Unlike many other transactions in your business career, the selling of the business is not necessarily a simple or intuitive process and it can force a business owner to use skills that are unique to the selling process.
The following are five considerations before selling your business:
One: Get Your House In Order
As you know from running your business throughout the years, things can go both very well and very badly. In order to be the best prepared you can be to sell your company, it is time to get your house is in order by reviewing your financial records.
Financial records will be the first and possibly foremost of the documents that any buyer will request and which most buyers generally use to form a basis of a potential purchase price. Additionally, these records are looked at in a historical context and buyers many times use them to assess the veracity and truthfulness of the seller and its management group. As long as your financial records have been reviewed by a competent accountant and are consistent with GAAP accounting methods, you are on the first positive step in the selling process. If they are not in good order, get them in good order.
Simple things can make a big difference when clearing up your financial records, such as cleaning up your AP and AR, dealing with family members on the payroll or realigning the correct list of assets such as cars or other equipment on the balance sheet. Your accountant should be able to help you “normalize” your balance sheet before a buyer begins their due diligence.
Two: Prepare Your List of Assets For Buyer Due Diligence
Depending on the type of business, most buyers will probably consider an asset purchase for closely held businesses. Such a structure allows the buyer to pick and choose what assets they wish to acquire and eliminate or disregard any liabilities of the selling entity. One example of an asset is if your business has many contracts, the buyer will review them in due diligence to determine if any potential contracts are assignable to the buyer.
Therefore, if you have a major customer with a non-assignable contract, a buyer may make an offer contingent upon getting certain contracts assigned to the buyer upon closing. Depending on the contract, some customers may or may not provide you with its approval to assign the customer contract to the new buyer. Additionally, under some circumstances the customer may attempt to extract further concessions from your company in exchange for the assignability of such a contract. The simplest way to avoid these potential hassles is to have a simple assignability clause in your material contracts allowing your company to assign a contract without approval of your customer.
The next area of considerable due diligence by a buyer is in the employment/management area. Generally, in both service and product businesses, employees of the company tend to be a valuable asset of the seller’s business. Depending on the needs and desires of the buyer, you may have to determine what employees and/or partners desire to move forward and work with the purchasing entity after closing. Some considerations may be the possibility of having to move out-of-state and/or to relocate to other positions within the purchasing entity’s organization. This potentially can put a fair amount of stress on you as well as key employees; however, addressing this far in advance with key employees may head off future issues with the buyer.
Another key area of due diligence is a look at the overall business structure to ensure the legal and business integrity and to ensure there are no legal and/or tax-related gaps in filings or in your business’ structure. This issue should be reviewed on an annual basis anyway; however, if it was not consistently done, you should update to put the corporate records in good shape in advance of the buyer’s due diligence process.
Three: The Value of Your Business
The valuation process can be both daunting and painful, as business valuations tend to be a mix of science and art. Assistance with outside advisors competent to address valuation can be extremely valuable. Their assessments will at least give you some range in valuation based on many factors, such as a multiple of earnings valuation, type of industry, current trends in the market and other related financial models.
Many times, owners who are looking to sell but have not been through the valuation process may view the valuation as either an extremely over-inflated selling price or measurably under-valuation of the company because they are without proper knowledge, information or advice. This is not good. Get expert advice so you can be prepared for the valuation process.
Four: Have a Plan
You and your advisors should develop some specific shareholder objectives and a transition plan. This should include issues concerning timing of the closing, potential earn-outs related to purchase price, tax strategies and other related seller financial objectives. With multiple shareholders and/or family members, this can become contentious if the key players of the company are not on the same page. The key in addressing this is to do it far in advance of selling the business to allow all key participants to discuss and resolve each person’s potential issues or objections in a possible sale. In the event that potential issues or objections are not adequately addressed, it can lead to many unsavory issues such as shareholder or buyer litigation, delayed or cancelled closings or negative impact to overall enterprise valuation.
Next in evaluating the potential sales process, consider the use and the assistance of an investment banker and/or business broker who has expertise and background in your particular business. Their advice in the sales process can be invaluable and can lead to higher returns for the shareholders in the actual buy-out of the business.
Five: Thoughtful Post-Closing
Lastly, be thoughtful about your post-closing transition plan regarding all aspects of the business including public relations, disclosures, key customer contacts, post-closing cultural changes with the new buyer, the psychological impact of a new owner, the reality of you not being in charge of the business any longer, family issues if your company is family run and other intangible consequences of selling your business. If a transition plan is not developed or properly executed, the best intended closing can turn out to be a nightmare.
As you can see, selling a business can be both exhilarating and daunting. However, if one sets realistic expectations and a strategic plan far enough in advance, you can avoid unpleasant surprises as it goes through the sometimes-stressful selling process. Ultimately you should attempt to enjoy the process as much as possible because you have dedicated your entire life and career to a particular business and now want to be a part of the successful fruits of those labors.
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Dan Young is co-chair of Lommen Abdo’s Business Law group. He focuses his business practice on mergers and acquisitions; closely held businesses, family, emerging, and technology businesses; real estate and venture finance; corporate governance; shareholder planning and dispute resolution; succession planning; employment; and estate & trust planning and administration.