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A Five-Step Plan to Prepare Your Business for a BIG Sale
Guest: Earle Pratt, a coach at CEO Coaching International. Earle is a seasoned CEO who has led companies in the U.S., Europe, and Latin America in the Education and EdTech, Franchising, and Financial Services markets. Earl has led multiple private equity backed businesses (investors include The Carlyle Group and Camden Partners) and has extensive experience prepping companies on both sides of a sale transaction.
Quick Background: What is the difference between selling your company and selling BIG? Preparation. CEOs eying an exit start planning to reach that finish line years in advance so that they can optimize both their businesses and that future opportunity. That longer runway also helps the CEO prepare for a major personal and professional transition once the sale is complete.
On today’s show, Earle Pratt shares a five-step process that CEOs aiming for a sale should adopt sooner rather than later.
Keys to Selling Your Company from Earle Pratt
1. Put your team together.
“Selling a company is usually a new process for a CEO,” Earle says. “Like any new process or learning, you need to take time and study it, learn, and prepare. So the first thing is just to acknowledge that this is new to you and that you need to take the time to work with people who know what they’re doing.”
Earle recommends that the CEO start assembling the necessary players at least two years in advance of a potential sale. Some of these team members will be third-party, such as the banker who will help you put together your company’s book, tax advisors, and an auditor. In-house, you’ll need to make sure you’ve aligned key stakeholders, such as your board or any additional owners, to achieving this sale goal. You also might need to add some additional support staff to organize a data room that will be convenient for both your team, auditors, and potential investors during due diligence.
And, perhaps most importantly, you need to make sure your C-suite is up to the task.
“The two key people in any sale process are the CEO and the CFO,” Earle says. “It’s ideal if the CFO’s done deals before, but it’s not essential. What is essential is making sure the financials, the audits, all these things are really as tight as they can be and can be thoroughly explained. If you don’t feel super confident about that person — again, here we are two years ahead — there is time to get a better financial person in, and it really should be somebody who’s internal to your business versus an outside company.”
2. Assess your value.
Another BIG benefit of putting this team in place so far ahead of that sale is that the CEO and major stakeholders can analyze the company, the competitive landscape, and your goals for the sale. Your investment bank will use multiples of EBITDA and recent transaction history in your space to set a baseline. But that initial valuation is going to raise some important questions that you and your team need to answer.
“Do you want to sell at this time?” Earle asks. “Is there a minimum price that you would sell for? The fact is that your gross price is, of course, not your net proceeds. When you get a gross price, you’re going to take off your deal costs for all these partners, particularly your investment bank. You’ll have legal, you’ll have an audit, and other professional fees. If you are in any debt, you’re going to clear your debt when you sell the company in almost all cases. You also have some adjustments in the balance sheet and accounts receivables, accounts payables, and that’s even before talking about tax implications. So once you get that valuation range, you’ll understand the implications of how the gross price becomes a net price. And if that’s something that’s very interesting to you and the rest of your ownership group, then you’re really prepared to go forward with the preparation.”
3. Evaluate potential deal structures.
“The two primary deals will be asset deals or stock deals,” Earle says. “The asset deal is simply selling all the assets that you own. The buyer doesn’t want to take your legal entities primarily for legal exposure. And that doesn’t mean that your company has problems. It’s just a safer way to buy the business. That would really be the primary way people will talk about buying your business, unless there’s an impediment to that. Some companies cannot do asset sales because they have regulatory accreditations or approvals that come with the company and are tied to the company. If you do need to do an equity sale, you really want to make sure you can present the cleanest company possible so that your buyer is very comfortable that what they’re buying and taking over as a legal entity is clean in terms of legal, tax, et cetera.”
There’s a subtle tension here that the CEO needs to be prepared to navigate: most buyers will want to go the asset route to minimize legal and tax exposures, and most sellers will want to go the stock route for the same reasons. In most cases your company’s value in an asset sale is going to be higher, so you and your team need to be crystal clear on what a successful sale looks like as you’re evaluating potential deals. And while Earle has seen companies get creative about various incentives and earn-out arrangements, one area where the CEO shouldn’t have any illusions is who’s going to be sitting in the CEO chair once the sale is complete.
“We always say here at CEO Coaching International, you need to ask yourself what you want first,” cautions Earle. “Make sure you want to leave the company. I know many people who wish they didn’t sell their companies. You should assume you will not be in the business more than 6- 12 months afterwards. And you need to make sure that, personally, that’s really what you want for something that you built and you really care about.”
4. Tell your company’s story.
Your company’s past is what’s going to interest a potential buyer. Your future is what’s going to seal the deal.
“You’re selling a future story about your business and your EBITDA multiples based on your future cash flows,” Earle says. “You’re going to want to make sure your costs are as reasonable and low as possible to run a business in a proper way. And also that your growth story is absolutely something that people believe in. If you’re going to talk about new markets, new products, new geographies, get started now. You can’t just tell potential buyers on the back of a PowerPoint slide that that’s what’s going to happen. You need to show, we opened an office in the UK, or, we’ve already sold a million dollars of this kind of product, to prove that your future projections have some basis in fact and that it’s already started.”
We talk a lot about storytelling as an effective communication device that CEOs need to master. Some of that story applies here as well, whether it’s the brand loyalty you’ve developed or how your broader social mission sets your company apart from competitors.
However …
5. Continue to execute on the details.
… when it comes to a sale, your story has to read as pure nonfiction.
Again, this is where building a two-year runway can provide a major advantage. Use that time to turn your company into a fine-tuned machine. Cut the fat. Speed up your cash operating cycle. Get specific on your ideal customer base. Test new products and services in select markets. Make tech and workforce upgrades you’ve been delaying. And get a professional audit. The time and money you invest in making your company great now is going to pay off when you’re sitting across the table from potential buyers.
It’s also going to keep your company operating at a high level even if you don’t close a deal on your preferred timetable.
“I’ve seen people assume the sale, kind of counting their chickens, frankly,” says Earle. “I’ve been on both sides of the table and very often, what you want to sell it for is not exactly what the buyer wants to buy it for. And things will fall apart on a valuation basis. You really have to make sure everything you’re doing keeps the company healthy. You don’t stop running the company. You don’t make short-sighted decisions. And emotionally, you’re ready for the fact that it may not sell.”
Top Takeaways
1. Plan ahead. You’ve come this far by breaking down a BIG long-term vision into smaller actionable steps. Use that same process to work towards a sale.
2. Go from good to great. Show potential buyers the best possible version of your company. If you don’t sell, you’ll still come out ahead.
3. Cross the T’s and dot the I’s. Impeccable records are the best back-up for your valuation.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average revenue CAGR of 31% (2.6X the U.S. average) and an average EBITDA CAGR of 52.3% (more than 5X the U.S. average).
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