This is CFO Secrets. The weekly newsletter that serenades you with sweet CFO ballads every Saturday morning.

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In Today’s Email:

• 🫵 Help Grow CFO Secrets

• 🛫 Learn How to Sell a Business

• 👟 What a CFO Should Wear on Their Feet

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THE DEEP DIVE

A Wonderful Story, Consistently Told; How to Sell a Business

This is week 6 in an 8 week season covering the world of M&A from the seat of the CFO

A confession.

Of the 25 or so M&A deals I have done across my career, only one third of them were acquisitions. Two thirds have been divestitures.

I’ve sold a lot of businesses.

And there is one simple thing that sets apart a good exit from a poor exit.

Preparation.

Preparation is everything.

I have been a forced seller of a business, where there was no opportunity to prepare the business for sale. We sold for a 20-30% discount to market value.

I have also run a process where we prepared the business immaculately. We spent 18 months optimizing perfectly for the point we took the business to market.

We secured 15-20% more enterprise value than we expected.

Anyway, a quick reminder…

We’ve spent a lot of time on the deal process and theory in this series so far:

• Week 0 - Introduction to M&A

• Week 1 - Why Business Buy Other Businesses

• Week 2 - How to Value a Business

• Week 3 - How to Build a Deal Team

• Week 4 - The Buy Side Process

• Week 5 - Quality of Earnings

We’ve covered a lot of process and theory in the series so far. And much of this is also applicable to a sell side process.

So I’m going to assume you’ve read it all. And today we are going to get more tactical.

Here are 19 tips for selling a business:

#1 - Know Why You Are Selling

For the rest of this post I’ll assume you want to maximize value. But there are plenty of other reasons to sell.

Especially founder led businesses who will be particular about who they are selling their baby to.

Being clear on what you are optimizing for is critical.

#2 - You Only Get One Shot

The value you get will always be the value you get.

So get it right.

If you sell a business for 10x EBITDA, only to see it’s EBITDA 5x just 2 years later, you have left value on the table.

A good sale process would get credited for that future upside.

Don’t leave money on the table.

#3 - The Range of Values is Huge

On a typical sale process, the first round bids are often + or - 30% around a midpoint.

A range of 70% - 130%.

There is a lot to be gained by getting your disposal strategy and execution right.

#4 - The Value is Controllable

You will hear people say “the price will be whatever the price will be.”

I disagree.

The price will be whatever you convince the buyers to make it.

What ‘the market’ thinks is irrelevant if you can find one person to pay much more than anyone else.

I once sold a business to one of the richest people in the world.

A multi deca-billionaire.

They paid 25% more than any other bidder. Well beyond the upper end of our expectations.

They liked the business and the story we presented so much, they decided they had to win the auction.

So they rounded up by nearly a hundred million dollars.

Pocket change for them.

Rocket fuel for us.

Yes, this is a bit of an edge case.

But this same phenomena happens at different levels.

#5 - Tell A Wonderful Story

When you sell a business, you are not selling a bunch of assets, people, and contracts.

You are selling a story.

And a good story is not good enough.

It must be a wonderful story.

When that deca-billionaire overpaid, they did so because he fell in love with the story.

Of what the business was.

But more important than that, where it could go. And specifically where it could go under their ownership.

#6 - Build a Story in the Zone of Believable Fiction

Businesses never stand still. They are dynamic.

And so are sale processes.

The art of running a good sale process is to make the facts of the business feel static and solid. Even if the business is dynamic.

There are four different zones these facts could live in:

1. Zone of historical reality. This is the zone where many business sales happen. Especially in SMBs. Without proper exit planning. Much value gets left on the table.

2. Zone of near future reality. This is where you get paid not just for the business today but for the forward momentum of the business.

3. Zone of believable fiction. Here you are pushing the story beyond verifiable facts (past or future). And into the realms of what is possible to achieve with the business. I.e. the potential forward momentum.

4. Zone of unbelievable fiction. If you are pushing a story in this zone. You are compromising your credibility with buyers.

You should plan your exit in zone 3. The zone of believable fiction.

This is where you ‘sell the dream’ to buyers.

If you push in to the zone of unbelievable fiction, your story will fall apart. And the buyers will default to the zone of historical reality.

You are now at the bottom of the value range.

Not where we want to be my crispy friends

#7 - Define the Assumptions Under Your Wonderful Story

Let’s say the story you want to tell is as follows:

You have

• a personal care Ecommerce Business with $50m revenue, and $5m EBITDA.

• the leading brand in your market segment, and can grow to $250m.

• an exciting new product development program

• high repeat buy rate

But you need capital to fund inventory and customer acquisition. The ideal buyer will be the one that can solve that problem.

