Four Things to Do Right Now if you Plan to Sell Your Business in the Next 12 Months

Are you planning to sell your business in the next 12 months?  If the answer to that question is “yes,” then here are four things you should do (or start doing) right now:

1.    Be sure your company can run without you. 

This is a big one if you want to maximize the purchase price for your company, and what “seller” doesn’t want to receive top dollar?  Buyers will pay more, and usually far more, for a business with a stable, strong management team than they will for a business with a weak (or no) management team.

Put another way, the biggest mistake you can make when it comes to your role in your business, particularly with a possible sale in sight, is to make the business dependent upon you (as the founder and controlling owner) for its success.

Admittedly, though, building a strong management team and retaining that team through the tumultuous sale process is a challenge, but you have to start somewhere.  So here are three steps you should take right now:

    • Hire or groom a strong “second-in-command” as your chief operating officer, general manager, or executive vice president, and then teach that person everything you think he or she should know about running the company successfully on his or her own.
    • Put a “stay bonus” plan in place that will both reward your key management team for sticking with you through the sale and incentivize them to help you maximize the company’s value in the interim.
    • Take a long vacation to someplace without phone or internet coverage (or just leave your electronics at home), let your team try to run the business without you, and then sit down with your team after your vacation to assess what more you need to do to be sure your company can run without you.

2.    Protect your intellectual property. 

In more and more companies, intellectual property is the most valuable asset, and potential buyers will be looking very closely at your intellectual property to assess the extent of its value.  A critical component of that value is the strength of your company’s ownership rights in the IP.

If your company has weak, contingent, non-exclusive, or short-term ownership rights in its IP, that IP will be worth less to a potential buyer than if the opposite were true.  Here’s the critical point: the more valuable your IP is, the more you’ll get paid for your company.  By “intellectual property,” I mean not just patents, trademarks, and copyrights, but also trade secrets, customer lists, customized software and the like.

There are a number of ways to protect and solidify your company’s ownership rights in its IP.  These range from applying for registration with the Patent and Trademark Office, to drafting (or amending) license agreements, and requiring your employees to be bound by agreements that ensure confidentiality of trade secrets and the assignment of inventions to your company.

The process can take time, so start now so you can maximize the IP’s value, make more money on the sale of your company, and avoid IP-related issues that could delay or even prevent a successful sale of your company.

3.     Figure out what obligations you have to outside parties and how to satisfy those obligations

UH-OH:  sounds open-ended, daunting, and maybe a little intimidating, right?  Well, with a little help from your legal advisor, you can break this process down into a number of concrete, manageable steps.

Start by looking at your material contracts and assessing whether you’re going to need the counter-party’s consent to assign the contract to your buyer at the closing of the sale.

Then review any loan agreements to which your company is a party and determine what consents you’ll need from lenders and whether the agreements would require you to apply loan proceeds to repay the loans.

Next, review your company’s organizational documents (for example, the certificate or articles of incorporation for a corporation, or the operating agreement for an LLC) to see whose approval you’ll need (e.g., from shareholders or members) to sell the company, and whether any of your investors will be entitled to receive sales proceeds before you will.

After all that, discuss with your legal advisor what you’ll need to do in order to fulfill your fiduciary duties to your investors.  Those fiduciary duties include a duty of care and a duty of loyalty, both of which can largely be satisfied through a well-planned sales process in which corporate directors or LLC managers are able to make sound decisions based on all the relevant information, conflicts of interest are avoided, and legal and financial advisors’ advice is sought and taken.

4.    Start the structuring process. 

Structuring what, you ask?  Good question – actually two things.

    • First, consider with your advisors how best to structure the sale of your company so as to optimize your return and minimize tax liability.  At a basic level, consider whether a stock or asset sale would be best, and whether the anticipated timing of your sale makes sense in terms of your tax exposure and personal financial goals; then wade in a little deeper to consider things like earnouts and purchase price adjustments; and then dive in to more challenging areas like whether a leveraged recap could make sense for you, and whether using a newly created GRAT will help minimize taxes.
    • Second, work with your financial advisor to structure your estate plan so as to minimize the tax impact of the sale and maximize the size of your personal estate.  Take steps before the sale to be sure the sale proceeds can be passed along to heirs in a tax efficient manner and in a way that will best benefit your children and spouse.  While you’re at it, consider how best to shield the sales proceeds and your estate from potential claims made by creditors and other claimants.

So, there you have it – four things you should do right now if you want to sell your business in the next year.  If you do just one of these things, you’ll be closer than you were to being able to complete a successful sale of your company.  But if you do all four, you’ll be setting yourself up to get the highest possible price for your company while minimizing the risk that your dream sale falls apart at the closing table.

Having said all that, there’s only one question left for you:  Are you going to start doing at least one of the things listed above in the next 24 hours?

P.S.  If you have some other “must-do” steps that a prospective seller should take right now, would you take a moment to share them with the rest of us by leaving a “Comment” below on this website?

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2 Responses to “Four Things to Do Right Now if you Plan to Sell Your Business in the Next 12 Months”

  1. Great post, Aaron! Sending to a few of our clients that I know could use this advice. One “must do” that comes to mind is simply coming up with a “walkaway, after taxes/fees” $$ figure that makes sure the sale is going to accomplish everything financially you wanted it to.. I have seen a fair amount of clients hang onto their business for longer than they should have awaiting some artibitrarily round number selling price because they just didn’t truly have a good handle on how much money it would take to achieve all of their personal goals (introducing unnecessary risk into the equation)..

    • Greg, that’s a critical point – thank you for raising it. In my experience, sellers wait far too long to address it, and then are left without adequate time to assess, with the help of a financial advisor, how much they need to raise from the sale in order to meet their own long term financial needs and goals.