It’s never easy to sell your business having put in so many years, funds and effort into building it. When it comes to selling your business to a supplier you must definitely seek to get the most value while remembering that it isn’t all about the money. Considering all that you’ve put into the business it will always feel that you’re letting something dear to you leave.
You can’t just accept any deal out there but really consider a number of things way before you let it go. It’s important to ask yourself whether your company is ready to be sold, if you’re ready to let it go and what you’d do if the provider you had in mind doesn’t commit to the deal. Essentially, the question is whether you’re ready to go the full nine yards.
What a supplier is all about
Selling your business to one of your suppliers, say, a commodities provider, mean letting the business go to a person that probably provides other businesses, including yours, some type of service or products. Suppliers are in the business of ensuring businesses access top-quality products and largely act to bridge the gap between retailers and manufacturers. Not just ensuring the stock comes in and at the right time, but also of acceptable quality.
Obviously, the supplier or contractor interested in your business has complied with any local or national laws, standards and guidelines while avoiding practices that might spoil their name such as engaging in child labor or contravening, directly or indirectly, the laid down protections on human rights.
Through proper supplier interactions and inherent management of the relationship you probably have noticed the value to your company were the provider to take over your business. Goods and services providers may interact with businesses but hardly engage themselves in internal matters of an establishment; throughout the relationship the business would have managed the information given to any dealer.
Different attributes make a supplier a perfect candidate to consider when you want to sell a business:
- Existing relationship. For years, a business deals with tens to hundreds of vendors each of them offering products and/or services while adding lots of value in their own individual capacities. It goes without saying that within that period a business owner may have noticed those suppliers who’ve given the company less headache, always delivering on time and genuinely interested in ensuring the business doesn’t lack enough inventory to remain open and grow. Even better, the merchant minds the little matter of cost to lock in the business for a lengthy, profitable relationship for both of them. As time goes by, a business owner might realize they’ve been dealing with a single provider for the longest time, one who may have sent signals and signs of their willingness to purchase the business if the owner were ever willing to let it go.
- Fostered advancement. A relationship with a supplier may have helped a business to work for the longest time possible with them such that the relationship could’ve fostered innovation. In the process, their offerings are improved greatly and the business may have gained so much from closely working with the stock source. Obviously, a supplier who may have gone above and beyond the provider’s beaten path to help a business enhance its processes and way of doing business with innovative systems and processes would be high in mind when a business owner wants to sell a business.
- Easy and efficient collaboration. As time goes by and a supplier and a business work together a degree of collaboration is fostered. The relationship becomes stronger that communication, trust, respect and feedback are easier, smoother and robust. Collaboration could be so flawless that a business is so free and encouraged to suggest and make observations on how the trader can enhance their commodity delivery and handling and vice versa. In the end, the business and the commodities provider would already be collaborating well and can communicate easily in a trustworthy manner.
- Improved processes. Cooperating with each other and communicating easily and receiving feedback often makes the supplier and the company to comprehend how they work with each other and the nitty gritties of the connection. As such, the dealer begins to understand the kind of items the business requires most, may want to invest and definitely how to let the business know. On its part, the establishment will know the proper time to have the goods delivered. Such enhanced processes and collaborations can convince any business owner a particular commodities provider is the real deal to take over a business at the proper price.
Before selling your business to a vendor it’s important to pay attention to a number of things.
Potential buyer might not be the "one"
Even if you find a provider fits the perfect profile of the kind of buyer you’re willing to let the business go to don’t stop there. It’s rash and ill-advised to be overwhelmed by the ability of the entity to purchase your company and obsessing yourself with what you’ll be getting out of it that you forget the individual might just be the wrong one to take over your business.
Until the deal is done and process concluded prepare your mind that the potential buyer could end up not purchasing the business. Even worse, being preoccupied with a single one could result in a business owner making concessions so much that a deal that would have been great may turn out to be a bitter pill to swallow.
You might forget your business needs to be run and taken care of even with the impending sale that if it ever falls through and the potential purchaser has pulled out, you are left with a less profitable business of little value.
Don’t run the business as if you’re going to sell it
Working with a particular provider for years and fostering a great relationship over time might make you feel like selling the business immediately if the proposal is ever made. Essentially, most companies end up selling for a loss if owners are building them to sell or so ready to sell the firm they’re almost willing to take any deal that comes up.
