SELL YOUR BUSINESS FOR MAX DOLLARS IN 15 STEPS
By: Aaron Johnstun
An exit strategy should be on every entrepreneur’s mind. One obvious exit strategy is selling the business. The goal should be selling at maximum value. At some point a sale opportunity will present itself. A few small actions early on will make your business more attractive to potential 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 accountan/CPA on board. I’m often surprised at how many small to mid-sized businesses don’t place a higher value on an outside accounting help. Qualified accountants and CPAs can literally save a business tens of thousands of dollars and more per 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. Minor nuances can have a big impact on what taxes a seller pays when a deal is done. When it comes to a turnkey business, buyers are going to look at your corporate tax history.
- 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 what your business’s worth is a huge advantage. For 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 is likely to require a liability and closing payoff schedule. With a valuation figure 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 catch phrase? 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 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 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 employers 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 confidentiality, non-compete, and/or non-piracy there is nothing to stop your employees from walking out the front door with your customers and intimate knowledge of your business. A sophisticated buyer will want to know the confidential information, trade secrets, and 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.
- Automate/systematize your business. This seems obvious and it is. The time to evaluate your business and the extent it is automated is well before a sale. This includes systematizing your business processes. You might consider hiring a consulting firm to formally evaluate and propose changes. A “turn-key” business that runs itself through professional management based on processes substantially increases its value to investors.
When you’re ready to sell
A business sale, especially for larger businesses, may take months 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 to 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 either party to attempt a sale on their own. 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 emotional based decisions and keep the parties focused on facts. Another member of the team you should consider is a broker. A good broker will earn their keep by bird dogging potential buyers.
- 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 of months ago have a tendency to become selective. 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.
- Begin with an NDA and NCA. 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—you do not want an unethical party walking away from the deal only to using you highly confidential information against you for free. A non-circumvention clause adds additional strength to an NDA.
- 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 document it in writing to both sides immediately after it becomes known. Not only is there a litigation competent, 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.
- 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 court’s 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 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 is fairly chilling.
- 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, eye towards a bigger picture, and a willingness to keep your options all minimize the emotional toll the transaction can otherwise have on a seller. Sellers should realize the emotional toll is actually intended to wear them down. The party willing to walk away from the negotiating table holds the most power.
Preparing your business to sell along the way will not only improve how your business runs, it puts you in the driver’s seat with options when a deal comes around.
About the author: Aaron started Johnstun Law in 2010, a boutique business transaction and litigation law firm. His law practice focuses exclusively on small business matters, particularly startups. He has successfully helped hundreds of businesses with their litigation and transactional matters. Since 2015 he has been rated as a SuperLawyer Rising Star for the Rocky Mountain region in business and corporate law matters. Along the way he has numerous reported decisions and publications on business and commercial law related issues. Outside law, Aaron will be found riding a mountain trail, casting dries to rising trout, chasing big game on a fall day, and aside his pudelpointer holding a covey to point. Reach him for further comment at firstname.lastname@example.org.
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