When you’ve done the work ahead of time with your exit planning process, you’ll be ready should the decision be made to sell the business. However, you likely aren’t sure what to expect when that time comes. Below is a recap of my experience as CEO of Roth Bros, Inc., when we decided to sell the business. Although it is business, it’s also emotional, and it can be a long, drawn-out process finding the right buyer and making the sale happen. In that way, it’s much like getting married.
I hope this recap helps to prepare you for what lies ahead when selling your business, as I describe the process and what it was like for me personally.
Timing: Are you ready?
The time to consider selling is when you do not have to, the economy is growing, private equity (financial) buyers and strategic buyers both are interested in your space, and you have no material uncertainties (like a lawsuit) going on. That was the situation we were in.
In addition, another major consideration for me, and one that most contractors have to think about, was what would we do when the ownership team ages or motivates out? I thought a lot about how long we could keep posting these great numbers. To reduce this uncertainty, I decided the timing part of the equation pointed towards pursuing a sale.
Starting the dating process
Before you can sell your business, you need some potential buyers—just like before you get married, you need some potential suitors. Our investment banker brought in both strategic and private equity firms for management presentations. Be prepared and rehearse for these presentations: The first impression is critical.
During this time, we received a few letters of interest so we knew the ballpark range of pricing and got a better sense for strategic vs. financial buyers. During the management presentation meetings, we also got to ask them questions, which provided an initial feel for the culture fit.
We decided to consider a strategic buyer and then started an approximately six-month process of getting to know each other better with several face-to-face meetings. Just like with the dating that leads to the wedding, spending the time to get to know each other in different venues is very valuable.
The Letter of Intent (LOI) = the engagement
When a firm is interested in your business, you’ll receive a Letter of Intent (LOI). We received an initial LOI draft. It didn’t contain all of the terms I wanted to see, so I had to insist on more. Be willing to do so. I believe all material issues should be negotiated prior to executing the LOI, which occurs before the time-consuming due diligence process begins. Even though it can delay executing the LOI and thus the process, I highly recommend having the LOI reflect the outcome of negotiating escrows, working capital adjustment calculation, claw-backs and related timeframes, employment agreement terms, delegation of authority and earn-out terms before moving forward.
There is a certain momentum to deals and you don’t want to get too far into it with major things still to be negotiated because you will be in a weaker position then. If you don’t have all the big things negotiated already, you might convince yourself to settle on something because you already have X hours into this thing. So, just get it all worked out before the LOI is executed when it’s easy to walk away. For us, we worked it out and moved on to the next step.
Due diligence = meeting the future father-in-law
Any self-respecting father-in-law is going to want to know everything about a potential spouse for his child. And so it is with your potential buyer as well, which can mean a lot of work for you. In our case, I was unprepared for the amount of due diligence a multinational buyer would require. It was overwhelming.
After going through that experience, I recommend getting a common due diligence list from your attorney or accountant, creating an electronic document room and starting the process of scanning all the basics into it. It’s a good practice anyway to have all your corporate papers, legal agreements, key customer agreements, employment agreements, supplier agreements (look out for ones that have to consent to a sale), tax returns, audit reports, etc. scanned and stored in one central location.
Regardless of when you start on it, this stage is a lot of work. My assistant and I worked at this 7 days a week, 12-hour days from Labor Day until we closed at the end of November. We were able to get the buyer everything they needed and professionally managed the financial, IT, safety, environmental and operational due diligence processes. But it was not fun.
Purchase Agreement (PA) = emotional rollercoaster ride as you get one step closer to the altar
You start working on the Purchase Agreement (PA) after the initial due diligence does not uncover any major issues. At this point, you’re tired and you’re trying to hold it together while keeping your team focused on delivering committed results. I read every page of every draft of all the turns of the documents so I could discuss any issue with our side and negotiate any important issues the legal teams were at an impasse on with their business people.
This process really is an emotional rollercoaster so you have to keep perspective on what is important and what really is not. I’ve seen deals fall apart because either side decided emotionally to draw a line in the sand about an issue that wasn’t critical to the success of the deal. Recognize you’re going to be tired and emotionally drained, but keep it in check. Every day I read a note that I had written that said, “You can always walk away…you do not have to sell.” This helped me keep level-headed and also gave me the conviction to negotiate hard for things that were important. The good news is, as tired and emotional as you might be, at this point in the process, you can see the goal line and both sides starting to move towards it.
Expect a surprise or two before closing
No wedding is perfect. Something always goes awry. Expect this when selling your business too. My main surprise resulted from learning the week of closing that both a supply agreement and a major customer agreement contained change of control consent requirements. Due to the size of the deal, there was also a government filing that could have impacted the timing of the close. So expect a surprise or two and problem solve your way through them with a level head.
Plan ahead for day one after the closing
You don’t want to foist a newly married person on in-laws they haven’t met before, right? So spend time with the buyer before the closing to plan the communication process to your key employees, all office and field employees, customers, suppliers and your community, etc. It was during this planning effort when it hit me that I was never going to be fully in charge again. It’s a weird feeling but a normal one. Expect a wide range of emotions during this time. Even though it’s an emotional time, you need to keep your eye on the prize and remain focused.The closing and wire transfer = the big day
The feeling at the end is like leaving after the wedding reception for your daughter when you are completely drained–except in this case, you’re not broke. All the planning and anticipation only to find out the closing is anti-climatic, just signing agreements you reviewed 10,000 times. The only thing left to do is to wait for the call or notice from your bank. Once the wire hits your account, there are parallel opposite feelings. For me, I felt a great sense of accomplishment, a sense of relief and utter happiness on the one hand. And, “What the hell did I just do?” feelings on the other. You need to understand these are normal feelings, and experiencing both at the same time is to be expected.