How Do I Sell My Business…or Complete a Dividend Recapitalization Process?

If you are a business owner, you may have considered selling your business or recapitalizing, immediately or in the future. You might want to realize greater wealth, or gain liquidity to reinvest or use for new projects. You may want to separate value from control as part of your wealth transfer planning. Your reasons are as unique as you are, and important to what comes next.

However, completing a business sales process or a dividend recapitalization is no small task. These are complicated processes with multiple steps and require coordinating a number of professionals. The right advisor can help. So can reviewing best practices to ensure you understand the journey ahead.

We have outlined below a brief “business for sale” process, followed by dividend recapitalization information built by the expertise of professionals at William Blair. The opportunity to be acquired or to generate liquidity can be both exciting and overwhelming, and the stakes are high—from both a financial and an emotional standpoint. We help guide owners of a family business or other closely held business through these monumental decisions, working together to evaluate the options available to create liquidity.

What Happens When Selling a Business? What Steps Are Important?

A sale, also known as a merger or acquisition, involves selling all or a portion of the company’s shares to a strategic buyer or a private equity firm (also referred to as a “financial sponsor”). In your case, the company up for sale may be owned by you the entrepreneur, or it may be a family business, or one with multiple, unrelated owners.

For business owners considering selling a company, it is important to understand the various steps of a sale process. Click below for each step.

Step 1: Should I Hire an Advisor to Help Sell My Business?

Selling a business can be a complicated process, and the potential buyers on the other side of the bargaining table usually are very sophisticated. It is important to have a team of trusted advisors with extensive experience managing these processes and representing companies in your industry.

• Team composition: The team may include investment bankers, attorneys, accountants, wealth planning specialists, and analysts who perform quality of earnings reports and market assessments.
• Take the lead: In most cases, an investment bank should be selected first because the investment bankers will lead the process and other advisors. The investment bankers can guide the sellers through the process of deciding 1) which type of transaction will be the most effective and 2) the timeline for pursuing a sale.
• Involve your wealth advisor early: By Step 2, business owners should begin discussions with their wealth advisors about strategies that may be used to minimize the taxes related to the sale and to achieve the owner’s long-term financial goals. These discussions should include a review of the owner’s estate planning documents, and should cover topics such as income tax implications of a transaction, wealth transfer and gifting objectives, and risk management.

Step 2: What Documents and Information Are Required to Sell a Business?

At a formal kickoff meeting between the investment bankers and the owners, the team will start brainstorming about which type of buyers will have the most interest, when to launch the marketing process, how to position the company for maximum value, and what questions or concerns will come up during due diligence.

• Marketing materials: Investment bankers will begin drafting the slide decks, financial models, confidential information memorandum, and other marketing materials that will be used to tell the company’s story to the universe of potential buyers.
• Data room: The investment bankers will begin creating the data room, which is a repository of financial statements, contracts, and other important documents that potential buyers who have signed non-disclosure agreements will be given access to in the due diligence phase.
• Quality of earnings: A third-party firm will begin creating a quality of earnings report, which is a forward-looking analysis that attempts to strip out irregularities related to taxes, currency movements, and one-time events, and measure the company’s ability to generate sustainable profit.

Step 3: How Can I Find a Buyer for My Business?

This is the point when the investment bankers will begin reaching out to potential buyers to let them know that the company is available for sale and to gauge their level of interest.

• Timing of outreach: Rather than reaching out to the entire universe of potential buyers at once, the investment bankers may decide to stagger the timing of when companies are contacted. This strategy, which is based on the investment banker’s knowledge of individual buyers’ aggressiveness and past behavior in deal processes, can be helpful in creating a dynamic where the most interested buyers are able to stay involved until the final stages.
• Non-disclosure agreement: Interested parties will sign a non-disclosure agreement (NDA) and then receive the marketing materials. The NDA is used to ensure that any trade secrets in the marketing materials are not used to adversely affect the seller’s business.
• Indication of interest: The interested parties will then submit an indication of interest (IOI), which outlines the range of prices that they would be willing to pay for the business and the assumptions they used to arrive at those prices.

Step 4: How Do I Answer Business Buyers’ Questions?

The investment bankers will determine which bidders will be invited to dig deeper to determine how much they would be willing to pay for the company.

• Evaluating IOIs: Upon reviewing the IOIs, the investment bankers will determine which bidders will be invited to conduct their due diligence on the company. An experienced investment banker will have insight into which potential buyers are most likely to make it to the finish line with a final offer at the higher end of their IOI range.
• Hosting management presentations: During the management presentations, potential buyers will meet with executives of the selling company to ask questions about the business and get to know the leadership team better.
• Granting access to the data room: Potential buyers will be given access to the data room, allowing them to review details of employment contracts; customer, supplier, and vendor contracts; insurance policies; and other documents that contain important details about the company’s operations, legal obligations, and financial background.
• Follow-up meeting: Many potential buyers will ask to hold follow-up meetings with the executives to go over any questions that arise when reviewing the data room.

Step 5: How Do I Choose the Right Buyer for My Business?

After the potential buyers have completed their due diligence, bidders will be asked to present their best and final offers.

• Reviewing the purchase agreement: In addition to giving a specific purchase price, the final offer will include a purchase agreement that stipulates details, such as how the purchase payments will be structured and financed, whether members of the seller’s management team and other key employees will be required to remain with the company, and whether the sellers will be able to participate in the continued growth of the company via rollover equity contribution.
• Selecting the winning bid: At this point, the owners and their team of advisors will be able to determine which bidder will make the best partner for the company. While price is certainly a major consideration, it is just one of many factors that need to be evaluated. Whether the bidder is a good fit culturally can make an enormous impact on the success of the company post-acquisition. The owners will also want to understand the bidder’s plans for the company and how those could affect the company’s employees. Other important non-price considerations include the timing of the closing and the degree of certainty that the bidder will make it to the finish line.
• Assessing the tax consequences: The owner’s wealth advisors should review the purchase agreements to determine what portion of the transaction will be treated as ordinary income vs. capital gains.

Step 6: What Happens While Finalizing the Business Sale Transaction?

Once the winning bidder has been selected and the final details have been negotiated, the final steps involve signing the transaction, receiving the funds, and passing regulatory review.

• Getting to the finish line: Once the final agreement has been negotiated and signed, it becomes a binding contract.
• Funds transfer: After the signing, typically there is a 15- to 30-day delay before the funds transfer to the owner’s bank account.
• Regulatory review: During this period, larger transactions will be reviewed by the Federal Trade Commission for compliance with anti-trust laws, and the buyer may be completing its financing arrangements.

How Long Will It Take to Sell My Family Business?

Although timing can vary significantly, it often takes 12-24 months from when an advisor is hired to when a transaction is completed. In a mergers and acquisitions (M&A) environment where buyers have become increasingly aggressive in their pursuit of high-quality companies, these timelines can be even shorter.