Once you have decided to sell your business, the next big decision lies in “how” to sell your business. For most entrepreneurial-led, and/or privately-owned businesses, taking a “do-it-yourself” approach by negotiating directly with a single buyer rarely results in a positive outcome (unless it is under some very specific circumstances - see DIY pros and cons). By interviewing several M&A Advisors, it will become clear that it matters a lot about the type of sale process you choose to pursue. This blog article will highlight some of the key issues sellers should consider, once the decision to sell the business has been made.

First, let’s outline some the sale process options you will need to consider.  While everyone’s definitions of 1) a negotiated sale, 2) a narrow process, and 3) a broad auction process will differ slightly, we like to think of the number of potential buyers for each as, a “handful” for a negotiated sale, perhaps 20-50 in a narrow process, and perhaps 300 or more in a broad auction process. While all three approaches differ, they all include at least some level of competitive tension amongst buyers.

Choosing the right approach starts with gaining a clear understanding of the seller’s objectives and priorities.  There is a lot to consider.  For a quick review of the key questions we ask before recommending a process, see our seller’s priorities questionnaire.

Best buyer vs highest price
The best buyer may not be willing or able to pay the highest price.  Most business owners know some of the best potential buyers for their business, based on their viewpoint on the best strategic fit. This could be based on the buyers’ complimentary products, services, customers, markets served, etc.  If selling to the “perceived” best buyer is a higher priority than obtaining the best value, then a narrower, or even a negotiated sale process should be considered.  A broad auction, however, can uncover high-quality buyers never previously considered; some may be willing to pay top dollar and could be an excellent strategic fit.  It is amazing how many M&A deals are completed with an unexpected buyer.  The reality is that it is very difficult to gain detailed insight into what motivates a buyer to pursue an acquisition unless you allow them to articulate their strategy in a confidential dialogue.

Confidentiality
Maintaining confidentiality from the outset through to close is paramount to ensure employees, customers, and suppliers don’t defect and create obstacles to correct if a deal doesn’t close.  When competitors become aware of a potential sale, they can try to take advantage of the market uncertainty that arises from the M&A process as well.  No NDA is foolproof, and logic would dictate that the risk of a confidentiality breach is higher with a broad auction process than with a negotiated sale. Before deciding on what type of process to pursue, the sensitivity of the business to a confidentiality breach with each of its important stakeholders should be considered.  Some processes are defined as broad because a lot of Private Equity Groups (PEGs) and/or financial-type buyers are included.  A confidentiality breach by a financial buyer is typically less impactful than a breach by another industry participant.  Therefore, it is not only the type of process that should be considered but also the make-up of financial vs strategic buyers that are included in the process.

It is also much easier to stagger customized and/or sensitive information flow to potential buyers in a negotiated sale and a narrow process than it is in a broad auction process.

Speed
If closing a deal quickly is a high priority, sometimes it may best to focus on a handful of the best buyers and open a confidential dialogue.  However, under some circumstances, this can backfire.  Large buyers, such as publicly traded companies, often move at a “snail’s pace” when it comes to M&A (unless it is an opportunity identified and pursued by the executive team or board).

A narrow or broad auction process usually involves a two-step bidding process.  Potential buyers are provided an opportunity to provide an initial bid, which can lead to further discussions with a subset of the best initial candidates, who then may get an opportunity to submit a more detailed Letter of Intent (LOI).  As such, the marketing material, data room, and preliminary Q&A sessions must all be completed before the real negotiations begin, which can add time to the process when compared to a negotiated sale.

Flexibility
Sometimes business sellers don’t know what they want but will know it when they see it.  In this case, the M&A Advisor’s role is to focus on creating options for the seller to consider.  This usually means going out to a broader market that includes financial buyers, foreign entities, companies in adjacent industries, etc. Flexibility on the type of deal structure, equity rolls, sale or retention of assets such as real estate, transition periods, etc. can drive value and open up opportunities for the seller that were never considered at the onset of the process.