This presents as a capital problem. I.e. it only needs the right PE or VC fund to inject capital, and the business can go to the moon.

There are a bunch of explicit and implicit assumptions here. To name a few big ones:

• the market is big enough to facilitate growth to $250m

• that customers can be acquired cheap enough

• the supply chain plan for growth is robust

• the management team is strong enough to run a much bigger business, or it can be easily strengthened as needed

Any decent buyer is going to DD these points to death.

By defining the implied assumptions in your story, you can work on how you evidence them (more on that later)

#8 - Run the Napkin Valuation Math

It is vital that you build your target napkin valuation math early.

If you are going to deliver that dream value, it won’t happen by accident.

We are going to have to will it into existence (more on how later).

Let’s say your target valuation math is an EBITDA of $15m and a multiple of 10.

You can now work back from what needs to be true to deliver that

#9 - Current Reality Audit

So you have defined the ‘story’ you are selling, the assumptions that would underpin that story, and the valuation math that applies.

You have put some flesh on the bones on the ‘Zone of Believable Fiction.’

Now for a reality check.

Where are you really?

Audit your current business reality against this story you want to tell.

What are the gaps?

Here is an example. We have a business we would like to sell for $120m in say 12 months that today is probably worth $60m:

Here you get a clear simple statement of what is needed to make your ‘believable fiction’ a valued reality.

This moves us to the next point, and the most important point of all…

#10 - Start Planning Early

Good exit or divestiture planning starts 18-24 months before the sale

You can sell a business in a few months if you want to.

But you will be selling on the zone of historical fact ($60m in the above example).

By starting early, you can resolve the issues that bridge your valuation gap.

The bigger the issues, the more time you need.

It’s all about the ambition in your exit valuation and the story you want to sell.

More work to do?

More time needed.

Not just to do the work, but to prove it’s happened to buyers.

Building an audit trail.

#11 - Optimize EBITDA

Assuming you are selling on an EBITDA multiple, you need to optimize short term EBITDA.

Specifically the Trailing Twelve Months EBITDA at the point you sell your business.

Strip out all unncessary cost. Scrutinize every penny. Drive sales harder than you ever have in your life.

There is a lot at stake

Imagine you had an opportunity to reduce costs by $20k per week.

Valuable at any time.

But on an exit runaway, that $20k per week, is an extra $1m of profit per year.

And if you expect to sell at a 10x multiple that is $10m of enterprise value.

$20k per week of cost savings, become $10m of extra value if executed well.

And the earlier you execute these initiative the more you can build them into your TTM EBITDA. Rather than relying on adjustments. We covered this in detail last time.

A watch out here though. You don’t want to push it so far it undermines your ‘wonderful story.’

Say your story is that you have a one of a kind brand that has a unique connection with its customers. And that you hope that will get you a 20x multiple.

If you then kill all brand marketing activity in the twelve months before sale, you destroy the story. You might add an extra 10% onto your EBITDA, but it could cut your multiple in half.

The ‘wonderful story’ is always your true North.

Check out the post on Quality of Earnings to understand the best way to present the earnings of your business to a buyer

#12 - Optimize Multiple

The multiple you are paid will depend on the quality, and credibility of the story you tell.

You need to do everything to remove downside risk to your current earnings. This means asking yourself ‘what could happen that would reduce our future earnings’.

And then pre-mitigate it.

Often this is about the strength and durability of revenues.

How can you improve contract lengths, and customer concentration to improve revenues? Increase switching costs for customers.

Mitigate cost increases. This is particularly relevant in a high inflation environment. How will you convince a buyer inflation is not going to eat your earnings?

Likewise, you want to build some upward pressure on multiples, through growth opportunities. Strengthen the brand. New products. New markets.

It’s all about articulating the full potential of the business, through a growth plan.

#13 - Execute Hard

By now, you will have built a good idea of what is needed to make your sale a success.

Now is the time to ‘control the controllables.’

Micro Management.

12 months of pure execution. Remember $20k per week = $10m.

Once you have the plan together, forget about the sale. M&A processes are very distracting for sellers.

I have seen many sales fall over because the business came away from its plan, and the ‘wonderful story’ fell into the zone of unbelievable fiction, and fell apart.

You have your plan.

You now need to focus on execution to get your reality as close to the ‘believable fiction’ as possible.

This is where you build the proof that your ‘wonderful story’ can be a near term reality for your buyer.

#14 - Get Your House in Order

This is the boring bit.

When you sell a business you will need to put every conceivable piece of information on your business in a data room.

Accounts. Permits. Customer Contracts. Staff Details. Supplier Contracts. Intellectual Property. Tax Records. Price files. Leases……

I could go on, but you get the idea.

