Building a Business for a Strategic Sale: A Comprehensive Guide
A sale of a business to a strategic buyer is an attempt to find the holy grail in M&A – the highest price, the best deal financing terms, and the highest probability of post-close success for the existing team under new ownership. Building your business to sell to a strategic buyer takes years of planning, operational and financial performance success. The business must have strong, consistent EBITDA, a motivated management team in place that will stay on board post close, a strong and differentiated customer, a vendor ecosystem that isn’t reliant on a single supplier, and an industry that shows strong growth potential in the future. Its nearly impossible for a business to check all boxes, but the more you can deliver, the better your odds that a buyer will pay and finance a premium.
In this guide, we share practical tips on how to prepare your business for a strategic sale. This will help you increase its value, attract buyers, and finalize the deal on the best terms.
We sell to high net worth individuals, private equity, and strategic buyers all the time, so give this blog a read, and look to other experts at Turning Point, Forbes, Harvard Business Review, and McKinsey.
This blog is meant to be insightful and help to business owners just starting the exit planning process, but we highly recommend the podcast Built To Sell Podcast.
Nerd talk – neural plasticity tells us people learn in different mediums and retain knowledge in different ways, so podcasts aren’t just a great to way to spend your drive time commute, but also valuable to investing in learning, personal growth, and building up your business. Some of our favorite episodes include –
Exit Story: How to Attract a Fortune 500 Acquirer With Brock Wealth
Exit Story: How $1M in Profit Changed Doug Lowenthal’s Life Forever
Inside Private Equity’s Roll Up Playbook
Understanding Strategic Sales and Business Building
Strategic sales highlight your business as a valuable long-term asset and easily transferable to new ownership in the short-term. The idea is to attract buyers who want strong business models, predictable earnings, and future growth potential.
To prepare a business for a strategic sale, critical metrics exist within your industry to attract more buyers. These steps will make tactical business operations instrumental if your goal is to build your business to be acquired by private equity investors or a strategic buyer, say one that wants your industry trade secrets, IP, or customer base that would enhance cross selling opportunities.
Key Benefits of Targeting Private Equity or Strategic Buyers
There are private equity groups for every industry niche, from HVAC and plumbing to pre-school education and maritime geo-spatial weather foreacsting….there is likely a private equity focus for every industry vertical! PE wants the investment upside, without the operational hassle, and are willing to pay more for less active management of their acquisition portfolio targets.
For big strategic buyers, what matters is the benefits that come from working together. These buyers want companies that fit well with what they already do. This helps them reach more people or gain new tech skills. For you, this means selling to buyers who care about your success in the long run.
Focusing on these valuable buyers makes your business more attractive for investment. Both private equity and strategic buyers look at proven sales metrics, a clear sales funnel, and stable operations. It is important to go to them with clear forecasts and honest financial information.
Preparing Your Business for a Strategic Sale
Preparation is critical if you want to attract the best buyers for the sale of your company. This means concentrating in 3 main categories:
- Clean, straight-forward financial performance (P&L, Balance Sheet, Statement of Cashflows)
- Operational excellence (standard operating procedures, staff redundancy, key employee succession planning, staffing and training protocol)
- Customers with a long track record of repeat, recurring, or re-ocurring business
Next, make sure your sales goals match what the market expects. This will help you create a plan for success.
By concentrating on these three main groups, your business will be better at meeting what buyers want. You can show that your business is financially strong and ready to grow. As you prepare for the sale, these factors will help you negotiate better terms.
Evaluating Your Business’s Current Standing
Assessing the current state of your business is important for a successful sale. By hiring a 3rd party to perform business valuation, you will get immediate feedback on the enterprise value range, types of buyers that fit your current business operations, and what levers you need to pull to achieve a better sales outcome. A one time valuation can range from $2,000 to $25,000 depending on the size and complexity of your business. This valuation should include an asset based, market comparable, and income based approach, with a few subsets within each category.Going with a firm that has a certified valuation analyst perform the work is worth the extra costs, as you will get real market data points on comparable transactions in your industry, the impact of current interest rates on buyer financing/lending options, real examples of similar transactions dealing with current risks (e.g. tariff boomerang, staffing challenges due to ICE raids, tax and industry specific incentive policies, etc), and straight talk on what deal terms buyers will demand in a potential sale
Depending on the size and complexity of your business, you may consider a Quality of Earnings (QOE), which can range from $20,000 to $100,000 in fees depending on the scope of work. A QOE will do a more thorough risk assessment and in depth analysis of your cash-cycle. WHen strategic buyers perform due diligence in a sale, they almost always order a Quality of Earnings from a 3rd party specialist. If your business is making above $2M EBITDA, paying for a QOE a few years prior to the sale can help you implement recommendations to remove risk that strategic buyers will almost certainly call out in due diligence.