This is often the recommended approach for highly marketable businesses, that are well-run, and are anticipated to capture high valuations from the market.  If the business and the seller's flexibility are conducive to a PEG recap (see here for desirable criteria), a broad auction process should be seriously considered.

Of course, like everything in M&A, the choices you need to make can’t be simplified down to a blog article.  The key is to look for an M&A Advisor that will listen carefully to you and your objectives and guide you to the right process for your situation. That means working diligently to understand your business, your market, and discover potential buyers' motivations, etc. to design the best process for your situation.

Taking time to brainstorm with team members on how to improve the business can take many forms.  One useful technique is the “Start…Stop…Continue” exercise.  It is a very simple process whereby each team member is asked to list a few things they think the team should start doing, stop doing, and continue doing.  Usually, the facilitator will provide some guiding questions beforehand to get the ideas flowing.

A few leading questions for the “Start” session could be:

• If money wasn’t a factor, where would you invest or what positions would you add to the team? … or,
• What projects should we initiate to grow topline sales the fastest?

Compiling the list and going through a priority-setting process should lead to two or three key initiatives to implement.

Deciding on the activities that do not add value to the business and therefore should be stopped can feel like a breath of fresh air for the team.  Taking a hard look at all the team activities that don’t fit with the core purpose of the business should be part of the process. 
 
Some potential questions could be:

• What are the daily or weekly tasks that you “mentally” place on the bottom of your “to-do list” and why?
…or,
• What tasks are completed inconsistently and what is (or was) the impact?  If it had a minimal negative impact, then why keep doing it?

From a customer’s perspective, if value equals benefits minus costs, perhaps there are unnecessary customer costs that can be reduced or eliminated.  Discontinuing services or processes can free up resources to focus on priority initiatives identified from the “Start” exercise.

For the “Continue” part of the exercise, it is important to identify the initiatives that are working well and to figure out ways to do more of them.  How are you measuring progress on these initiatives and how can the team dedicate more resources to accelerate the success?

Perhaps there are examples of how the team “wowed” a customer or helped turn a bad situation into a win.

Sometimes, changes can be made to how critical processes are undertaken through a “Start…Stop…Continue” exercise and meaningful improvements can be made. 
​ 
You should look for at least a few small wins each time you execute the process to gain buy-in and momentum for the next session.  Of course, if nothing changes after the exercise, team members will quickly disengage from future sessions.

Almost every entrepreneur considering a future sale of the business is interested in knowing what comparable businesses are selling for and what the typical multiple of earnings (EBITDA) are for their industry.  However, there are many variables to consider when comparables are used to estimate enterprise value, many of which can lead to inappropriate assumptions about the value of the business.  While comparable transactions can be one component of a pre-sale valuation, they should always be used along with other valuation techniques.  In the end, the actual multiple a business trades for depends on 1) the prevailing market conditions, 2) the nuances of the business and the industry it participates in, and 3) how the business is marketed and sold.
​
The number of direct comparables.  For companies in the lower middle market (Enterprise values of between $10 million and $100 million), there are often very few direct comparables, let alone those with a similar growth or profitability profile.  Typically, data on EBITDA multiples come from databases that extract information from press releases and from disclosures made by publicly traded companies when acquiring private companies.  Under most circumstances, there is no reason for private companies to disclose the purchase price and/or terms of any companies they acquire, let alone any details about the businesses themselves.  Some databases allow companies to extract financial data on a no-names basis in turn for submitting financial M&A transaction data, however, this only helps to guide users with average multiples, the median multiple, and/or ranges of valuations in specific industries/segments.

Timing.  The prevailing market conditions for the general economy and the specific industry in which the company participates are in constant flux.  This means that valuations vary over time based on competitive factors as well as external factors such as the cost of money.  The timing of comparable deals is especially sensitive in cyclical industries.

