Five Key Points to Consider Before Selling Your Business
Are you thinking about selling your business? If so, there are undoubtedly dozens if not hundreds of questions, concerns, issues and action items flying through your mind. This is a big and potentially complicated and challenging question. Over many years of talking with business owners who are at the stage of deciding whether to sell, one of the challenges in almost every case is figuring out how to answer this question wisely while also keeping their business running profitably. Doing so requires that you prioritize your thoughts.
Start by developing a list of your first tier, most important questions, considerations, and tasks, and be sure to include the following on that list:
1) Can your business be sold and are you ready to sell? Answering this first question requires some research and analysis. Whether your business can be sold at an attractive price is a function of a number of factors, including: whether it has a solid history of revenue generation and profitability, a valuable asset or service, a large and growing base of customers, a skilled workforce and management team, a competitive advantage, and the potential for growth; and whether there are willing buyers in the marketplace.
By contrast, the question of whether you’re ready to sell is both an emotional and a practical question. If you’re ready to relinquish control, if you’re not motivated to grow the business, or if you no longer have the skill or energy to take the business to the next level, it might be a good time to sell. Likewise, it might be a good time to sell if it becomes clear that your designated successor can’t or won’t succeed in running the business, if market conditions are such that the likelihood of a well-priced sale are high, or if the potential risks of running your business outweigh the potential rewards.
2) Assemble Your Deal Team. This is a critical action item, even if you haven’t fully committed to sell your business. Your deal team should consist of the following: a savvy and experienced lawyer, a skilled CPA, and an insightful financial advisor. The CPA and financial advisor may be the same person or firm, and you should add to that list a business broker or investment banker who can help you explore the market, shop your business, and get you the highest price at closing. What will the advisors do for you? They’ll help you plan and prepare for the sale, avoid mistakes, solve problems, structure for tax efficiency, and ultimately put you in a position to get the best possible price for your business. The lawyer you choose should be somebody with extensive experience representing sellers and, ideally, who is part of a law firm that has specialists in key areas, such as tax, employment, and intellectual property law.
3) Get your Financial Affairs in Order. There is a lot we could talk about here but, for starters, let’s focus on a few critical points. First, do whatever it takes to have an accurate and complete set of financial statements available for any prospective buyer. This is likely to be the first thing that a prospective buyer will ask for, and unreliable financial statements are likely to scare prospective buyers off very quickly. Part of this process should also involve strengthening your business’s financial systems and controls, both of which a wise potential buyer will investigate in order to assess the credibility of the financial statements you provide. Second, analyze ways to maximize your business’s net income. Usually this starts with identifying perks and expenses that reduce your earnings, determining which of those expenses most likely won’t need to be incurred by the future owner of your business, and then reconstructing your net income by adding the amount of those expenses back into net income. Examples might include expenses for health insurance, cars, entertainment, and phones. Third, prepare a complete and accurate capitalization table that shows in fine detail exactly who owns what equity in your company. Be sure to include not only common shareholders, but also any preferred shareholders and holders of any convertible equity such as warrants, options, and convertible promissory notes. This is as critical as having accurate financial statements and is an area that is notoriously problematic for many small and mid-size small businesses. Any serious buyer will need an accurate snapshot of your company’s financial condition and ownership, and you’ll need to make representations and warranties in the sale agreement as to the accuracy of both, so get it right the first time.
4) Take Steps to Protect Your Assets. One test of a business’s maturity and value is the extent to which steps have been taken to protect the business’s customers, intellectual property, and other key assets. If done correctly, your business will have a competitive edge in the M&A market and will take on a certain luster that will add to your business’s value. Start by identifying where the real value is in your business and then, with the help of your lawyer, put safeguards in place to protect that value. For example, register your business’s trademark; apply for a patent for your business’s key idea or process; require employees to sign a document that assigns to your business any inventions or ideas they develop while on the job; and insist that managers and other key employees sign restrictive covenant agreements prohibiting them from competing with your business, poaching customers or employees after they leave your company, or disclosing or using customer lists and confidential information outside the course of their employment.
5) Consider Obtaining a Valuation of Your Business. This might cost you a little upfront, but you really can’t decide whether to sell your business without having a decent sense of how much you can get for it, right? For small to mid-size companies, a valuation might cost in the $3,000 – $5,000 range, and it may be that your business broker or investment banker can do this for you at an even more affordable price. If you only need a value range based on EBITDA and market conditions, the cost may be less; and if your business is large or complex, the cost will likely be higher. Typically, though, the trick is to ascertain value based not just on historical data but, perhaps more importantly, based on current marketplace conditions, prospects for enhanced value, and the use of a mixture of methodologies that are custom-suited to your business. When examining prospects for enhanced value, be sure your valuation expert accounts adequately for the upward pressure on the sale price resulting from the super effective sale process you put in place!
So, when should you start? The answer is, “RIGHT AWAY!” If you’ve read this far, you haven’t dismissed the possibility of a sale. Every step mentioned above is a step in the right direction and, in most cases, will help add value to your business even if you don’t sell for a few years. Call your lawyer or financial advisor today and get the process started.
Great post, Aaron — thanks for sharing your insights.