If you are like most business owners, you’ve put a lot of sweat equity into building a successful business with the goal of eventually selling your company to achieve personal liquidity for retirement or the pursuit of another dream. As the time to sell approaches, an understanding of the sale process could reduce anxiety and allow you to maximize shareholder value. Generally the sale process includes valuing your business, identifying and marketing to potential buyers, negotiating and preparing documentation, conducting due diligence, and closing.

Selling a business, however, is not an easy task, emotionally or mechanically. Before you put your business up for sale, do some serious soul-searching. Assess your future personal and financial needs and goals. Also, consider the effects of a sale on your company and its employees.

Contemplate whether you have the time and skills to sell your business yourself, or if you should hire an investment banker. If your days are consumed with managing your business or you don’t have strong legal and financial skills, you probably don’t want to go it alone. Although an investment banker will charge fees, their experience, contacts and negotiating skills should result in a higher price for your company than you would get if you tried to sell it yourself. At the very least, be sure to have an experienced attorney and accountant involved early on.

The decision to sell your company should be made well in advance of the time you actually put your company up for sale. This will give you adequate time to position your company for a successful sale. At a minimum, make sure your business plan has clearly defined strategies, measurable goals and a detailed organizational structure. In addition, make sure your financial statements are in order and you have realistic budgets and forecasts of future revenues and profits.

Determining the value of your business is one of the first steps in the sale process. It is important to establish a price at which you would be willing to sell your business. A great deal of time and money can be wasted if the sale process is undertaken with an unrealistic price expectation. To set a realistic price, it is a good idea to have an outside party – your investment banker or other valuation advisor – conduct a valuation of your business.

As much as people would like one universal formula for valuing a business, various methods are used. "Value" means different things to different people, and valuing a business, to a great extent, is a subjective process. The three most commonly used methods for valuing a company for sale include the following:

Discounted Cash Flow: This method establishes a valuation of a business based on the value of its future earnings potential. The four primary components of this valuation technique, which can effect the result, include the projected cash flow forecast, reinvestment rate, terminal value and discount rate. Obviously, the usefulness of this technique depends on the extent to which the underlying assumptions are appropriate.

Comparable Transaction Analysis: Often the valuation of a business can be based on other sale transactions consummated within your industry. The overall objective of this approach is to identify some pricing relationships: ideally, price/earnings ratios, revenue multiplies, cash flow multiples or market/book value premiums for completed transactions and apply them to determine a company’s value.

Comparable Companies Analysis: This valuation method assesses the value of a business based on the market price of publicly traded companies subject to similar economic trends and risks. Like the comparable transaction analysis, this method identifies certain pricing relationships and then applies them to determine a company’s value.

These methods quantify the extrinsic value of your company, but don’t always account for the intangibles that can add to its intrinsic value. Intrinsic value is often difficult to capture and tough to price. As you or your investment banker approach potential buyers, be sure to communicate effectively about the unique characteristics of your business that add to its overall value, such as a dynamic corporate culture, a strong
management team, or a unique market niche.

Thinking through the implications of a sale and establishing a realistic price expectation will help you determine the type of buyer you should pursue to best meet your objectives. Buyers basically fall into two categories: strategic and financial. Strategic buyers are typically looking for businesses with synergies that will accelerate
their own growth. For example, a strategic buyer may be a business in your industry that needs your direct sales force or engineering capabilities. Strategic buyers will probably offer a premium price for your company, and will most likely change your company’s operations to maximize the synergies between the businesses.

Financial buyers are investment groups that are primarily motivated by investment return. Since their investment return expectations are normally high, they tend to look at many potential transactions before investing and generally don’t pay premium prices. Typically, financial buyers will leave the company’s operations intact
after a purchase, with plans to sell the business in the future to realize their investment return.

Regardless of the type of buyer sought, after identification it is important to evaluate and qualify each potential buyer. Valuable time and opportunities can be lost if potential buyers are not qualified early on.

Once qualified buyers have been identified, the next step in the sale process is to market your company to them. A comprehensive marketing plan and thorough buyer solicitation will typically result in the highest price for your company.

Companies are typically marketed by use of a Confidential Information Memorandum. This memorandum should place the company in its best possible light and provide prospective buyers with comprehensive information about the company. A well-prepared Confidential Information Memorandum allows a potential buyer to
more timely assess its level of interest and streamlines the due diligence review process.

Orchestrating the marketing process according to an established schedule and qualifying potential buyers are important to a timely and successful sale. Your chances of receiving the maximum price possible for your company are greatly enhanced if you can create an atmosphere of competition among qualified potential buyers through an"auction" process.

Negotiations will culminate in the selection of a buyer, and the transaction terms should be detailed in a formal Letter of Intent. This is where experience and negotiating skills will pay off. Typically at this phase, the seller is expected to discontinue discussions with other prospective buyers even though the selected buyer is not contractually committed to buy your company. Therefore, it is important to examine all the difficult issues up front before you dismiss the other potential buyers.

The selected buyer, in cooperation with the seller and the respective teams of professionals (investment bankers, attorneys and accountants), then proceeds with the due diligence review process. During this same time, the parties will negotiate and enter into definitive transaction documentation. This process is time consuming and distracting for business owners and their employees, and can take more than six weeks to complete. Thorough preparation early on and a well-crafted Confidential Information Memorandum can greatly facilitate this process.

All that is left now is to close the transaction and enjoy your well-deserved rewards. From beginning to end, a well-orchestrated sale process can take approximately six to eight months. As with anything, adequate planning and preparation up front is the key to consummating a successful transaction in a timely manner.