Size.  In general, larger companies trade at higher multiples so it is important that when researching comparables, companies of similar size are used, or the transaction data is size adjusted. Since much of this data comes from high-profile deals and/or when publicly traded companies are required to disclose transaction details to shareholders, this usually means that the published, or publicly available transaction data is scarce for smaller companies in the lower-middle market.

Location. Some businesses trade at higher multiples simply because of where they are located.  Differences in labour laws, tax incentives and rates, compliance requirements, average wages, skilled labour availability, etc. make it very difficult to make valid comparisons between deals in Europe and Canada/U.S. for instance.

Public vs private.  Publicly traded companies trade at higher multiples, not only because they are typically larger, but also because of the liquidity it provides shareholders.  Shareholder liquidity is usually much more complicated and expensive for investor holdings in private companies.

EBITDA multiples period.  Often when comparable data is available, it is not clear whether the EBITDA multiple is based on the trailing twelve months (TTM), the last fiscal year, or a forward multiple on projections. Some public companies will only report the multiple after synergies to help gain support from analysts and shareholders that they are not overpaying for an acquisition. The standard protocol calls for EBITDA multiples to be based on TTM, but there is nothing requiring anyone to comply with this standard.

EBITDA Adjustments.  It is normal for business buyers and sellers to adjust the TTM EBITDA based on their judgment of maintainable earnings under new ownership.  Normally, there is little if any hard data on what, or if any EBITDA adjustments have been included in a reported EBITDA multiple.

Assumed debt/liabilities.  Most deals are completed on a cash-free/debt-free basis, but that may not always be the case.  If liabilities, such as a Line of Credit, are assumed by the buyer, they may report the price they paid, along with the TTM EBITDA, but it may not be reflective of the Enterprise Value (equity plus debt) as a multiple of EBITDA.

Minority/majority deals.  Generally, investors expect a discount on an investment when only taking a minority position and this may not be fully disclosed.

In conclusion, there are a lot of variables that limit the value of comparable transaction data as the primary means of estimating a company’s enterprise value.  That is not to say it doesn’t provide value – it must simply be used to supplement other valuation techniques.
​
There are also a lot of comparable data points that Investment Bankers and M&A Advisors have access to through their experience but are not available to the broader market.  For example, when bidding on a company in a competitive process, buyers and their advisors get a sense of the multiple they need to pay to remain competitive.  On sell-side engagements, M&A professionals are given the opportunity to observe bids from multiple buyers, giving them a much deeper appreciation of expected trading multiples in a given industry.  This insight is much more valuable than any database that reports on EBITDA multiples, as the nuances of the business and the industry are understood.

Getting a fair price for your business, when it is time to sell, is largely based on its “transferable value”.  Here are ten quick tips to focus on in advance of a potential sale of your business to improve its marketability and therefore its transferable value.

1. Make yourself redundant.   Too many lower-middle market businesses thrive when run by their founder and falter when run by the next generation or new owners.  Astute buyers intrinsically understand that if a business acquisition is to be successful, there must be a way to reduce its reliance on its existing owner/ownership team.  Taking the time to build the management bench generates buyers that are much more open to acquisitions when the risk of transitioning is reduced.

2. Build/Develop a strategic growth plan. Many entrepreneurs didn’t become successful by spending inordinate amounts of time on generating fancy powerpoints from their strategic planning sessions. Typically, they know their market backward and frontwards and instinctively know where they are headed and how they will get there.  Unfortunately, that doesn’t translate well into transferable value.  Sellers benefit from having a well-articulated, documented, strategic growth plan even if it differs from their “thesis” on how to grow the business.

3. Clean up your financials.  For some companies that means getting their books audited, for others, it means cleaning up their balance sheet by writing off or selling obsolete inventory or redundant assets.  Working capital levels need to be adjusted to an appropriate amount as historical levels will likely be part of the negotiations.  Owner’s benefits and related party transactions are another area that should be cleaned up in advance of a sale.

