How to sell your small business to a much larger company
Selling a small business to a much larger buyer is a daunting process. Whether its negotiating headline terms, getting shareholders’ objectives aligned or surviving due diligence (DD) the process can be stressful.
On the plus side, it’s easier than ever to sell your business to a large company. Buyers are searching the globe for innovative new products and, increasingly, for exciting and entrepreneurial talent that can provide a fresh perspective.
And, if you have the talent and innovation, bigger businesses can open the doors to vast global markets and give you a chance to make impact on a much bigger stage.
Macro-conditions favour exits
Large companies are increasingly turning to smaller businesses for innovation and ideas. Corporates recognise that the talent within small businesses often yields better results than internal R&D.
In this way, purchasing smaller businesses has become a way to outsource innovation and gain traction in new categories and audiences faster.
Globalisation and modern technology have meant buyers are looking all over the world to acquire businesses. While in previous decades, large companies might not understand the market and legal structures in other countries, today they have multi-national advisory teams and are comfortable operating in different regions.
How do deals come about?
Due to this shifting approach to R&D, it is more likely that you’ll be approached to sell. Buyers are more sophisticated and channel a lot of resources into finding companies with innovative solutions or products they could market. Digital channels also amplify smaller businesses.
You’ll be perceived well if you approach a corporate too. If you’re in the mindset to sell, it’s essential to have something that is genuinely scalable and aligns with the buyer’s strategy. The critical thing is to find out exactly what that buyer needs and to ensure you have a clear fit.
If larger buyers see an opportunity, they may ask to run a “co-creation session” with you to build a post-acquisition business plan. This forms the basis of the internal business assessment they need to start the acquisition process – take advantage of this but be careful to protect any core IP that is giving you a competitive edge.
How does the conversation start?
Ahead of a Letter of Intent (LOI), which marks the start of the formal process, the buyer will expect to have some sight of the key performance data and other information about your business. You need to be careful to share just enough for them to make an indicative offer.
If the buyer pushes for too much information ahead of an LOI, get them to sign a non-disclosure agreement (NDA) up front. If they refuse, warning bells should start ringing.
You should give the buyer some of the key criteria of what it will take to buy your business.
The key is you have a choice of getting immediate value through cash or potentially getting more through an earn-out. Most buyers will consider ‘structuring’ a deal in a way that motivates you to sell and/or want to stay and perform in the post deal world.
When entering negotiations, you need to have a best- and worst-case value for the business. You want some justification for your price, too. Look at the market and see what similar companies have sold for. When you’ve done the strategic fit, determine how much acceleration and value you could give to the buyer.
If you have more than one buyer interested, it’s better to keep the target price and terms to yourself and use competitive tension to get the best deal.
What happens when you get a Letter of Intent?
If a buyer is excited about your business, they’ll draw up a LOI, draft heads of terms or make you an indicative offer. This is the start of the formal process.
The LOI needs to be agreed by shareholders, even if you have to use a drag along clause. You should aim to keep the communication positive internally and externally, and that means getting people to buy into the deal. You also must be aware of clauses in your Articles and shareholders’ agreement (if you have one).
You should never respond to an LOI before getting advice. The main reason is there may be some very large tax traps based on the conditions and structure of the deal. Ensure you get corporate finance, tax, and legal advice.
These experts allow you to give a professional response, help you negotiate the best position and give buyers confidence you can make a deal happen.
The offer contained in the LOI will be subject to due diligence (DD)
How much should you share before getting an LOI?
There are two schools of thought on LOIs and how much of the discussion happens before receiving a formal offer:
● Share the minimum amount of information possible and negotiate through due diligence
Get as much information out there as possible, so there’s little room for negotiations after the LOI has been received
There’s little that’s legally binding in an LOI, except for certain clauses around exclusivity and confidentiality.
Thinking about your sale value
One tip when thinking about what you might sell for is to consider the following questions:
1. Valuation: What is the total value you would be prepared to sell your business for (and on what do you base this value on and how defendable this is)?
2. Structure: What deal structure would you be prepared to accept? There is often a trade-off between valuation and structure, e.g., a buyer might offer you a really high valuation but pay this over a future period (typically called an “earn out.)
3. Deliverability: Can a buyer prove to you that they have the real desire, strategic need, deal resource, available cash or approved funding and shareholder/senior decision-making support and approval?
What happens after the LOI has been received?
LOIs normally include exclusivity clauses, which means you’ll only deal with one potential suitor for a particular period (normally 90 days). Shorter exclusivity periods tend to focus everyone’s minds. The key issue for a small business is to never not take your eye off running the company – a short time frame can help with that.
Be careful about exclusivity clauses, especially if you’re talking to more than one potential buyer. You may have to run a process to see who to go into exclusivity with.
Once you’ve signed an LOI the most important thing is to prepare for DD. You should carry out your own internal DD beforehand, preferably with your advisers (legal, financial, HR, intellectual property and commercial). It’s helpful to get a DD checklist that your buyers use, which your advisers should have.
Renegotiating LOI terms
The only reason any big terms from the LOI should be renegotiated is if the buyer finds something unexpected in DD. That’s why it’s important to get everything out on the table and make sure all the big terms and issues are covered.
You then need to prepare yourself for an onslaught of DD questions. They’ll ask you to find every piece of paperwork you’ve ever signed. Often, they’ll ask for things you don’t have, and you’ll need to have answers on why you don’t have them.
You’ll need a repository of all the information that the buyers asked for and you’ve disclosed. It’s important to keep it together. You want to be able to say this is all the information they’re basing their decisions on.
This is about becoming due diligence ready – having no skeletons, no surprises and defendable financials and forecasts makes sure there’s no obvious price chipping opportunities.
Knowing what kind of deal you want
You need to have a view as the founder or main shareholder of what type of exit you want. Do you want to sell and get out? Do you want to partially sell? Do you want to stay in the business and work with the buyer post deal?
It’s important to understand the motivations of your shareholders and how those balances with your expectations too. A professional investor might want to cash out quickly with no warranties and indemnities, the founder might have to stay on and may push for a higher valuation.
Having support from the start of the process ensures you can effectively manage the negotiations, understand the legal and financial ramifications and, most importantly, you get what you want from an exit.
Want to talk through your options? Book a 30-minute exploratory chat with Realise director Richard Fifield, who’s supported founders to achieve exits in excess of £200m.