For better returns and avoiding the pitfalls of getting less for the business, run it like a person who has no intention of selling at any given time. That way, once you’ve identified the supplier you intend to sell the business to you’ll be able to take the process of selling slowly as you build the business.
Even if it took months or years and a number of potential company buyers, the business would be growing its sales and the cost of selling the business would be going up; you might end up selling the company way above what you had in mind.
Know how the potential supplier buyer labels or sees your company
Don’t take it for granted that the vendor company buyer interested in taking over your business knows your company and has labeled it correctly. For instance, it’s possible for a potential buyer to see a business as a recruitment agency rather than what it’s; IT outsourcing and human resource related company.
Simply take the time to talk with the potential buyer, demonstrating why a prior categorization and labeling of a business was wrong. The time would be worth it that the shift in how the potential buyer sees the business could result in the company value multiplying a number of times over.
Don’t take due diligence lightly
Everyone expects that when you want to sell a business it’s the potential buyer who would be doing due diligence. Some carry out due diligence on potential purchasers but wait too long to do it. However, avoid being so enthusiastic about the deal to forget to investigate the ability of the potential buyer to close the deal.
Due diligence way before any concrete agreements are entered to can help a lot. You might want to know how the trader treats their customers and members of staff, their financial strength and ability to close the deal without issues, whether they’re likely to honor or dishonor agreed deals and contracts later on and much more.
Rationalizing and ignoring these matters could be detrimental once you’ve let the company go. Otherwise, chances are that you could end up letting the business go at a lesser cost and complicated terms you never anticipated.
Check and recheck the litigation history of the prospective supplier/purchaser
Just like in due diligence most business sellers ignore the little matter of litigation history or checking the ongoing litigation the potential buyer may already have active in court. The entity might show their interest in the deal, be the most charming, warm, personable and agreeable but with diverse legal matters pending in court with other businesses like yours.
Asking your lawyer to perform a litigation check doesn’t mean you mistrust the potential buyer but careful to avoid misunderstandings in the future. You could actually realize the deal would cost you going forward due to the history of litigation of the individual and simply end it or find another better taker.
Know the perfect time to inform staff and management team
With time you’ll need to let your management team and members of staff, or some of them, know about the impending sale of the business. Most of the long sale process will involve lots of documents from them. However, letting them know so early can be counterproductive and you might want to take some time until the possible supplier buyer has indicated their interest in the deal and taken solid plans towards it. Then you can call the team for a meeting, preferably the top management officials only and seek to answer lots of questions that will run through their mind right away, such as what will happen to them and the company employees.
If possible, set apart a significant percentage of the sale to cater for the incentivizing of employees and top management to instigate them to walk with you throughout the process and remain motivated to offer their support whenever needed. Speaking to your top management team prior to the conclusion of the deal and at the periphery of the process is okay if done at the proper time. Business owners can use it to let them know what the potential future owner has indicated about the future of employees and the management team.
If possible, top management team should be the only ones in the company who know about the impending deal to avoid dealing with freaked out employees if they learn too early. Later on when the deal is done and dusted they can be informed.
Selling your business to a supplier - the process
The actual process of selling to a supplier shouldn’t be complicated at all. Firstly though, ensure the prospective buyer has signed a Confidentiality Agreement considering you’ll be sending them highly sensitive documents. This involves the Sales Memorandum, a document that’s wholly legal detailing specific characteristics of the company that would be of interest to any taker. It’s a highly critical document in any business selling process due to the detailed and sensitive information it has you wouldn’t like many eyes to look at.
Related: Sales Memorandum Template
The information on the Sales Memorandum (SM) may differ to some extent but mostly contains up to the last 36 months of financial documents, projected sales up to the next few years, company description laying down how it operates and its history as well as future development and growth prospects, including the business’s strength/weaknesses/opportunities/threats (SWOT analysis).
SMs can also contain a breakdown of key customers or clients as well as, important members of staff and their place in the business and the unique assets (mostly intangible) that set the company apart, among other information. Most importantly, the memorandum should be accurate and truthful.
#1 Seek advice from M&A experts
Considering the vital nature of the impending sale process of the business to a likely supplier buyer and the importance of presenting to them an accurate Sales Memorandum and other documents, seeking the expertise of Mergers and Acquisition experts is critical. They’ll make sure you know whether it’s appropriate to release your business to the market now and if you’re ready to allow a potential buyer to scrutinize it. Weaknesses, gaps or problems in your business will come up to help you see your business from the perspective of financial experts and do something about it.