4. Rationalize your spending. Deep scrutiny of operating expenses should be an ongoing process, but it is even more important when preparing the business for a sale.  Furthermore, while no one would suggest that you should radically reduce capital expenditures in advance of a planned sale, focusing primarily on maintenance or replacement Capex would be prudent. Any expansion-type Capex should have clear ROIs to help new owners understand how the benefits will accrue to them.

5. Focus on Quality of Earnings. High-quality revenue is generally considered to be sales that are sustainable and predictable, are profitable, and come from a diversity of products, customers, markets, etc.  High-quality revenue reduces the risk for any new owner or management team and therefore can increase business value. 

6. Stage your business for a sale.  Similar in concept to staging your house in advance of a sale, it is important to make sure that the office and business premises are neat, uncluttered, and clean. 

7. Reduce risk for buyers.  Business buyers and sellers view risk from an entirely different frame of reference.  Anything a seller can do before marketing the business to improve terms or secure improved supplier, customer, or employee contracts can reduce the perceived risk for a new owner. The degree of reliance on key suppliers is also something that a seller can focus on by finding alternatives or having backup plans in place.  Putting stay bonuses in place with key employees may also be necessary.

8. Review and upgrade IT Systems.  A thorough review of all things IT-related is usually a good idea when preparing for a sale.  How reliable and secure are your systems?  Is all your software properly licensed and up to date?  Many times how you collect, analyze, interpret, and utilize your customer, product, and market data is incredibly important to a buyer and needs upgrading.

9. Document your processes. Buyers typically want to make sure that all operating procedures and company policies are well documented and up to date. Sellers should consider imposing a vigourous “self-audit” similar in substance to what would be undertaken under any third-party audit.

10. Implement HR best practices. For top-performing teams, everyone must have a clear understanding of what is expected of them, their role, and how it fits within the organization’s goals. Putting HR best practices in place for recruiting, onboarding, evaluating, training, developing, promoting, and retaining employees can make a business much more marketable when it's time to sell.

Most rational people enter an M&A deal negotiation with the intent to close the deal but with an understanding that some compromises will be required along the way. There may be some healthy skepticism on the probability of a successful close by one or both parties but typically there is also some level of hope that it will work out and that a deal is doable.

However, like any important negotiation process, it is critical to know your “red lines” and when to say "no", even if it ends negotiations of what is otherwise a good M&A deal. The challenge is to ensure those items are dealt with early in the negotiations so that you and your team minimize the amount of time and resources you waste on a deal that can’t be completed.

Defining your red lines early doesn't mean being closed-minded to finding creative solutions to address your concerns. Both parties need to look beyond their counterparty’s “position” to explore their “interests” and focus on inventing options for mutual gain.  It can be hard work but worth it if an otherwise undoable deal becomes doable.

Unfortunately, it's not enough for only one side to focus on such principles.  Far too often, one party walks away from the deal at the "11th" hour based on issues that should have been addressed early or that they should have known much earlier in the process.

For the buyer, this can happen for any number of reasons. Sometimes, the buyer’s deal team may seem to be uncoordinated and unclear on the deal’s major objectives. Some members of the deal team are focused on immaterial due diligence details while some of the key decision-makers may not have entirely bought into the concept. This seems to be more common with larger corporate buyers.  Larger corporations sometimes require a diverse group of internal approvals across the organization, and it often seems that almost anyone can veto the deal if they’re not completely on board.  Of course, the more senior the “objector”, the more likely their input and opinion can kill the deal.  The deal team must keep the key decision-makers on board throughout the negotiation and due diligence phase to ensure that the entire process does not waste valuable resources, nor does it sour relations with the seller if the buyer walks late in the process.  The deal team needs to thoroughly explore the acquisition from a wide range of perspectives and have an early and deep understanding of the red lines from each of the key decision-makers’ frames of reference.

Sellers' red lines usually center around value but could be any number of factors, such as the amount of rolled equity or its share structure, non-competition clauses, transition or employment contracts, etc.  Sellers should insist on having discussions about the key deal terms and “must-haves” early in the process and each should be spelled out clearly in the LOI.  All too often a lot of key deal terms are excluded from the early negotiations because the buyer is unwilling to commit without further due diligence. Sellers should insist they be agreed to, at least in principle, so the buyer knows up front what is non-negotiable.

