One issue that should be on every business owner’s radar is selling their business. You’ve scratched and clawed, overcome the startup chaos, and finally achieved a profitable smooth running business. Whether you’ve thought about it, the odds are at some point a sale opportunity will present itself. Even if a business is never sold, the following tips are sound best practices that will increase managerial oversight, efficiency, and profitability—all things that make your business more profitable for the owner, and equally attractive to buyers down the road.
Prepare in advance
It is common for business sales to come up suddenly. A little advance preparation will have your shop windows sparkling and put you in a superior bargaining position when potential buyers come calling.
- Get an accountant. I’m often surprised at how many small to mid-sized businesses don’t place a higher value on outside accounting help. An accountant or CPA can literally save a business tens and hundreds of thousands of dollars a year through tax planning and financial controls. An accountant who knows your business, the tax returns, assets, cash flow, etc. is a very valuable resource in a sales transaction. An accountant who knows your business inside and out is also valuable in structuring a buy/sale deal in a way to maximize your net take home. Minor nuances can have a big impact on what taxes a seller pays when a deal is done.
- Prepare audited financials. Any serious buyer will want to see audited financials. The more years you can provide, the more credible a seller will be taken in a transaction. Audited financials are a sound practice, especially in identifying control issues that need to be changed. More importantly, when it comes to sales time and negotiating a price, audited financials can give you the upper hand in negotiated price based on independently evaluated financials.
- Have your business valued. If you think selling is a possibility, entering the sales market knowing your business’s worth is a huge advantage. For roughly a few thousand dollars, you can have your business valued. Valuations use a number of methods and can give you fairly objective figures. One primary benefit to a valuation is knowing your liabilities. Any potential sale will likely require a liability and closing payoff schedule. With a firm valuation number, you’ll know in advance which buyers are low balling you, and which buyers to engage in serious negotiations. This puts you in the driver’s seat. Even if you’re not planning to sell, you might be surprised at how much your business is worth.
- Get your IP in order. As businesses mature, their reputation and other intellectual property can become the most valuable components of their business. Has your name and logo been trademarked? How about that well-known business catchphrase? Do you have designs or processes that should be patented? You could be very disappointed when a buyer dramatically reduces their offer or walks away altogether because you neglected to protect the business’s intellectual property. Keep in mind IP work may take years to finalize.
- Test the waters for buyers. In economic terms, you want to create more demand (interest) in your business than supply. Even if interested buyers don’t know about each other you’ll have the confidence to walk away from a low ball offer, or work buyers against one another to reach a full or greater than full value offer.
- Get your employee agreements in place. Most don’t like to think of their employees as a Trojan horse. The fact is, they are. The fastest way to destroy a small business is not competition, it is your key employees moving to a competitor or becoming a direct competitor against you. In either case, without a non-compete, there is nothing to stop your employees from walking out the front door with your customers and intimate knowledge of your business. The solution through non-compete agreements is very simple and relatively inexpensive. More importantly, a sophisticated buyer will want to know the goodwill built into your business and key employees are secured through non-compete agreements. Retention of employees, especially key employees, is often a critical component to the sale for a buyer.
- Depersonalize the business. It is common for businesses to evolve with personal assets owned by the business owner. This could include personal furniture, vehicles, art and other personal assets. These hybrid assets should be identified and removed them from the business asset list long before sale discussions come up. Removing them in advance eliminates having to explain to a potential buyer which items are personal and which are business. Buyers are attracted and more willing to pay for tidy bundles than cluttered piles.
- Make your business automated. This seems obvious and it is. The time to evaluate your business and the extent it is automated is well before a sale. You should consider hiring a consulting firm to evaluate and propose changes. A “turn-key” business that runs itself through professional management increases its value to investors.
When you’re ready to sell
A business sale, especially for larger businesses, may take six months or more to finalize. There are numerous ups and downs between starting the sales process and inking a final deal. That said, there are few things more satisfying as an M&A attorney than a happy buyer and seller who just finalized a deal.
- Assemble a professional team. Buy/sale deals are too complicated to complete without an experienced professional team. There are simply too many legal and tax issues for a seller to attempt a sale without professional help. You should have at minimum an attorney and CPA/accountant participating on your behalf. Relying on a buyer’s attorney to get the job done is never a good idea. Having professionals will also minimize emotionally based decisions and keep the parties focused on facts.
- Consider an LOI. The common purpose for using a letter of intent is to assure a buyer you will deal with them exclusively for a certain period of time. Another common purpose is to spell out bullet points of the deal. This is helpful when finalizing a written agreement—the time when memories from months ago have dulled. While not binding, an LOI is evidence later on if a deal goes south and the parties are headed for a legal dispute. In any case, it is a good idea to document beyond a napkin what the parties generally agree on.
- Use a non-disclosure agreement. Did I mention use a non-disclosure agreement? There are many stories of buyers expressing interest in order to gain access to key competitor information. In the process of due diligence without a non-disclosure—i.e. looking at your most sensitive business information—there is nothing to stop an unethical party from walking away and using your highly confidential information against you.
- Conduct thorough due diligence. Full and open due diligence is the only standard you should have when selling a business. One of the greatest post-deal litigation sources inevitably involves due diligence failures and omissions. Sellers should expect to sign a final agreement containing heavy seller warranties and representations. A good portion of the seller warranties and representations will be related to due diligence items. If there is anything that is questionable, you should loudly disclose it in writing to both sides immediately after it becomes known. Not only is there a potential post-deal fraud litigation component, but sale proceeds holdbacks relating to due diligence are fairly common.
- Purchase M&A insurance. M&A insurance, especially for sizeable deals, is something that should be strongly considered. The value of M&A insurance cannot be understated and should be strongly considered in almost any deal with a significant value. One upside to M&A insurance from the seller’s perspective is the reduction, or complete elimination, of post-closing holdbacks.
- Exclude privileged communications from the sale. This is a key consideration even many experienced M&A attorneys miss. The issue of whether a buyer or seller owns the pre-deal privileged communications between the seller and seller’s counsel is a new legal issue. Although new a consensus of courts are ruling that absent an express exclusion in the buy/sale agreement, the privilege stays with the company purchased. In other words, absent an exclusion in the final agreement, a buyer will likely get your pre-deal communications with your lawyer. The thought of a buyer having access to all of your confidential pre-deal communications with your attorney should be chilling to any client.
- Hang on and keep your options open. I’ve closed deals that two weeks prior looked like there was no chance to close. With the above, know that a buy/sale transaction can be a roller coaster ride. Sellers should minimize their emotions as much as possible. Preparation, patience, an eye towards a bigger picture, and a willingness to keep your options all minimize the emotional toll the transaction can otherwise take. In some cases, sellers should realize the emotional toll may be intended to wear them down. The party willing to walk away from the negotiating table holds the most power. Adopting the above steps puts you in the driver’s seat with options. If a deal falls through, you still have a great business on your hands.
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