Aligning Business Goals with Market Expectations
It’s important to match your valuation and company sale goals with what the market needs to attract private equity and strategic buyers.
Concentrate on setting improvement goals that focus on making profits and generating demand. Private equity buyers tend to prefer businesses with smooth sales processes and reliable sales pipelines. On the other hand, strategic buyers appreciate businesses that align with wider market needs. Create sales tactics that satisfy both types of buyers.
An often overlooked aspect of a company sale is assembling a full team of advisors that can help guide you on the capital gains tax impact in an asset sale or stock sale has in the post closing proceeds to the owners – tax, legal, and wealth counsel. A buyer might want an asset sale for the advantages future depreciation presents, but could be convinced to go forward with an asset sale when customer/vendor contracts, assignment, and assumptions has a higher upside for future success. Its critical business owners hire an M&A advisory firm that can help the business coordinate the valuation, finding buyers, reconciling any tax challenges with the company’s CPA, as well as analyzing personal financial wealth management in the potential outcome range in a business sale.
Essential Components for Building a Sale-Ready Business
To get your business ready for sale, you need to focus on aspects that will appeal to the most likely buyer and the buyer you are striving to obtain.
You also need to boost your financial health and be clear with your reports, not just P&L and Balance Sheet, but leading indicators (e.g. customer buying behavior, customer churn rate, lifetime value, re-occuring or recurring revenue, etc.). If you have a regular scorecard for operational health, all the better, as this shows you track and improve operating procedures.
Strengthening Your Business Model
A strong business model is essential for a successful strategic sale. First, improve your operating processes to make them easy to scale. Buyers prefer businesses that can grow while staying efficient. This can be achieved with new systems or better sales structures.
Next, your business model needs to be adaptable. Can it quickly adjust to changes in the market or customer needs? If it can’t, make changes to your sales processes to improve flexibility. This adaptability makes your business more attractive to investors.
Finally, back your business model with clear ways to generate revenue. Show buyers that your growth is planned, not random, and is based on solid sales metrics. Whether you use account-based selling or focus on solutions, buyers want to see that your model is ready for the future and focuses on growth.
Enhancing Financial Health and Transparency
Transparent financial reporting is essential for attracting valuable buyers. Start by gathering detailed financial statements that show revenue trends, sales performance, and profit margins. When you’re clear with your information, you build trust. All buyers will want at a minimum five years of profit and loss, balance sheet, and (when available statement of cashflows. Reviewed financial statements, and even better audited financial statements, show the strength of the business.
Money is made, and lost in the margins, so standard accounting and bookkeeping is critical. If your total annual revenue is down 3% year on year, buyers will want to know what revenue segment is accountable for the performance loss. The same is true for cost of goods sold (COGS), operational expenses, and capital expenditures (CAPEX). Why are costs for one general ledger line item up 3%, but CAPEX is down for the last three years. Is there additional CAPEX the next owner will need to invest in, say a new CNC machine, 5 new trucks, or other aging plant equipment? for
Market Analysis for Strategic Sale Success
Market analysis helps you find valuable buyers and check investment interest in your field. Split your audience into groups of potential buyers. Knowing the general trends in your region and nationwide within your industry can help you time your sale, your company process improvement and financial performance improvement activities.Knowing the WHY on a competitor’s successful acquisition will help you prepare for a sale, or inform you that perhaps a strategic sale isn’t in the cards. IInsights from this analysis give your business an advantage. You can position your value proposition to buyers in a clear way. This will help you make the most of your deal chances.
Identifying Your Potential Buyers
To find the right buyer for your business sale, start by knowing your target audience. Focus on buyer personas connected to private equity firms that want to invest in growing ideas or companies seeking partnerships.
Look at potential customers who fit with what your product or service offers. This includes niche experts or big companies. By defining your buyer pool, you make it easier to match what sellers and buyers need.
Create buyer profiles based on what you see in market trends and response rates. Check factors like their preferred ways to buy and sell or their flexibility regarding purchase terms. This analysis will help you improve your buyer strategy.
There are serious risks preparing for a sale, performing any of this analysis. When customers, competitors, employees, or vendors know that you are considering a sale, the rumor starts and it can take on a life of its own. Exit planning should be done in a confidential manner internally and with 3rd parties.
Understanding the Investment Appeal in Your Sector
Every buyer looks at how appealing an investment is in your business sector. It is important to show your business as a successful entity in a growing market. For instance, private equity buyers will check how fast the sector is growing and how scalable your company size is.
Strategic buyers want to see how your sector trends fit with their goals, current operations, capabilities and customer segments. Are you offering new ideas that meet market needs? By focusing on these points, you can get more attention from buyers who are interested.