Some sellers are reluctant to expose certain aspects of the business early on in the negotiations and due diligence if they feel they could devalue the offer.  This is usually a mistake and is a good way to waste everyone’s time and money.
​
Every M&A deal negotiation has its nuances, however, the probability of a successful close increases when both parties 1) ensure all key decision-makers are on board from the beginning, 2) address the most important “must-haves” and “red lines” upfront or early in the process, and 3) remain open-minded to finding creative solutions to address their counterparty’s interests.

Of course, any business buyer should first formulate their acquisition strategy before going out and seeking potential target candidates.  They also should formulate a clear post-transaction strategy for businesses they seek to acquire. 
 
For the seller, finding the right buyer via a “strategy-first” approach is a little dependent on the overall objectives of the seller.  If getting the top-selling price is the highest priority, business sellers should run a broad, professional, competitive process.  There are however situations when a strategy-first approach might be more appropriate.  By this, I mean when the seller is seeking a buyer/investor that 1) brings a specific strategic fit to the deal, whether that is access to markets, resources, etc., and 2), the strategic fit is more important to the seller than getting top dollar.

Deciding on the right priorities before engaging in a discussion with potential buyers or hiring an investment bank to run a process is a critical first step.  Once a seller has decided what his/her highest priorities are, then the decision on what approach to take is a little easier. Here is a link to the types of questions you should answer before you start.

When the strategic fit is the sellers’ highest priority and when there are only half a dozen or more buyer candidates, a limited sell-side process may be appropriate.  When the strategic fit is critical and there are very few suitable candidates, the seller is in a delicate position.  Approaching a buyer directly to explore whether they are interested in acquiring your business can be a little intimidating, particularly if there is no pre-existing relationship.  If the buyer candidate is a direct competitor or a potential future competitor, it can put the seller in a precarious position.

However, establishing a working relationship with a potential buyer can be a non-threatening way to explore the strategic fit between the buyer and the seller, without the seller even exposing that they may have an interest in an eventual sale.  Without explicitly outlining that a sale might be considered, potential sellers should look for ways to build a commercial relationship as a first step.  Of course, once a trusting relationship has been established, it can be easier to explore synergies, business strategy, cultural fit, etc.

Whether you’re a future business buyer or a business seller, one of the most important exercises you should undertake before going to market is to identify your highest transaction priorities.  Often, business sellers fail to think through what they want to achieve from a sale, other than obtaining the highest price.  Likewise, business buyers often know they want to grow through acquisitions but fail to clearly define their priorities and resource their acquisition strategy accordingly.

If obtaining the maximum value is a seller’s highest priority, it is usually advisable to hire an Investment Bank/M&A Advisor to run a broad process to create competitive tension between potential buyers. However, not all businesses and situations are well-suited to the traditional sell-side controlled auction process.

Interestingly, the most obvious buyer(s) sometimes submit a mediocre offer or decide to “pass”, and unexpected buyers sometimes submit impressive initial offers. While an unexpected buyer can cause some consternation, as they may not know what they don’t know, a broad, competitive process, helps ensure that the highest selling price is obtained.

The highest selling price, however, often comes in the form of a structured deal.  So, if the priority is to obtain the highest total enterprise value, business sellers should be prepared to accept earnouts or other contingent payouts and/or provide financing support such as equity rolls or vendor takebacks (VTB), etc.  It is important to calculate how much “cash at close” will be needed after tax and all other expenses are considered.  An equity roll or VTB demonstrates the sellers’ confidence in the future of the business and therefore it can drive valuations, or at the very least, help ensure that the best buyers submit offers.

