A couple months ago you may have been surprised to see Stanislas Wawrinka beat Rafael Nadal to win the Australian Open. After all, Nadal was the clear favorite, having won all 26 combined sets in their 12 previous matches.
But Nadal’s lower back started to seize up in the first set, and Wawrinka was prepared to take full advantage. In fact, Wawrinka has been preparing for his moment in the sun since he was fifteen years old, when his parents pulled him out of school so he could focus on his tennis career. He turned pro back in 2002 and ever since then has been preparing for his shot at winning a Grand Slam.
Will you be prepared for your moment in the sun?
As a business owner, you too need to be prepared when opportunity strikes. The two most common reasons owners sell their business are:
Getting approached with an unsolicited offer; and
Having a health scare (e.g., heart attack, stroke, etc.) that lands them in the hospital.
In either case, you’re not in control of the timing, but you are in control of how prepared you’ll be when opportunity (or necessity) strikes.
Whether you want to sell in five or ten years, here’s my list of things to do right now to get your business ready to sell:
1. Make sure your customer contracts include a “survivor clause,” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business.
2. Cultivate a group of a dozen “referenceable” customers that an acquirer could interview. When you sell, the buyer will want to speak with your customers; so you need a group of people – customers who are also friends – that would be willing to say good things about your company. In particular, the acquirer will be looking for assurance that the customer will keep buying after you leave, so make sure your referenceable customers are loyal not just to you but also to your business.
3. Start tracking your Net Promoter Score (NPS). Increasingly, acquirers (both “strategics” and Private Equity Groups) have standardized on NPS as a way to predict the future of their portfolio companies.
4. Write a “teaser.” A teaser is an anonymous letter an M&A professional uses to solicit interest from an acquirer to buy your company. Writing your teaser now will crystallize the important attributes of your company and ensure you focus on the right metrics in the coming years. Your teaser should cover the Who, What, Where When and Why of your business:
- Who: describe why your management team is a winner.
- What: describe what you sell and why customers choose you.
- Where: where are you located and what is the potential to expand geographically?
- When: how long have you been in business?
- Why: What are the strategic reasons someone would want to buy your company? Do you have a niche? Is your product a world-beater?
Carry your teaser around with you and update it constantly. Keep making decisions for your business now through the lens of how the results of your decisions would be perceived by a potential acquirer down the road.
5. Identify 10 companies with a strategic reason to buy your business. Once you have a short list of potential buyers, study their M&A activity. What do they buy? What do they list as the strategic reasons for their acquisition in their media releases? Who are their lead corporate development executives?
6. Do business with your short list. Once you have a short list of potential acquirers, try to do business with as many of them as you can. Companies buy companies they know; so if you can find a way to work with a potential acquirer (either as a partner, supplier or customer) it’s a chance for them to become familiar with your company.
7. Professionalize your bookkeeping – there’s nothing that freaks a buyer out more quickly than sloppy books.
8. Protect your gross margin. Oftentimes, when leading up to being listed for sale, businesses grow by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.
9. Stop doing the selling. If you’re the rainmaker, nobody will buy your business without a soul-crushing earn out. Keep in mind that sales people take time to train and to hit their stride. Depending on your industry, it may take them a year or even two to start cranking out deals, so now is the time to hire and train them – not six months before you want out.
John Warrillow is the author of Built to Sell: Creating A Business That Can Thrive Without You published by Penguin in 2011.