#2 Evaluation of the investment and increase of value
Obviously, to sell your business it pays to learn and understand the value of the company and basically your investment in its entirety. Before you can entertain any idea of selling the business to a provider you need to strongly comprehend the financials, assets and lots of other items relating to the business.
Whatever crack that may result would be better seen now than later when the provider has started reviewing the profitability, value and viability of the investment. Business evaluation is critical as it results in coming up with a concise Sales Memorandum for the potential supplier buyer.
Flaws found if any, including threats to the business and sections that need to be improved that could lower the value of the company will be easier to take care of. You’re actually able to address them effectively and way before the potential buyer can be encouraged to start perusing the Memorandum or send Letter of Intent.
Loopholes that quench value would be perfectly sealed.
#3 Mind your exit plans
Know what your exit plans look like and establish all strategies pertaining to that before the business is released to the market or the prospective buyer is encouraged to pursue the sale. Essentially, ensure the entirety of your exit plans take into account the reasons why you want to sell the business, the drive you might have for the purchase and most definitely life after acquisition.
#4 Prepare for the prospective supplier buyer’s visit
Once the Sales Memorandum has been distributed and the Confidentiality Agreement prepared and shared with the interested acquirer then prepare for their visit. The idea is usually to visit the business and see the faces behind the investment, have a one-on-one meeting and get a good idea of how the business operates in person.
#5 Deals and negotiations
Once the offers have been received from the interested supplier buyer you might want to conduct any negotiation in a deal structure. This creates a clear outline of the sale process, which includes diverse information like the timelines until completion of acquisition and payment. Essentially, the Letter of Intent setting the due diligence, scheduling guidelines, the deal plan expectations among other important particulars, will materialize at this stage. After signing the Letter of Intent the potential merchant acquirer and the business owner would be protected in case the negotiations ever broke down or come to a sudden halt.
#6 Prepare for due diligence by the potential buyer
Apart from bringing in M&A experts and creating a credible and impressive Sales Memorandum you need to ultimately prepare for a due diligence process by the supplier business buyer. Any potential buyer prepares accordingly to carry out intensive examinations and analysis of a company before they consider buying it. In essence, due diligence is all about doing all they can to make sure the information in the memorandum is proper, accurate and unpretentious with zero perils and undesirable flaws.
#7 Purchase agreement and transaction closing
Due diligence can take unspecified amount of time, but once it’s done and the likely commodities provider business taker is okay with the enterprise a purchase contract will be needed. In a conclusive purchase agreement the parties involved in the deal will be seeking to lay down clearly all the conditions pertaining to the sale and purchase of the company. Once the contract is over and everyone is okay with it the process of closing the transaction can begin; the business owner receives funds for the business and anything else settled upon in the agreement and the acquirer becomes the new owner of the establishment.
Obstacles to successful closing
- Unclear/insufficient buyer financing: Anything can happen and a deal that seemed to be going on perfectly well falls through. To avoid such heartache after months of preparing for a sale, make sure the supplier prospective taker is able to get financing or has the financial muscle to complete the sale. Do this way before you begin the process of due diligence.
- Owner’s personal matters: As a business owner you may not have dealt with your personal matters sufficiently that they crop up and either complicate the deal, halt, and end or crumble it. You must satisfactorily deal with personal issues that could have an effect on a company sale. For instance, you may have a pending or ongoing divorce where a part of your stake in the company is considered as marital property and the wife or husband could be a part-owner of the firm. To be on the safe side, contact your lawyer and resolve any pending divorce or personal legal matter that could affect a business sale.
- Exit of critical management team: It’s possible that as a business owner you may take too long to speak with your senior management about an impending business takeover. As such, some of the management team members may seek greener pastures. If key senior staff members leave or unwilling to work in the company after your exit and conclusion of the sale, with or without incentives it could spell doom to the deal. Deal with this matter satisfactorily well, way before you encourage the interest of a supplier to purchase your company.
It’s never easy to sell a business and get a deal completed fast. In essence, very few experts would advise rushing a business sale. It could take up to 12 months or more just to get some things such as preparing for and creating an Sales Memorandum and other legal documents and probably the same period of time or more to prepare the company for a sale process.
To be on the safe side, you might want to start preparing very early in the day while still busy working to improve your business profits, income, customers, assets and anything else that raises its value.