After more than 50 years of cumulative experience buying and selling more than 100 different companies, our partners have optimized the process for selling a business. This page describes some elements of our process and several common myths about selling a business.

Virginia Capital's Sales Process

As with any high dollar sale, the sale of a business requires careful planning, precise execution and emotional control. We typically advise our portfolio company CEOs and CFOs to plan to spend at least half of the total sales process (probably six months) preparing.

A controlled auction managed by an investment banking firm that specializes in either the size transaction ($50 million in likely sales proceeds) or industry (e.g., bankers with a focus on business publications) is the most effective means of realizing the highest value. Most major capital markets use an auction process to realize maximum value. For example, U.S. government bonds and initial public offerings (IPOs) are sold pursuant to an auction.

The mergers and acquisitions (M&A) groups within most investment banking firms have experience running an auction as part of the sale of a business. But some firms are better at it than others. Sales preparation is tedious, detailed work that many bankers see as a "necessary evil" that keeps them from a commission. But the preparation enables the seller to move quickly when bidders are interested and allows the seller to take advantage of the buyer's emotions (rather than vice versa). Understanding how the sales process will unfold and how to react to changes in terms along the way (e.g., buyer price reduction demands) are critical to ensuring a successful closing on the business owner's most favorable terms.

Most entrepreneurs only sell one business in their life, so the process is new. Most business buyers have acquired many businesses. As a result, buyers are at an advantage because they understand how the process will unfold and will use that knowledge (including when the seller is most vulnerable to buyer changes in price and terms).

Over the years we've heard several common themes among business owners regarding the sale of their businesses. Many of these are nearly urban legend and are worth explaining.

Common Mistakes Business Owners Can Make in Sale of a Business

Below are some common perceptions that we hear and how they can adversely impact the sale of a business.

"It will be easy to recognize the best time to sell...and take action"

Many entrepreneurs miss the market opportunity because they believe that accelerating business growth, peak profitability and unusually high business valuations will continue. Believing that unusually good times will prevail indefinitely can lull business owners into a sense of complacency; and many will miss an optimal time to sell because they weren't tuned into the macro-economic froth. Virginia Capital tracks a variety of macro and micro-economic data to help keep a realistic perspective and avoid this complacency. The process to sell a business may take a year (or more), so all owners need to be highly attuned to unusually euphoric conditions indicating an optimal time to sell. Business owners who missed the unique window in 2006 and 2007 are facing an extended hold period because of the financial setbacks associated with the Great Recession. Virginia Capital entered the Great Recession with nearly 90% of our funds in cash because our portfolio companies took advantage of uniquely favorable conditions to sell.

"I will save money on brokerage fees and sell the business myself"

Saving money is certainly a sound business philosophy, but not when you only make the sale once. Virginia Capital's partners have sold more than 100 businesses and have demonstrated that an experienced investment banker optimizes the process to sell a business (and also protects the business owners from the inevitable eleventh hour "re-trade"). Investment banking surveys indicate that three-quarters (75%) of all business sales close on terms less favorable than were agreed upon in the initial letter of intent. In other words a business owner can be virtually certain that after a letter of intent is signed with a buyer; that buyer will inevitably close the deal at a lower price than indicated in the LOI. This purchase price reduction is popularly known as a "re-trade." Unless the investment banker has managed a proper auction process with other back up bidders waiting in the wings behind the lead buyer, the business seller will have no alternative but to accept the new lower price (and most acquirers understand this, which is why it happens so frequently).

"My employees won't know the business is for sale"

Confidentiality is also a sound business policy, but Virginia Capital's experience is that rumors of a possible sale of the business will leak out to the employees (if you have ever considered changing your employee benefit plans, you will understand how effective employee rumor mill is). Consider the volume of unusual "closed door" meetings with unspecified visitors and undisclosed off-site meetings -- all of which will raise employee suspicion. The possible sale of a business doesn't necessarily worry your staff, but a lack of communication will cause employees to suspect the worst ("a corporate raider is buying the business, will move the headquarters and fire all of the local staff" is a typical rumor that can get your staff polishing their resumes). As a result, we have found that it is frequently best to get ahead of the rumor mill and disclose that a financial partnership is being considered. Explain the new opportunities that the transaction will afford employees, especially key people and provide an incentive for the extra work associated with the sales process. It is important to consider the impact on your team if the sale doesn't happen (what if your controller leaves because she is fearful of losing her job).

"The buyer will purchase equity instead of assets"

Business owners hear this advice from accounting and legal professionals. In our experience this is customarily more wishful thinking. In our experience, substantially the vast majority (we estimate at least 70%) of small to mid sized businesses sell assets, not equity. This presents unique tax and legal issues for the business owners. Preparation to deal with possible adverse tax consequences must be taken in advance or the business owners will realize lower net after tax proceeds. Extra time will be needed to "wind down" the current company. Even if a buyer purchases the owner's equity, he will look for extensive personal indemnities against undisclosed liabilities. This exposes the business owners to potential liabilities for many years after closing.

"If the deal isn't perfect, I will just walk away"

This nerves of steel attitude is admirable, but the emotional reality will make this choice more difficult than initially imagined. As the sale of the business progresses, your employees, customers and suppliers will know that the business is for sale. They will all expect something is "wrong" with your business and will believe the buyer decided to walk away (because the seller rarely "walks away" from a transaction). Also as the closing process moves forward, the seller's sunk costs (in legal, tax, accounting and other advisory services) begin to mount. Plus business partners or family members may have already begun to "spend the money" from the sale; making it more difficult to walk away.

"Our audited financial statements should suffice for the buyer's financial due diligence"

This is true for a preliminary review, but once a buyer starts his more thorough due diligence, they will examine every aspect of your financial records looking for improper bookings or misstated transactions. Buyers typically have more experience than business sellers and they use the due diligence process as a search for purchase price reduction excuses (remember than 75% of closings take place at reduced purchase prices and due diligence findings are the major reason for those adjustments). The best defense against the "re-trade" is extensive pre-sale assessment of financial systems, bookings and records to ensure that a buyer's due diligence will not uncover any surprises. Plus a well orchestrated auction with genuine backup bidders interested in buying the business will also keep bidder #1 honest and moving quickly to close.