From Founders to Sellers: Start Early to Plan the Why and When for Exiting a Business

by Jordan Tate

It is common for business owners to consider selling their company, whether now or at some point in the distant future. For most business owners and founders, this process is a black box, without even a clear starting point. As a private equity firm that’s been investing in founder-owned businesses for nearly 20 years, we’re shedding some light on how business owners can prepare for the sale of their company.

Define the Goals for the Sale

This is perhaps the most important step business owners can take. They need to have a clear idea of why they are selling their company or receiving a capital investment and what they hope to gain from it. Is it to retire and fully exit the business? Is it a strategy in searching for growth capital and as part of a plan to continue to run the company? Is keeping majority control of the business important? Is the aim to find someone who can bring relationships or other experience to help the company grow or just someone to provide capital? The answers to these questions will determine everything from the type of buyer to look for (e.g., financial or strategic) to the structure of the deal itself (majority vs. minority, asset sale vs. equity sale).

Start Tracking Data Now

Regardless of whether you are looking to sell in the next year or in ten years, one step that you can take now is getting close to your data. The transaction process involves gathering a lot of data: financial data, customer data, employee data, historical data … the list goes on. Most business owners can find this information individually, but often the data is spread across multiple systems and storage devices, and the process to aggregate it all can be time consuming and overwhelming. The best way to avoid the headache is to organize the company’s data early on and create processes to update it frequently and access it with ease. It is helpful to have a central database for key business data and monthly financials; gathering and tracking this prior to entering a sale process can not only speed a transaction along, but much of this data can be used in the daily operations and strategic decision-making.

Button Up the Business

While this is most important if the aim is to find a financial buyer (such as a private equity firm), most buyers will want to have key managers in place prior to a sale for continuity. For business owners looking to retire post-sale, having a succession strategy already in place makes the business much more attractive to buyers. A successor could be someone from within the organization who has shown the skill and desire to lead the company or be recruited from outside. Either way, current leadership should spend time with the successor, mentoring them on the day-to-day running of the company, collaborating on strategic and growth goals, and even transitioning responsibilities or key relationships to them early on. The more hands-on experience a successor has, the more comfortable a buyer will be that a business can continue without its current leader.

Another area of concern for buyers in many transactions relates to the business’s customer concentration. Most buyers will prefer a diversified customer base (a good benchmark is no single customer accounting for more than 25% of total revenue), though this can be heavily dependent on the specific industry. Some buyers can get comfortable with a higher customer concentration if they understand the nature of those relationships. Business owners should, if possible, consider strategies by which they can diversify their customer base or customer end markets. It’s important to keep in mind that any action here will likely take considerable time, so this should be incorporated into a long-term exit plan early on, potentially two years or more out from when owners want to start the sale process.

Rally the Business’s Advisors

As business owners get closer to the time they are ready to actually begin the sale process, it’s time to start building an advisory team. Typically, we find the most impactful advisors are an experienced M&A attorney, a CPA (one who understands tax structuring in a sale) and, for those who decide to engage one, an investment banker. These advisors should be identified and involved well before the start of actual negotiations with buyers, as they will play a key role in some of the practical preparations for the sale, such as confirming tax filings are in order, ensuring the business’s current legal stucture is optimal for a sale, and identifying any potential areas of concern for buyers in the business.

While there are certainly more steps in the process, these provide a good base for business owners to feel prepared when starting a sale of their company.

As managing partner, Jordan Tate is involved in all aspects of Montage Partners’ investments, including sourcing and execution, valuation and structuring and post-closing oversight.

Prior to Montage, Tate was a member of the investment banking group at Merrill Lynch & Co. He holds an MBA with honors from the Wharton School at the University of Pennsylvania and bachelor’s degrees in finance and accounting, summa cum laude, from the University of Arizona.

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