Make sure you have these things in order, and in one place. Again this is much easier if you start early.

#15 - Select Advisors Wisely

You need the right advisor line-up. I have covered this in detail earlier in an earlier post. But the two most important roles are the Investment Bank you appoint to run the process, and the law firm you use.

Get this right, and the actual process itself, will be easier.

You should largely just be following advice from your well paid advisors.

The 2-5% of enterprise value you pay them will feel painful. But pick them right and they will add more than this in value every time.

They will help you decide how to structure the process; How many rounds, How to canvass for buyers, What diligence to perform, etc. They do this all day, every day. You should challenge them, but you are paying for their advice, listen to them. Remember though: the big decisions are yours to make, don't outsource them.

The slick process management will make sure you are never left wondering ‘what if’.

They will also help you with how to manage due diligence. Often it is better to get ‘Vendor’ side due diligence on key assumptions in the plan.

As the seller, this will give you a sense for how your numbers will stand up to due diligence before they meet contact with buyers.

More on the details of the process mechanics here

#16 - A World Class CIM

Your Confidential Information Memorandum (CIM) is the document where you formally tell the story of the potential of the business. Sell the dream.

It’s a document normally 50-100 pages where every corner of your business is laid bare for a buyer.

Your investment banker will write this for you but it’s important you are comfortable with the content, and know it inside out.

#17 - Consistent Storytelling

Whilst the CIM is the formal channel for telling your ‘wonderful story’ it is not the only channel.

The story of your business gets told everywhere:

Through your numbers.

Through your customer relationships.

Through the wording in your supplier contracts.

Through the look on your employee’s faces

Through the greeting at the reception desk

Through your leadership actions.

Everywhere

Your job is to make sure, that your wonderful story is told consistently at every point a buyer makes contact with your business.

#18 - Selecting a Buyer and Deal Structure

There is much more than goes into selecting a buyer than just value.

There may be some non-financial considerations (particularly in founder led businesses).

But also, different deal structures will have different post completion risks.

In pure corporate M&A you are more likely to get straight cash upon completion.

But you may get offered stock with a lock up period. Then all a sudden the future prospects of your buyer, and the price at which the stock gets offered is critical.

Or if you are in a founder led business, an earn-out is not uncommon. An earn out is where the cash paid is dependent on post completion performance of the business.

That’s a difficult thing for a seller to swallow. Having the value be dependent on the performance for a period where they no longer own the business.

This is especially common in founder led businesses. Every founder I’ve met said ‘I don’t want an earn out.’

The problem with that, is a buyer will often just de-risk their cash offer down to the zone of historical reality. Once they realize that, an earn out doesn’t feel so bad.

Or you may have fixed consideration, with a part deferred until after completion. Sometimes for many years. Then you have to think about the credit risk of the buyer, and the time value of money.

Even if you have a cash offer, you will have representations, warranties and indemnities in the legal agreements. All which are forms of leaving risk with the sellers.

Needless to say the detail here is extremely important.

Your advisors are the experts but you need to understand exactly what your risks and exposures are on each deal. Then weigh it up against the value, and any non-financial considerations.

#19 - Be Relentless

Sale processes are exhausting. Whether thats as a corp dev on a corporate deal, or even more so as a founder selling your business.

Maintaining energy and enthusiasm throughout is hard but critical.

If you need it, get someone experienced to coach you through it. From a distance. Someone who can listen to the ups and downs of the deal, but keep you level emotionally.

This is how I use my independent directors when leading a deal as CFO. If I were a founder, I would want someone with experience behind the scenes in my corner on a 1 on 1 basis.

So, those are the 19 things you need to know about selling a business.

But the essence of securing a great business sale can get boiled down to on simple idea:

A wonderful story, consistently told.

Next time we will talk about working capital in M&A. Get ready to nerd out with me, HARD.

THIS WEEK ON TWITTER

We settled the CFO sneaker debate…

Come to think of it, if you do ‘clean up’ CFO jobs, maybe it’s better to leave your best sneakers for the weekends …

FEEDBACK CORNER

A review from last time:

I know a course is the fashionable thing to do these days, but I have no plans currently. I want the things I give away for free to be 10x better than the content everyone else is charging for.

I will introduce some paid content at some point, but it will be something new. Something so crispy, it will need to stay in the oven a while yet.

CASHFLOW TIP OF THE WEEK

Anyway …

That’s all for this week. As always you can find me here:

• CFO Secrets

• Twitter

• LinkedIn

• Threads

Next week we will get really nerdy about working capital in M&A. I can’t f*cking wait.

Until next time…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.