How Long Does It Take to Sell My Business?
by: Trent Barnes
If you are thinking about selling your business, you might be wondering how long the process will take. This is a common question, and the answer is a bit more complicated than many realize. In this article, we will provide an overview of the sale process while highlighting several factors that can delay or expedite the timeline. One important caveat before we begin - this discussion assumes you will hire an experienced M&A banker and M&A attorney to manage the process. Without experienced advisors to assist you, there is no telling how long the sell-side process will take.
Pre-Sale Process
Although this article’s scope is the length of the sell-side process, we would be remiss to exclude a discussion of pre-sale preparation, that is, the work an owner performs before beginning the sales process. Some examples include - maintaining the corporate books and records, ensuring complete and accurate financial reporting, and executing the company’s growth strategy. Focusing on these items will improve the efficiency and outcome of the process and should be performed continuously. Once you decide it is time to sell the business, there are two crucial tasks to complete.
1) Establish Goals of The Transaction
The first task is to define what a successful outcome means to you. Do you want to maximize after-tax, cash-at-close proceeds, or retain equity for future upside? Do you want to retire once the transaction has closed or continue working for the business? What about your employees? These are just a few questions an owner should ask as they prepare for the sales process. Defining success before the sales process begins will provide a clear road map and enable you and your advisors to work towards your goals.
2) Identify and Select Advisors to Assist with the Transaction
The sell-side process is complex. Most business owners find that it is burdensome to run the day-to-day of a business while also managing all the aspects of a sales process - creating marketing materials, identifying and contacting prospective buyers, negotiating non-disclosure agreements, fielding information requests from numerous parties, and negotiating complicated deal terms - this is where an advisor becomes invaluable. To maximize the chance of a successful outcome, an owner should identify an experienced M&A banker and M&A attorney to assist with the transaction.
Preparation:
The preparation phase is the first phase of the sell-side process and typically lasts 4-6 weeks. During the preparation phase, your banker will work with you to understand your business operations, prepare marketing materials for the company, and curate a list of prospective buyers. Your banker’s knowledge of the industry and buyer landscape will go a long way to shorten the preparation phase. With sufficient industry knowledge, an advisor can quickly understand the nuances of the company and craft a compelling story for buyers. Similarly, familiarity with the buyer landscape will enable the banker to compile a target list containing the highest-quality buyers. Knowledge of which firms are actively looking for companies in the industry, which firms have the financial firepower to pursue a transaction, and which firms can efficiently execute a transaction are all relevant factors that the banker will consider. The more experience the banker has, the faster you can get through the preparation phase. However, there are steps that you can take to hasten the process as well.
Preparing for a sale before beginning the sell-side process is the best way to reduce your workload during the preparation phase. Financial reporting is one example. Buyers will want to understand revenue and cost by business line, geography, customer, product, and other detailed financial and company information. Having this data already prepared will save you time. Proper preparation will enable you to get to market efficiently.
Marketing:
The timeline of the marketing phase is dependent on the chosen marketing strategy. A broad auction strategy will market the business to a hundred or more buyers; a limited auction strategy may only contact a handful of high-probability buyers. There is a trade-off here. Broad auctions are more likely to maximize the transaction price, but calling and fielding questions from all the prospective buyers will take more time. On the opposite end, a limited auction is quicker, but the lower number of prospective buyers could result in reduced competition. With a broad auction, you can expect to spend 5 – 6 weeks in the marketing phase. In a limited auction, 3 – 4 weeks is more likely. There are other considerations to the auction strategy outside of transaction value and timing. An experienced banker will be able to walk you through the pros and cons of each to determine how to accomplish your goals.
At the end of the Marketing phase, interested buyers will submit their initial offer, known as an Indication of Interest (“IOI”). As transaction structure and pricing can differ significantly from offer to offer, your banker will expedite the process by standardizing the IOIs so you can review the bids on an “apples to apples” basis and select the best buyers to take into the next round.
Diligence:
In the diligence phase, the selected buyers will meet you and your management team and tour your company’s facilities. The buyers will dive deeper into the company’s operations and expect additional in-depth information. A good rule of thumb is that the diligence phase will last 4 – 6 weeks. However, the number of buyers included in this phase and your availability are significant timing factors. Your banker will speed up the process by efficiently coordinating calendars, preparing materials for meetings with buyers, and handling information requests.
After the management meetings, your banker will request Letters of Intent (“LOIs”) from the buyers. Similar to IOIs, LOIs lay out the buyer’s proposed transaction structure and valuation and will require standardization by your banker so you can choose the best offer. Once you have selected the LOI, you will enter the final phase of the sell-side process.
Closing
Ideally, the closing phase should be as quick as possible to minimize the risk that an unforeseen event jeopardizes the transaction. Typically, the closing phase will last 60 – 120 days, but this will vary from buyer to buyer. Buyers who have made numerous acquisitions and buyers in your industry should be able to close faster than buyers who are new to the M&A process. Additionally, you and your advisors will play a significant role in expediting the process.
Once the closing phase begins, the buyer will begin detailed due diligence, often using third party experts. Common diligence areas include Legal, Accounting, Tax, Insurance, Benefits, Environmental, and IT. Your banker will work with the buyer’s diligence providers to answer questions using documentation already provided and route new document requests to the appropriate company contact. Your banker will also negotiate key transaction terms with the buyer and work hand-in-hand with your M&A attorney to ensure deal terms are understood.
Your M&A attorney also plays a significant role in the closing phase. Your attorney will prepare and review the Purchase Agreement (“PA”) to ensure it appropriately reflects negotiated deal terms and company specific representations. It is crucial that the deal terms and representations are accurately reflected in the PA to avoid future liability.
The most important thing you can do to ensure a smooth closing process is quickly respond to data requests and carve out time to meet with your banker and attorney regularly. Although the wide variety of topics covered by the diligence teams and the detailed discussions around deal terms can make this phase feel hectic, your banker should be able to take the brunt of the work so you can focus on running your business.
Finally, the PA is signed, and the buyer sends you a wire. Congratulations!
Ultimately, the sell-side process can take anywhere from 5 to 9 months. Numerous factors impact the timing of the sell-side process, but the one constant is that experienced advisors will work towards quickening the process and giving you the best chance for success.