Furthermore, many buyers will require a transitional role for owner/managers.  If “handing over the keys” and walking from the business is your highest priority, the type of sale process you engage in and the buyer universe you approach should be designed to achieve this priority.  On the other hand, perhaps you are looking for a specific ongoing role under new ownership.  Either way, defining your priorities on your potential post-transaction role, if any, is critical.
Maintaining or ceding control is also often one of the most important priorities to decide at the onset of any buy or sell process.

In some situations, selling the shares of the business (rather than the assets) may generate higher after-tax net proceeds but buyers may offer less because they may lose some potential tax benefits and assume more liability.  Sellers need to decide how important is it is to sell equity (shares) vs the assets of the business.  Also, sellers should decide how important it is for them to retain (and lease-back) or divest any real estate (if owned by the business or an affiliate) that the business utilizes.

Other important priorities to consider include the importance of the retention of the management team by any new owner, the cultural fit, the impact of a transaction on employees, customers, suppliers, and other stakeholders.  Business sellers need to think through the impact a sale to a direct competitor may have on the business and decide whether it is important the business remain as a stand-alone entity.  Is it important that the legacy of the business’s operations, brands, etc. be maintained?  In other cases, the priority may be to capture needed synergies or to facilitate needed industry consolidation to survive and thrive in the future.

For business buyers, many of the same questions need to be answered.

Rarely do acquisition or divestiture processes proceed exactly as planned.  The approach you take, however, needs to be shaped by your highest priorities.
​
Take our business seller survey to help you sort through your most important transaction priorities.

Many people would argue that the “market” is the best judge of a business’s value.  While true, it is not very helpful if business sellers or buyers go to market with unrealistic expectations.  Business sellers should never attempt to market their business to determine its value unless they intend to carry through with a sale.  Astute, serious buyers will quickly ascertain whether a seller is serious or simply testing the market.  It may impact the seller’s ability to effectively market the business in the future.

For sellers, having the business professionally appraised or alternatively, assessed/evaluated by an outside professional with deep industry-specific M&A experience, is an important first step. It is always possible that sellers will find a buyer that will pay an outsized multiple, or that buyers will find a below-market bargain, but it should never be assumed. 

There are many ways to estimate the enterprise value of a business based on its historical financials, asset values (costs to replace or build), projected cash flow/earnings, comparable analyses, precedent transactions, or some combination of each. All approaches have their advantages and disadvantages with the true market value influenced by the prevailing conditions both in the general economy and the specific industry vertical the business operates in.  There is no universally accepted best way to estimate the value of a private company in advance of a sale.

There are, however, a lot of resources that private company owners should think about utilizing before considering a sale.  Whatever valuation approach is used, it should be a prerequisite for any sale process or speculative dialogue with buyers.  Taking the time to have an outside professional assess the value of the business will provide owners with some important insights on what will drive its value in the future.  It is never as simple as growing the topline and bottom line, although growth is an important valuation driver.  Besides an estimate of the value of the business, owners should speak to professionals they trust with experience in their industry to ascertain the marketability of the business. Are there a small handful of buyers or would the business appeal to a wide range of financial and strategic buyers?  The broader the interest, the more likely a favourable outcome if selling for the highest price is the primary motivator.  Having an appreciation of enterprise value is even more critical when the buyer universe is limited.

A business appraisal by an accredited professional is often the best approach when there is a high percentage of the business value tied up in real estate and hard assets, in which the condition of those assets and their replacement value is crucial.  Commercial/Industrial real estate values are largely driven by local economic forces, so hiring an accredited appraiser with local knowledge and experience is advisable.
 
M&A advisors and Investment Banks are likely better at assessing the current market trends and valuation multiples in specific industry verticals they participate in and are more likely to have insider information on actual trading multiples based on their prior experience. While analytics, models, databases, and projections are important and helpful, experience, insight, and knowledge of the industry dynamics, the buyers’ strategies, and the underlying market trends will provide sellers with needed perspective in advance of a potential sale.
​
Whatever approach sellers take, having a realistic view on the value of the business is a crucial first step, regardless if you want to broadly market the business through a traditional M&A sell-side process, or deal directly with potential buyers that would be a strategic fit.

