This article is an excerpt from the Shortform book guide to "Built to Sell" by John Warrillow. Shortform has the world's best summaries and analyses of books you should be reading.
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Why should you sell your business? What is the process of selling your business?
In Built to Sell, businessman John Warrillow provides advice on how to make your small business sellable. The best way to do this is to build a business that runs on its own and accepting the best offer possible.
Keep reading to learn how to sell your business in the smoothest way.
Find the Right Company to Help Sell Your Business
Want to know how to sell your business? Once your company is in a good position to be sold, Warrillow claims you need to find a professional advisor. When searching for an advisor, there are two key aspects to consider: the size of the firm and their knowledge of your business specialty.
Finding a broker or firm that’s the right size for your business is important because it ensures they’ll have the right contacts and appreciate your specific needs. Warrillow advises using a business broker if your company does less than $2 million in annual sales, and a merger and acquisition firm if it does more than that. If a broker is too small for your company, they might not be able to find the companies that would give you the highest offer. If a firm is too big, they might view your business as less important than their bigger clients and not put in the effort to find the most suitable buyer. Instead, they’ll simply look to sell your company as quickly as possible, take their cut, and be on their way.
(Shortform note: Though they perform similar duties—help people sell and buy companies—there are some key differences between merger and acquisition (M&A) firms and business brokers. In general, business brokers operate on a smaller scale, brokering deals of single companies in a local or regional market. M&A firms are more likely to broker complex deals on a national or international scale. A business broker is also more likely to work for companies that are easy to evaluate and focus on getting the deal done for a predetermined compensation. M&A firms are more likely to help their clients after the deal is done and thus require additional payouts.)
Your advisor should also be well-acquainted with the industry your company specializes in. If it’s not, you run the risk of them overlooking or underappreciating the value you bring to that particular industry. If you have truly built something special, a broker or firm familiar with your industry will recognize that and fight for every dollar your company is worth.
(Shortform note: Warrillow’s advice to make sure your advisor knows your industry is similar to Peter Lynch’s investing advice in One Up On Wall Street. Lynch argues that the best investment opportunities are usually found in the places you’re most familiar with. If you like a company’s product and are well-acquainted with the industry, you’re more likely to accurately predict how well the company will perform. It seems that across the board, familiarity with companies and industries leads to better financial choices.)
Accept An Offer
The next and final step in selling a business is to accept an offer. Warrillow recommends knowing exactly what you want from a deal. This will make the decision easier. For example, have a minimum amount of money you’ll accept up front, with any performance fees or add-ons seen as a special bonus. If most of your compensation is based on how the company performs in the future, you may be forced to continue working for the company to ensure you get a proper payout. Knowing exactly what you want will help you stand firm if your business broker pushes for you to accept a lower deal just so they can get paid and move on.
Additionally, be aware that when a company agrees to buy your business, they’ll want to do due diligence, and this can be a painstaking process for all involved. The due diligence process usually lasts about two to three months, and the buyer will carefully review every aspect of your company with a microscope. It’s not uncommon for a company to decrease their offer or pull out of a deal entirely after they’ve combed through your business. Don’t be discouraged if this happens, and stick to your guns if they offer less than what you think your company is worth.
(Shortform note: To get an idea of just how thorough the due diligence (DD) process can be, let’s look at some of the different types of due diligence that an acquiring company will perform. There’s financial DD, which looks at all the company’s finances in detail, such as financial statements, company projections, debt, inventory, and an analysis of customer accounts. There’s human resources DD, which analyzes all the employees, their benefits, labor disputes, HR policies, and any other employee-based information. An acquiring company will also do due diligence on administrative items, assets, environmental impact, taxes, legal processes, customers, and anything else they wish to look at.)
One way Horowitz advises that you can properly—and rationally—assess its value is to ask yourself if the market your company specializes in is bigger than anyone realizes, and if your company has a chance at being one of the top businesses in that market. If the answer is yes to either or both of these questions, you may be selling your company for much less than it’s truly worth.
More Advice On Selling Your Business
In The Hard Thing About Hard Things, Ben Horowitz states there are two sides to consider when selling a company: the rational side and the emotional side. Though Warrington doesn’t explicitly mention these, his advice on knowing what you want from a deal will incorporate both considerations: You should decide rationally what your company is worthwhile keeping in mind that your assessment may be influenced by your emotional attachment to it.
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Like what you just read? Read the rest of the world's best book summary and analysis of John Warrillow's "Built to Sell" at Shortform.
Here's what you'll find in our full Built to Sell summary:
- A step-by-step process for building a business you can sell
- Why you should build a sellable business even if you don't intend to sell it
- How to manage the selling of your business and all the headaches that come with it