Use tools to analyze your sector and improve your approach. Keep track of trends like how buyers behave and what the market wants. This useful information can help you become an attractive option for private equity firms and large strategic buyers.
Crafting Your Unique Value Proposition (UVP)
Developing a strong unique value proposition (UVP) is important to help your business stand out from others. This proposition shows how your products or services solve the specific problems of your ideal customer while meeting their unique needs. When you define your value proposition clearly, you help create better sales strategies. This makes it easier for your sales team to connect with qualified leads. A clear UVP also improves your marketing strategy. It helps both inbound and outbound sales efforts. As a result, you can build better customer relationships and grow your market share.
Differentiating Your Business from Competitors
Building a strong identity in the market is key for any business looking to sell strategically. It helps to highlight unique value that speaks to your target audience. This can help your brand stand out from competitors. You should use new sales strategies and understand the pain points of customers. This knowledge will help you shape your marketing strategy to meet the specific needs of qualified leads and boost your market share. Focus on building relationships with buyer personas through good communication. Regularly checking sales metrics will help you adapt quickly to changing customer needs and stay ahead of the competition.
Communicating Your UVP Effectively to Attract Buyers
Creating a clear and engaging story about your unique value proposition (UVP) is very important for attracting potential buyers. Good sales strategies focus on knowing the specific needs and pain points of your target audience. Use different communication channels to make sure your UVP stands out to qualified leads. Adding case studies and testimonials can boost your credibility, and using social selling tactics can help build connections with future customers. A well-designed sales funnel can present your UVP at the right time. This way, it matches the buyers’ goals and increases their interest in your business.
Legal and Deal Structure Red Flags for a Company Sale to Private Equity or a Strategic Buyer
Before going to market, business owners should understand the tax advantages and disadvantages to a stock sale and asset sale, and what buyer’s expectations will be for deal structure. The business should identify key legal risks, which could include past and current lawsuits, safety and environmental incidents that occurred due to the business, employee (or union) benefits and pay risk, which all could come up at the 11th hour to kill deal negotiation if not properly disclosed to the buyer. Depending on the structure of the sale, certain warranty liabilities may exist, so its important to identify key risks within current contracts, purchase orders, or master service level agreements. All customer contracts and vendor agreements are different, assignment and assumption clauses could be no issue at all, or they could be a deal breaker for a buyer to take over ownership.
Deal terms could include equity roll over, representations and warranty risk producing a hold back on payment, employment agreements for key employees, incentive earn out or a seller’s note. It is critical that the business seller obtains expert legal and tax advice prior to signing an LOI and then during deal execution. Exit Equity can be your quarterback leading the process of selling your business.
Beginner’s Guide to Building a Business with a Strategic Sale in Mind
Outside of strong cashflow and reliable EBITDA performance, there are organizational strengths that must be in place to attract private equity and strategic buyers.
Step 1: Establishing a Strong Leadership Team
A strong leadership team is key to a successful business focused on strategic sales. Choosing leaders with different skills and a common vision can improve how decisions are made and make sales activities run smoothly. Leadership should concentrate on guiding the sales cycle, solving the pain points of possible buyers, and ensuring the sales strategy matches the business goals. When team members have strengths that work well together, they can improve operations and create a culture of responsibility. This leads to a better offer for buyer, highlighting the business’s ability for steady growth and profit.
Step 2: Implementing Scalable Systems and Processes
Creating systems that can grow is very important for smooth growth and running things well. Start by looking at how things are done now. While automation tools, AI, and ChatGPT may be all the range, a long term and consistent use of a key performance indicator score card and process performance report shows the maturity of a business over a flash in the pan new tech tool. ERP, CRM, marketing communication tools, inventory planning and control all need to be flexible so the new owner can adjust and scale as the company grows. Focusing on key tools, system, processes, and people develop highlights the durability of your business.
Step 3: Focusing on Sustainable Growth and Profitability
Focusing on sustainable growth and making a profit means understanding your company’s sales numbers, revenue segmentation, customer concentration, marketing effectiveness (customer acquisition cost and life time value metrics), and how well you can shift gears when the market changes. If revenue is increasing, but profits are decreasing, buyers will be wary to make an acquisition.
Step 4: Building a Compelling Brand Story
A good brand story connects with your target audience. It is important for a successful sales process. To craft this story, you should highlight your company’s mission, values, and value proposition. Make sure it aligns with customer pain points. Storytelling can change your buyer personas into leads that care emotionally, improving how you connect with potential customers. Use solution selling to show how your products meet specific needs. This story not only draws in buyers but also builds trust, helping your sales process move towards a successful deal.