Private business owners are increasingly seeking the benefits of Advisory Boards to provide independent and experienced counsel on complex issues such as exit planning, succession strategies, growth strategies, acquisitions/divestitures, etc. These advisors are often experienced industry veterans, CPAs, lawyers, consultants, or other trusted advisors and act as a “non-binding” sounding board for private company leadership.

For some entrepreneurs, success has come from working hard and by figuring out a lot of things on their own, so seeking counsel from outsiders can seem a little daunting.  However, as a business grows in complexity, the value an Advisory Board can bring to private company owner(s) increases exponentially, especially when it is carefully composed and structured to meet the specific needs of the business.

It is important to understand the difference between an Advisory Board and the Board of Directors (BOD).  Advisory boards can provide independent advisory services to the owner, the BOD, the CEO, or the senior management team, but do not have a fiduciary duty to the company and are not tasked with oversight of management on behalf of the shareholders.  They simply are there to provide independent counsel.

The first step in forming an Advisory Board is to define what guidance will be needed from the board.  This begins with a clear vision, mission, and core values statement that can be articulated to Advisory Board candidates to ensure alignment.  Understanding where you are headed will allow you to assess the experience and talent of potential advisory board candidates against how they may or may not be able to help you with your mission.
 
Focus on finding members that with help you with your “holes and goals”.

One way to consider candidates is to ask the simple question – “Are they ahead of me on this?  If for example, you see a path to growing your business to “X” million in sales, focus on potential candidates that have “been there and done that”.

Building on the concept of the board’s makeup and mandate, it is important to select candidates that will provide diverse opinions and therefore provide a healthy dialogue amongst board members. Look for candidates that will challenge the status quo with you, your partners, or with management and are not afraid of taking an alternative viewpoint.  The value of the board to company owners is in the diversity of opinions and the varied, independent counsel, that is not stuck in a narrow way of thinking.

While technical advisory boards are quite common for start-ups and high-growth specialized businesses (eg: pharma, biotech), mature company Advisory Boards need members with leadership and business experience in combination with members with specialized subject matter knowledge (depending on the mandate).

There are plenty of other considerations that need to be decided before forming an Advisory Board, such as how big the board should be, how it should meet (i.e. in person, virtual, one-to-one), how often it should meet, what time commitment will be needed for each member, and how will you compensate members?  Also, how will you help ensure your board members are successful?  It is more likely you will get high-quality advice when you provide the opportunity for the board members to properly prepare for meetings with a professional board package and a clear meeting agenda.   How will you communicate with board members between meetings, and who will take the role as board chair?

Finally, in the spirit of continuous improvement, you should always be prepared to change the makeup of your Advisory Board as the business needs change.
​
Like most things in life, the more you put into something, the more you get out of it.  This applies to the formation of an Advisory Board, recruiting and selecting its members, and providing it the tools and resources to ensure it meets its objectives and ultimately drives value for the company owners.

​Business sellers often think their business is worth more than what a buyer is willing to pay for it; at least, what they will pay as an upfront payment of “all cash.”  That’s not to say that either party is right or wrong, it’s just both parties view the risk/reward balance from a different frame of reference. Deal negotiations almost always involve some degree of compromise. This blog article outlines some ideas that can be used to help bridge differences of opinion between buyers and sellers on business value.
 
Earnout
The use of an earnout is one common mechanism buyers and sellers of private businesses can use to simultaneously satisfy both parties differing viewpoints on business value and its growth potential. Since buyers often remain skeptical of the sellers’ projections, particularly when there are a lot of market uncertainties, the earnout can help mitigate those concerns, as payment is made when expected results materialize. Earnouts are usually based on meeting certain future financial metrics, such as sales, or EBITDA.
 
