is rather that investors are more or less aware of what they are buying and should be offered goods that are “as far as possible fresh and without defects”. Many potential risks can be eliminated or at least reduced at the initial stage before the sales process starts, which significantly increases the chances of the successful completion of such a project.

Alternative strategic options and their value

No business owner can be 100% sure that selling the company at a given moment is the best solution possible. Most often, there are a few other strategic options – you can carry out an ambitious investment program, try to enter new markets, or simply continue operations in their current shape, hoping to improve market conditions and increase the dividend. Finally, you can try to take over competitors or companies that match your strategy. Of course, nothing can replace your own experience and intuition, which best suggests what to do at the moment, but you need to help your intuition by performing an initial calculation of the various strategic options. Such analyses also help in assessing proposals that investors will submit to us later – we are then able to refer the parameters of these offers to specific alternative options.

Readiness to accept market conditions

The last and most important question that entrepreneurs should ask themselves before proceeding with the project of selling their company is, “Am I willing to sell my company on market conditions?” Of course, at first glance, most of us will answer this question with, “If the offers are attractive, why not?”, but the essence of this question comes down to a transaction concluded on market terms. Knowing the strengths and weaknesses of our company, expecting who may be interested in purchasing it and why, and having defined alternative variants, we can try to set the threshold conditions for our transaction. The term “attractive offer” is not a theoretical term, but is based on specific calculations. The company’s sales process is difficult and time-consuming so it makes no sense to start it if our expectations regarding the value of the transaction significantly deviate from what is possible to obtain.

Project Preparatory Phase

The preparatory phase is the answer to all of the questions above and should be carried out before starting the actual company sales project. The duration of the project preparatory phase varies (usually from a few weeks to several months), and it depends mainly on the scope of necessary work related to the preparation of the company for sale and limiting the risks. In my experience, I can say that those entrepreneurs who have decided to carry out such works are definitely better prepared for the company’s sales process and have a much better chance to complete such a project successfully.

Of course, it often happens that the preparation phase is carried out in parallel to the first negotiations with potential investors. This is mainly due to the fact that the impulse to undertake this work is precisely the interest reported by such an investor. It can be done, but it requires proper management of the negotiation process.

Project Executive Phase

Generally, the majority of company sales transactions are carried out in several stages during which the following works are carried out:

  • Drawing up a list of potential investors;
  • Presenting brief information about the company being sold (the so-called “Information Teaser”) to these investors;
  • Signing confidentiality obligations by investors who have expressed their interest in participating in the project and providing them with basic materials about the company being sold (most often in the form of the so-called “Information Memorandum”);
  • Submission of preliminary offers by investors (mainly based on materials presented in the Memorandum);
  • Another selection and preparation of the so-called “Shortlist of Investors” with whom further negotiations will be conducted;
  • Allowing selected investors to carry out research on the enterprise being acquired (so-called “Due Diligence”);
  • Negotiations of transaction agreements;
  • Submission of binding offers by investors;
  • Final negotiations and signing contracts (usually conditional) for the sale of the company;
  • Fulfilment of conditions precedent (e.g. consent of UOKiK) and closing the transaction.

The works listed above are just an example of the most characteristic elements of the company’s sales process. These elements can appear in different orders and have different weights. Usually, additional works come up resulting from the individual characteristics of the companies taken over or the individual course of the conducted process. The duration of the project implementation phase is usually 9-12 months, but it depends largely on the behaviour of the investors. The skilful planning and implementation of such a process, taking into account the needs and limitations of both the seller and investors, is one of the key success factors.

How do you sell your own company – Summary

Selling your own business is a difficult and complex process for an entrepreneur (also for emotional reasons), which should be carefully planned and professionally managed. The sooner we prepare for it, the bigger the chance for final success. Of course, you can try to carry out such a process yourself, but cooperation with an experienced transaction advisor, who will be responsible for coordinating and managing the entire project, gives a much better result. The advisor should be involved with appropriate advance so that they can fully bring the expected values. It is worth emphasising that the main element of the remuneration of such a consultant is usually a bonus on success payable after the conclusion of the transaction.

I hope that this article will at least answer the question asked in the title – how do you sell your own company?

Find out more about the choice of advisor in transaction processes in the article “Transactional or strategic advisor“.