This due diligence process should take no more than two 2 months

From Abc to Abcp: How Long Does it Take to Sell a Business

"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know."

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-Donald Rumsfeld, Nov. 2006 -

Back on January 18th 2007, my daughter was born and the acronym A-B-C-P was a ‘known known.' For our growing family, the acronym stood for "ABCs of Parenting." It was an informative brochure provided to us by the hospital upon discharge after which it was unceremoniously filed away given that she was our second. We knew what we were doing; at least we hoped we did.

Funny how your paradigm shifts so quickly. By late August of last year, a mere 7 months later, A-B-C-P stood for "Asset Backed Commercial Paper," a "known unknown." In fact, as the acronym started making its way into the everyday vernacular of media and bankers, many still did not have the foggiest clue what was in store.

Risk is most threatening when it seems least obvious and least threatening when it seems most obvious.

Now, if a business owner initiated the process of selling his or her business during the same time as my daughter's birth and eventually divesting within 7 months, the exit would have been painless. Conversely, if the process dragged beyond the 7th month, one of two things would have happened; the buyer would have gotten cold feet and walked or they would have re-negotiated, perhaps for a lower valuation. As the full magnitude of ABCP and their corresponding risks became evident, the once voracious appetite for acquisitions began to experience indigestion during the fourth quarter of 2007.

The French have a saying: "things that drag get dirty." It is no different when selling a business; the quicker, the better. The longer the process drags, the more exposed the business becomes to the vagaries of the market.

How long should it take to sell a business? On average, the entire process should take no more than 7 months. Here is a brief 3 step strategy that gets a business sold effectively and quickly:

(1) Mobilize: Individuals do not sell businesses - teams do. Taking a page from the sailing handbook, ‘all hands on deck' should be the attitude of any team tackling the divestiture process. No more than one (1) month is required to analyze and showcase the business via an offering memorandum.

(2) Maximize: An outreach marketing campaign that maximizes the number of touch points between strategic buyers and financial buyers is ideal, despite much written to the contrary. With today's market indigestion, buyers once deemed ideal may no longer have an appetite, while others previously overlooked should now garner serious consideration. The emphasis is to have more than one offer. Securing multiple offers keeps a buyer committed and provides additional leverage during negotiations. This outreach and ultimate courting process with potential buyers should take no more than three (3) months.

(3) Monetize: It is not enough to have a value on the business. You need to place an implicit value on everything from chemistry, probability of close, and the treatment of employees post acquisition. Doing so, will help you dovetail toward a quicker decision. Business owners need to enter the due diligence process with their eyes wide open, it is akin to walking down the aisle at the chapel for your wedding. You need to be committed before the vows get exchanged.

This due diligence process should take no more than two (2) months. While some buyers attempt to extend this process even longer, this often is a stall tactic. Finally, the concluding negotiations outlining the purchase and sale agreement, equivalent to the wedding vows, should take no more than one (1) month. Do not let any lawyer tell you otherwise. Many of the terms and conditions of the purchase and sale agreement could be negotiated concurrently with due diligence.

Today, almost a year to the day the lid blew off the ABCP market, the general public appears well-versed on these synthetic derivatives. At least they should, since it has been headline news for the past year. Nevertheless, the risk to the market appears less threatening as their impact has become more transparent. As a result, the appetite for acquisitions has recovered. It is a more favourable economic environment for selling a business – if you get it done in 7 months.