Business owners have worked hard to create, maintain and grow their companies, and know that someday they will need to be ready to take the next step. Selling a business is a complex process. It is important to understand the intricacies involved in order to reduce (or avoid) surprises along the way. Before considering a sale, business owners should be able to answer five key questions to gauge their readiness.
What is your motivation for selling?
Do you plan to retire immediately, to pay off other investors, or to raise capital for a future business opportunity? If there are unforeseen circumstances, like a health crisis, that requires you to retire before you are ready, you may end up selling prematurely, accepting the first offer that comes along in order to close the sale quickly. Even in such cases, it’s still advisable to take some time to properly prepare before going to market in order to maximize the return on your investment and increase the gains for you and your loved ones.
When should you start preparing for a sale?
There are many steps involved in the selling process, including things like performing a quality of earnings analysis; valuing the business; the due diligence process (financial, operational, legal, etc.); and, negotiating the purchase price and definitive legal agreements. These steps can take a long time, and you should start preparation one to three years prior to the actual sale.
Do you have the time and resources to manage the sales process?
Every sales transaction involves “due diligence,” which varies greatly from transaction to transaction. According to industry research, sellers who have the time and resources to manage the sales process, increase their chances of a successful transaction, and can obtain a higher price. Buyers often gain the upper hand for deals that drag on because they have more time to discover information or use the “waiting” to their advantage to lower the price paid. This particularly applies to smaller companies, or one-time-sellers, who may lack the experience or resources compared to larger or more M&A-active companies. In these cases, having experienced advisors, including investment bankers, accounting and tax advisors, and legal representatives, is very important.
What role do you want to play in the business, after the transaction?
You have made a significant investment into building the business over the years may not be ready to retire after a sale. Additionally, you may have key client relationships which are necessary to maintain the business. If you would like to remain active in the business post transaction, you should enter into an employment agreement or consulting arrangement with the buyer. Regardless of your plans to stay involved with the business or retire, you should consult with an advisor, early in the process, in order to ensure that the deal is structured to minimize your tax obligations.
Do you have a “Plan B”?
You might be eager to sell and believe that your business is very attractive and will be sold quickly. However, there are many market factors beyond your control, which may impact a deal and force you to delay a sale (i.e., severe economic recession or a loss of key customers). If the sale is not completed or goes on for an extended period of time, you may be forced to absorb expensive transaction costs. You should prepare a budget for these costs and also consider adding a ‘break-up fee clause’ to the Letter of Intent. If possible, you should continue to actively maintain the business so that it will be desirable to buyers in the future.
Selling a business is a challenging task. While this list of questions is not comprehensive, knowing the answers will help you get through the process
Authored by: LaQuita Jewett