The fact of selling a company is one of the most challenging things to do because it’s necessary to determine many factors. As an entrepreneur, you will need to affront many factors to decide if it’s a good option for selling your company. It means capitalizing all the earned money throughout your life.
Many third age people decide to sell their companies to have financial stability. That is demanded in a life stage where the person can’t make money on his own or need more money than what he earns.
Sometimes, retirement can’t afford bills that a person needs to live with comfort. Therefore, many people are starting to feel anxious about these things and decide to find ways to have enough money at their ages.
There are many websites and companies to get advice about selling a company, but the best option can be Pretivm.es. This M&A (mergers and acquisitions advisor) specialized in profitable companies in the lower middle market.
One of the most critical questions that we are often asked by entrepreneurs who want to sell their companies is what types of buyers there are.
Depending on the type of sector we are in, there are two types of buyers:
1. Financial investors
This type of buyer is not an expert in the business, and therefore, they will try to keep the current management team in the company.
The degree of personalism of the company will be essential for this type of buyer to end up buying our company. If the owner and his family are linked very carefully, and if the intention is to leave the company after the sale, it will be challenging for the M&A advisors to convince a financial investor to buy the company.
Unless we guarantee that we will remain in the company until the buyer recruits the new managers. Some “earn out” (deferred payment subject to compliance with the business plan) is commonly used. Another option that can eliminate the uncertainty in the operation, could be to maintain a minority percentage of shares with a drag and drop clause (drag alone and tag alone).
What are the advantages of selling the company to this type of buyer?
Firstly, both investors (funds and venture capital) have a professional team able to manage this type of process, so they are usually agile in the process. They do not get too dizzy until a decision is made. As they are professionals and are not direct competitors of the target company, there is no risk that in case they do not reach an agreement, they can use the information to make us unfair competition.
Finally, we must be aware that this type of buyer usually intends to sell the company after a few years, obtaining a significant gain over the price paid to us. The average return they often demand rarely falls below 20%-25%.
How can we benefit from your strategy? If we trust our business, it is interesting to keep a percentage of shares, even if it is a minority one, by establishing an accompanying clause (tag alone and drag alone) in the SBI contract (selling buying contract) in the sale of the shares or holdings. That will oblige a future buyer, to buy ours shares in the same conditions as those of the investment fund, so we can obtain significant additional profits 5-7 years after the sale of the majority package, as this is the average period in which an investment or venture capital fund remains in the company.
2. Industrial buyer
That is the usual buyer for M&A companies located in the lower middle market (companies with EBITDA of fewer than 3 million euros).
These are companies in the sector that seeks growth through mergers and acquisitions. It is a formula that allows for rapid growth with less risk than organic growth (carried out with their resources). There are many reasons why a company decides to carry out inorganic growth (entry in new markets, in new geographical areas, control of a critical supplier, etc.). The purchase of a company generates synergies and, in many cases, economies of scale, hence the importance of correctly identifying who can buy our company.
These buyers, being from our industry, know our business, which has enormous advantages when closing deals, since our continuity in the company will not be so important.
On the contrary, unlike the sale of companies to a financial investor, unless the buyer is a large company with a lot of experience in corporate operations, if they are not familiar with this type of process, they tend to be slower in making decisions. Besides, on many occasions, the company has to leverage itself to make the purchase, leaving the entire operation subject to possible project financing.
What is the best moment to sell a company?
M&A operations involve lengthy and complicated processes. Therefore, it is mandatory to choose the right moment, when we can show the best results, having a historical that supports the track record. Some entrepreneurs decide to exhaust the grow cycle to the maximum and decide to sell when it is already exhausted.
It is advisable to prepare the sale. Firstly, by training the key personnel in critical positions, making us dispensable in the company. The less dependence the company has on its owners, the easier the sale of the company will be.
On the other hand, it is widespread for companies to try to reduce results by acting on the variation in existence or by inflating expenses to reduce the corporate tax base. These corrupt practices have a very negative impact when it comes to selling the company, as in many cases, an EBITDA multiplier determines the sales price. The lower the operating result of the company, the lower the amount we receive for sale. If we intend to sell the company, reducing the outcome will allow us to save only 25% of this year’s result. For example, if the company is sold with a multiplier of 8 times EBITDA, if we have an EBITDA of 100, by saving 25, we will have stopped earning 200.
Another action that can facilitate the operation is to audit our company, although we are not obliged to them. Even if the buyer, when reaching an agreement, performs due diligence, it will always be of great support to have an audit report that supports our proper management.
All these suggestions can help us to get the best price for the sale of our company.