So, what is the process to sell my business?

This is a question that we often get from owners who respond to our national outreach campaign. And it’s a fair one, too — whether they are familiar with selling a company or not. And that’s because different types of buyers can have different steps to ultimately giving a selling owner a legally binding agreement to purchase. 

What we lay out below is our process — and why we do each step. We believe there is nothing to hide about how we do things at CAM Transitions, so we are okay with posting this online and talking through each of our steps:

Exploratory Call

This is often our second conversation, after a first conversation where we introduce ourselves. If the owner expresses interest in selling their business, or at least getting a sense for what their business is worth, we move to the Exploratory Call. On this call, we want to understand a few things, which is why we ask for a few items up front (after we sign a non-disclosure and confidentiality agreement):

Why do we ask for this specific information? Each piece gives us a snapshot of how the Company is doing. In essence we are trying to understand:

  • How has your company grown over the past few years?
  • What does your company’s relationship with its customers look like?
  • How is the company staffed?

On the exploratory call, we try to dig a little deeper to understand the story behind the numbers. The call isn’t formulaic — every business has its own story, and we’re here to listen. We love listening to the owner’s “origin stories,” and hearing the pride in their voice as they talk about the culture they’ve built, what separates them from the other managers (particularly the big box folks), and why they are set up to grow. We think at this point we could write a book about all the inspirational ways owners have come to build their businesses from the ground up!

A few other common topics on the call include: operations (e.g., do CAMs manage a portfolio of properties or work on-site exclusively? What software does the company run on? How are CC&R inspections handled?); growth (e.g. How has the owner has grown the business so far? What do growth plans look like going forward?); and any questions that come up from reviewing the information that was sent along.

Additionally, we try to spend a little more time understanding what the owner hopes to get out of a sale. Are they looking to retire within a year? Are they looking for a growth partner to invest in the company and help them take it to the next level over the next decade? There is no right answer here, but it helps us structure our Indication of Interest (IOI), which we usually send to owners within a week after the call.

Indication of Interest (IOI)

Following the exploratory call, and possibly a few follow-up questions, we give owners a letter sketching out what we think a deal could look like. 

The letter is short (2 pages) and focuses on a few key parts:

  1. Valuation range: What we think we could pay to acquire the company. We recognize that there is more to learn, which is why we express our valuation in a range. We also explain our methodology. 
  2. Structure: The components of the offer — cash, seller note, and/or earn-out.
  3. Management transition agreement: How we see working with the owner after the sale. Sometimes it’s a formal employment agreement, sometimes it’s a short-term consulting agreement, and sometimes it’s a continued partnership with some retained equity (typically for owners who aren’t ready to retire right away). 
  4. Next steps: we outline the rest of the process — getting to an LOI, and then to a purchase agreement (basically what we are explaining in this post!)

After delivering the IOI, we schedule a call to go through it. For owners who were simply looking for a valuation, this is where the road ends (for now); no harm, no foul, we are glad we could be helpful! But for those who are interested, the IOI serves as a way to level-set expectations on the most important parts: how much, how we’d pay for it, and what happens after the company is sold. It also serves as a kick-off conversation to the next step, delivering a letter of intent (LOI).

Letter of Intent (LOI)

At this point, we’re working together more closely with the interested owner. Our goal here is twofold: (1) to have a more refined view of the company’s current financial performance and (2) to understand the go-forward growth opportunity. Ultimately, we want to figure out “normalized earnings.” 

Normalized earnings? In our industry, valuations are typically calculated as a multiple of a company’s cash flow (which, due to the way management companies operate, is closely tied to its net operating income or ‘earnings’). So before we can apply a multiple, we want to get the most accurate picture of what we should expect a company’s earnings to look like in a normal future year — hence, “normalized.”

Typically, it’s a simple task of looking back over the last twelve months, adding the company’s revenues and subtracting its expenses. But every rule has exceptions: in some cases, we have to ask a few more questions to figure out what “normal” really looks like.

Here’s where understanding the growth opportunity comes in. Say the business has signed three new accounts, but handoff from the last management company hasn’t yet happened. Or the company has recently onboarded a new developer account and the lots haven’t fully sold out. In both of those instances, the owner has done the work to get new customers and should get credit for the revenue that will come from it. Similarly, if the company has just recently onboarded a new CAM, and the expenses haven’t yet been reflected in the P&L, this should be adjusted.

What we find here is that most other buyers will not give selling owners full credit for the work they’ve done. We consider it part of our jobs to make sure that every dollar is factored into the price we pay — ultimately because we think it’s fair that you get every bit you deserve.

So what’s in the LOI? LOIs have much of the same content as an IOI, but with much more detail:

  • The money: detailed dollar amounts for each component of the purchase price — dollars expected up front, dollars expected over time (either as a seller note or earn-out), and retained equity onwnership
  • Terms of the deferred cash: more detail around the terms of the seller note or earn-out
  • Outline of the management transition plan: More detail around the owner’s employment contract after the company is sold and the ongoing commitment between us and the selling owner, if they want to stay around longer
  • Terms of exclusivity: Upon signing the LOI, the selling owner agrees to remain exclusive to us — meaning not entertaining new offers. In return, we agree to dedicate our time and resources to get things done and signed as soon as possible. The LOI lays out the terms of exclusivity, including how long and under what conditions. 

Ultimately, LOIs are legally non-binding agreements to purchase (although we are certainly bound to confidentiality and exclusivity), but we think LOIs send a much different message than IOIs. 

Some buyers will sign an LOI before they have as good a picture of the company, hoping to learn more while taking advantage of tying the selling owner up in exclusivity. That’s not what we try to do — we want to make sure that by the time an LOI is signed, we are fully committed to getting to a purchase agreement.

That’s why it usually takes about 3-4 weeks from IOI to get to this point. We think it’s worth investing the effort up-front — because we don’t want to waste an owner’s time in exclusivity just to back out! (We’ve heard horror stories of this, and think it’s unfair to everyone.)

Sign and Close

At this point, we are working together to get things wrapped up. We’re not only excited about the prospect of buying the business and working with the team, but we’re already envisioning ourselves in the company and dreaming up what the future could be, alongside the owner. What lies ahead of us is due diligence, where we bring in advisors (lawyers, accountants, HR experts) for their expert review. 

Due diligence? Isn’t that what you already did? Because CAM Transitions is an investment collective of former operators and entrepreneurs, we have a duty to them as stewards to have an expert review the books (as neither of us are CPAs or lawyers). We see this as largely confirmatory, since the work we’ve done up until now should have uncovered anything unexpected. Here’s some more detail on what each of those experts is looking at:

By now we view ourselves on the owners’ team and we’re willing to roll up our own sleeves to answer the advisors’ questions and data requests. We know the owner is tied up running an entire company, so we can dig in ourselves — pulling down the general ledger, digging up contracts, you name it. That often ends up being more efficient than burning an owner’s (or other employees’) time.

We also begin learning the day-to-day operations. Whether it’s a weekly call with the owner or attending team meetings in person, we want to start learning firsthand about the people and processes that make the company tick. We may even be willing to take on a few of the owner’s to-do’s ourselves and lighten the load.

Once confirmatory diligence is completed, we have the lawyers begin drafting the purchase agreement. This is the final, legally-binding document that allows us to pay the owner and close the transaction. 

This all culminates in a signing and closing day, where documents are signed, funds are transferred, and everyone can breathe a sigh of relief and celebrate a job well done.

… but in our case, not for too long! As new owners, we know that the hard work for us has just begun!