The Trick to Selling your Business: Think Like an Investor

When Stephen Adele and his four co-founders sold an 80% controlling interest in QuickBox Fulfillment to Pike Street Capital in Seattle, the eight-figure deal with the private equity firm was part of their grand plan.

They had founded QuickBox Fulfillment, a Denver-based firm that does ecommerce fulfillment, in 2017, and grew it to 500 employees and $57.3 million in annual revenue by the time the deal closed in late 2019.

“We had started the company with a very strong mission and strategic vision,” says Adele. “It was that we’re going to build this to sell this. We had a little bit of an advantage that we are going to build this with the end in mind.”

But Adele and his co-founders took nothing for granted and kept their fingers on the pulse of the market to make sure they could position the business for a successful transaction. With advice from a merchant banker, they built a strong case for the future financial health of the business in an environment where ecommerce is booming.

“What’s important is to figure out how to substantiate and prove the value of an organization,” says Adele. “What they are looking for is future cash flow, to service their debt or whatever they are doing to buy the company.”

High-velocity deal making 

Adele was ahead of a trend that’s gathered steam since the pandemic, the acceleration of dealmaking in the lower middle market. Axial’s Lower Middle Market Pursuits report found that the number of lower middle market companies marketed for sale on the Axial platform increased 12% in 2021, compared to 2020.

Many buyers and investment firms are eyeing lower middle market businesses because of their high growth potential, the room many have for operational improvements and the opportunity for add-on acquisitions. “We invest in teen-age companies and help them become adults,” says James Andersen, founder at private equity firm Clearview Capital in Stamford, Ct. “If you ask us what we’re looking for, it is companies with great potential for growth.”

There seems to be plenty of growth ahead, despite challenges like the supply chain crisis. The National Center for the Middle Market reports that the vast majority of middle market firms saw improved performance in 2021, compared to 2020, with four out of five reporting revenue gains and 57% expanding their workforce. The 12.3% average year-over-year revenue growth the center reported was the highest on record.

Thinking like a buyer 

For companies that hope to sell, knowing what investors want is essential. One thing virtually all want to see is an easy hand-off. “You need at least a full year of running it with the intention of having other people in charge of your systems and having the cleanest and best books as humanly possible,” says Dan Faggella , who sold his seven-figure online store Science of Skill, which focused on martial arts and personal safety products, to a group of software investors in 2017.

To that end, it’s important to build a brain trust early. “You want to build an advisory team that is familiar with these transactions and can give you advice based on current market conditions,” says Andrew Sherman, a partner in the Washington, D.C. office of law firm Seyfarth Shaw and author of Mergers & Acquisitions from A to Z. “Every couple of months there are marketplace shifts.”

Sherman recommends starting with an “eyes of the buyer” analysis, in which sellers look at their businesses the way a potential acquirer or partner might. It is important to ask questions like, “Why is my company attractive? What is the buyer really buying?” says Sherman. “There is typically a disconnect between what the seller thinks they are selling and what the buyer is actually buying.”

Sometimes, Sherman says, the buyer sees an intangible asset that the seller may not even be aware of until they conduct an eyes of the buyer analysis.

“Buyers are under no obligation to disclose what they see,” says Sherman. “It’s almost like I’ve bought your house. You’ve never done an environmental survey, and it turns out there is oil and gas under your house. You thought you were selling me the house. I was buying the oil and gas rights.”

Sherman also recommends that his clients go through what he calls “mock due diligence” 12 to 18 months before they bring their company to market, to take stock of the intangible assets the business may have. During this process, the sellers will typically set up a virtual data room and review common concerns for investors, such as their labor and employment practices and intellectual property protection.

“If you don’t go through this, you will be blindsided by the process,” Sherman says. “Or worse yet, you will become too defensive. I’ve seen a lot of deals derail over emotional and ego issues.”

Steven Sudell went into the process of selling his business prepared. The physical therapist from Venice, Calif., invented the Neck Hammock, a portable neck traction device, to help his patients, bringing the product to market in 2017 and selling it online. He sold the company, which grew to $6-7 million in annual revenue, in early 2021 for a seven-figure amount to an individual involved in ecommerce.

One thing that worked in Sudell’s favor was that prior to the sale, he had licensed the entire company to a larger firm that had the resources to scale it internationally and fend off IP infringers. In exchange, this partner paid him royalties. He worked with an experienced broker, David Fairley, founder and president of Website Properties in Olympia, Washington, to negotiate the sale with the buyers.

“The thing that really interested them most about the company was the extensive amount of IP protection I had in place,” says Sudell, who had secured multiple patents, trademarks and copyrights. “It was a lot more than they were used to. It helped them sleep better at night.”

Tapping the power of relationships

Having the ability to form good relationships with potential buyers can also work in your favor, given that you will be collaborating closely during the ownership transition. Before Brian Dean  sold Backlinko, his traffic-rich SEO and content site, to SEMRush, the NYSE-traded maker of a popular SEO tool, in January 2022, he visited the company’s headquarters in Boston and found there was kismet. “They seemed like the perfect partners,” he says. He is now working for SEMRush in a part-time capacity. His advice to other sellers is to ask themselves: “Are they people you want to hang out with?”

“You will be hanging out with them a lot,” he says.

Good chemistry is particularly important during rollover equity deals, where a private equity firm comes in and buys a majority stake and the original founder becomes a minority owner, says Sherman. “You are now the minority owner of your own company,” Sherman says. “That’s a lot for some entrepreneurs to swallow.”

Ultimately, though, it will only help you if you can let go of the reins a bit and find a way to make it work with a new team. Says Anderson, “What we’re looking for, more than anything else, is great partners.”