There are myriad resources available to entrepreneurs when it comes to growing and scaling start-up ventures. However, even the most seasoned veteran may not fully grasp the complexities of selling their strategically positioned digital assets.
The truth is the average business owner does not have the skills or background necessary to secure the maximum value from an M&A transaction by themselves. However, an experienced investment banking professional possesses the acumen to help you market your business to the most qualified buyers and guide you through each stage of the transaction.
The M&A process is highly involved, and acquirers are becoming increasingly sophisticated. In order to achieve the optimal outcome from a transaction, it is imperative that you utilize a comprehensive approach when preparing to go to market.
That methodical preparation takes time. We advise our clients to begin the process at least 12 months in advance of their anticipated exit date so they can do everything possible to achieve the best results at a potential sale.
But what exactly does that process entail? Here’s everything you need to know about selling your online or digitally native business.
Creating Your Company’s Offering Memorandum
Similar to a pitch deck, a professionally prepared offering memorandum offers prospective acquirers a chance to get to know your company. This includes a history of the business, an organization chart, an overview of products and logistics infrastructure, historical and proforma financials and growth opportunities.
Once the above information is organized and vetted for accuracy, it can take several weeks to synthesize a well-written, visually stunning set of marketing materials. Creating your company’s offering memorandum is a critical step because you never get a second chance to make a first impression on the market.
The presentation of your company should convey its strength as well as its advantageous and defensible position within the industry. This is your opportunity to demonstrate a thorough understanding of the business, highlighting everything that makes it unique and desirable while detailing how the company’s new owner can continue driving exponential growth well into the future.
Preparing Clean and Accurate Financials
Investors almost always look at financials first, often before learning anything else about your company. While most businesses keep a set of books for tax purposes, prospective acquirers require a more comprehensive breakdown of the company’s financials. They want to know:
- How fast are you growing year over year?
- What is your advertising cost of sales?
- How much does it cost to acquire a customer?
- What is the average lifetime value of each customer?
Private equity and strategic acquirers are accountable to the stakeholders they represent. They must see a strong return on their investment in order to justify acquiring your company. Clean, professionally prepared financials signal that the business is in good health and the information presented is accurate.
On the other hand, inaccurate or incomplete financials are a major red flag. Discrepancies in the books can delay or completely derail a transaction. This is why it’s important to retain a qualified intermediary who can help ensure your financials are in order prior to beginning the M&A process.
Gathering Important Business Licenses and Legal Documents
In addition to financial records, prospective acquirers will ask to review articles of incorporation as well as any other permits or licenses the business may hold. We recommend you keep these documents organized along with lease agreements, employee contracts and any other pertinent legal papers.
Maintaining the above items in a secure data room or other readily accessible location will aid in a smooth, seamless due diligence process, wherein the prospective acquirer will verify the information presented in the offering memorandum.
Calculating the Value of Your Business
You must obtain an accurate business valuation before going to market. Most transactions are priced as a multiple of the seller’s EBITDA, or earnings before interest, tax, depreciation and amortization. The multiple is derived from several factors, including the industry and the company’s potential for growth.
For example, if EBITDA is $10 million and you apply a multiple of five to six, then the sale price would fall between $50-60 million.
An experienced investment banking professional can assist you in calculating the truest estimate of your company’s value. As experts in the M&A process, they have their finger on the pulse and know how similar businesses are valued and sold. Your intermediary can also fight on your behalf, helping you earn the maximum value for you company at a sale.
Selecting an Exit Strategy
Not all exits are created equal. Whereas some owners may want to cash out and move on to new pursuits, others may look for a strategic partnership that empowers them to expand and scale their business.
Deal structure varies on a case-by-case basis. Prospective acquirers may want to buy out 100% of the company, or they may secure a lower percentage contingent upon hitting certain milestones, objectives and deliverables before the business owner can get cash out of the business.
You must choose the approach that allows you to achieve most of you goals.
Determining the Best Buyer Fit
With the help of an experienced investment banking professional, you can position your business to pique the interest of sophisticated buyers with capital at their disposal. Online businesses are in high demand with the recent shift towards ecommerce, and many traditional blue-chip investors are looking to expand their portfolios by acquiring digital companies. It’s a great time to think through an acquisition.
Investment bankers know all the right buyers for your particular business and can field offers on your behalf. Then, they will leverage their deep understanding of transaction structures to advise you which offer will best empower you to pursue your post-exit goals.
Negotiating Deal Terms
The average deal takes anywhere from six to nine months, start to finish. Upon reviewing the offering memorandum and executing a Letter of Intent (a non-binding document that outlines the proposed terms and transaction structure), the prospective acquirer will complete a thorough due diligence.
The prospective acquirer will verify all the information presented in the marketing materials, including the historical and proforma financials. This also signals the beginning of negotiations. The sale price, transaction structure, etc. may change based on the outcome of the due diligence process. If you have engaged an investment banking firm to represent you in the transaction, rest assured they will help you negotiate from a position of strength.
Once due diligence is concluded, the transaction can proceed. A purchase agreement memorializes the transaction and includes any and all employment agreements, legal agreements, financial offers and non-compete agreements.
The Home Stretch
At the transaction’s close, you will receive payment as stipulated in the purchase agreement. This may take the form of cash or a mix of cash and stocks/earnouts.
In any case, you deserve to walk away completely satisfied that you secured the maximum value for the successful online business you built. That’s why it’s so important to begin preparing for an exit in advance and retain the services of a qualified professional to ensure the transaction goes smoothly.
Don’t settle for anything less. The M&A process is complex, but if you understand each step you can position your company for a successful sale that will allow you to exit the business and pursue what comes next.
Chris Shipferling is the Managing Partner of Global Wired Advisors. He has over 20 years’ experience working for house holding investment banks such as Citibank, Wells Fargo, Bank of America and Deutsche Bank. At Global Wired Advisors he helps ecommerce and digitally native businesses with revenues of between $5 million to $70 million get acquired.