Milestone payment
Similar to the earnout, a milestone payment is when a buyer agrees to make additional cash payments to the business seller(s) after the transaction closes, contingent on the occurrence of a certain agreed-upon event(s). Normally, it applies to situations where the seller has laid the groundwork for a significant event that will positively impact the business and thereby negotiates a cash payment should that event occur under new ownership within a given time frame. For example, if the business obtains a new “game-changing” customer, a patent is granted, a new product is granted regulatory approval, etc.
 
Holdback in escrow
When the buyer and seller disagree about the potential financial impact or risk associated with a potential future event, the parties can agree to place a portion of the purchase price in escrow, subject to payout to the seller if the event remedies itself, or repaid to the buyer if it doesn’t, within an agreed-upon time. Examples could include the outcome of a lawsuit or a product regulatory review. Holdbacks are standard practice in the M&A negotiation process as protection for the buyer against misrepresentations by the seller, but can also be used as a tool to bridge differences in perspective of the likelihood of certain negative events occurring in the future.
 
Seller financing or vendor take-back (VTB)
Sometimes the simplest solution for a value gap can be solved when the seller agrees to help finance the deal with a vendor take-back note secured by the company’s assets and/or personally by the buyer. It helps the buyer acquire the business based on the future cash flow it generates. This is very common with “main street” deals and in the lower-middle market, as access to competitive financing is often less robust for smaller buyers. It also demonstrates confidence in the business and its outlook by the seller. While there are many ways in which deals with owner-financing can be structured, in general, most sellers will want to stay involved in the business to some degree to keep an eye on their ongoing investment and the ability of the buyer to eventually pay out the VTB.
 
Equity rolls
Like the VTB, when a seller agrees to re-invest proceeds as equity back into the business, it demonstrates confidence in its future potential and therefore can be a means of obtaining a higher valuation. Unlike the typical VTB, it allows the seller to share in the upside potential of the business, however, the seller will also share in the relative risk associated with the business.
 
Equity rolls are common in PE-sponsored deals, but less common when the buyer is another industry participant (strategics). Full liquidity of the investment normally comes naturally when the PE-sponsored acquirer sells the business (usually 3-7 years after its initial investment) but it can be a little trickier in strategic buyer equity rolls. When a future sale of the entire business is not anticipated in the foreseeable future “Put Options” can be a solution. This is when the seller negotiates an option to sell some or all of its rolled equity to its equity partner at fair market value during an agreed-upon period in the future.
 
Discounts to an ongoing commercial relationship
In some cases, buyers and/or sellers may be able to negotiate a preferential business relationship to help bridge differences in value. For example, the seller could provide products or services to the buyer at preferred rates for an agreed-upon period, in turn for paying a more attractive price for the business.
 
Retention of real estate
Many buyers are more interested in the operating business than any real estate that is owned by the business. Sellers can sometimes retain the real estate and lease it back to the new owner, thereby reducing the purchase price for the buyer and gaining a stream of future income. This approach can also potentially defer some taxes for the seller.
 
Anti-embarrassment protection
Some sellers are afraid that a buyer will acquire their business and simply “flip” it in a year or two at a much higher value. On occasion, it may be possible to use an “anti-embarrassment” provision whereby if a flip were to occur within an agreed-upon time, the buyer is required to share a portion of the proceeds with the original seller. This is used mostly when the seller is forced to sell for some reason.
 
Product line or business unit carveouts
Buyers often have specific reasons why they want to acquire a business, whether it is gaining market share, scaling operations, capturing synergies, or simply putting capital to work. However, there is usually no perfect business that meets all its objectives. Sellers need to be keenly aware of the attributes of their business in which the potential buyer sees the most value, and conversely the aspects of their business in which the buyer sees little value. Sometimes, it may be possible to carve out those components of the business in which the buyer places little value, to retain or sell to another buyer in the future. For example, there may be patents, products in development, products/product-lines, business units, facilities, etc. in which a carveout could bridge a valuation gap.
 
Transition plan
A large part of the value of any transaction lies in the retention of key people, often including the owner and/or management team. Sellers that are open to working with the new owner through a transition period can help reduce the risk for the buyer and thereby bridge valuation gaps.