Step 5: Engaging in Strategic Networking
Building relationships through smart networking is very important for business growth. Strategic networking isn’t just acquiring new customers, vendors, or partners, its networking with lenders, tax, M&A, and legal experts within your industry that can help you grow bottom line performance and position the company for a successful business sale.
Optimizing Operations for Maximum Valuation
Streamlining operations is very important for improving a business’s value. Focus on key performance indicators that connect with sales goals, and make sure all team members understand these numbers. Setting up systems that can grow not only makes things run smoother but also lowers pain points in operations. Regularly review processes to spot and fix any problems quickly. A good customer relationship management system can help keep track of client interactions, which leads to easier sales cycles. By putting operational excellence first, businesses can create a strong story that draws in high-value buyers and improves their market position.
Financial Strategies for Attracting High-Value Buyers
To attract high-value buyers who are willing pay an EBITDA multiple premium, you need a tight, coherent, and smart financial, accounting, and cash management plan. This plan should focus on managing cash flow well and reducing debt effectively. By having strong financial planning, you can forecast accurately. This helps you align your sales strategies with your revenue targets. It is important to find key leading performance indicators. These are essential for checking your financial health and showing value to buyers. Outside of business performance, business owners should ensure the realistic company sale plan aligns with personal financial goals and expectations. A trusted financial advisor, and one with past experience helping business owners through the M&A process and managing the significant cash event, will help you sleep better at night knowing you are making sound decisions. In the end, these financial strategies make your business a good fit for investment. This creates a great opportunity for serious investors.
Digital Tools that Attract Modern Investors
Investors today want businesses that use the latest digital tools to improve how they work and grow. Platforms that combine customer relationship management (CRM) systems help sales teams manage leads better and make their sales processes smoother. A company with a modern Enterprise Resource Planning and accounting software highlights the company’s commitment to process excellence. As discussed earlier, ease of use to report on KPIs and PPIS using data analytics tools let companies clearly show active operations management instead of reactive operation. All of these combined use of tools shows they are serious about year on year performance improvement.
Post Business Sale – Transition Planning
Selling to a strategic buyer or private equity buyer typically involves an equity roll over, or hold-back, so it is in the buyer and seller’s best interest to form an effective communication to employees, customers, vendors, and investors. The goal here is not just to make an announcement to keep current employees content, but to create excitement on what the company sales means for future growth for the company, for customers, and for new opportunities for employees to further their careers.
Post-sale communication management needs regular touch points, not just day of the deal closing, but routine and regular communication with key stakeholders. Forming a transition team (if possible) with the right people from the current management team and new ownership helps share the change management workload, reduce the rumor mill, customer churn, and operational headache. On average, business culture is afraid of change, so discussing clear operational, growth plans, and expectations helps reduce misalignment of incentives and impact of change.
Build a Business for Sale with Exit Equity
Building a business that is ready for a sale is a time consuming, difficult, AND rewarding endeavor. Sometimes the best way to learn is hearing it from other business owners, so please check this great podcast of being in the trenches of mergers and acquisitions.
It takes years to build a company that can maintain steady growth, profit, and a culture that can be resilient in an uncertain economy. If the management team can routinely pass the M&A vacation test – going off grid for 2+ weeks with little to no communication with staff, you have likely built your business to sell to a strategic buyer or private equity.
Frequently Asked Questions
What is the ideal timeline for preparing a business for sale?
The best timeline for getting a business ready for sale usually takes 1 to 3 years. This gives you enough time to improve operations, improve financial performance, standards, forecasting, and increase what the business offers in terms of transferable value to the new owners. It helps make the process of negotiating with potential buyers easier, since business performance risk is greatly reduce, and boosts the overall value of the business with buyers willing to pay an EBITDA multiple premium.
How to identify strategic buyers?
To find the right strategic buyers, check for companies that fit well with your business strengths and position in the market. Look for firms that want to work together, improve product offerings, or grow their market presence. M&A advisors will perform detailed research and connect with companies seeking inorganic growth opportunities in your industry and adjacent industries to discover those who may be interested. The right M&A advisor will have existing relationships and the technology tool kit to find strategic buyers in your region, across the US, and outside of the US. Rule of thumb is if you are above 750k EBITDA you will start to attract strategic buyers, above $2M and you will get significant private equity interest, and above $4M EBITDA then you will begin attracting international strategic buyer interest.
What are the top deal killers for strategic buyers?
Top dealbreakers for strategic buyers often involve high valuations, unclear financial information, unresolved legal problems, and not enough operational detail with the management structure all tied up in the founders or primary shareholders. Also, poor communication and lack of urgency to exchange data during negotiations can turn away potential buyers and risk the sale. Additionally, if the assets of the business are falling apart, buyers will factor in future capital expenditures which will reduce the pricing multiple, purchase price, and cash at close.
