Building a successful business takes years of effort and attention. Having expended plenty of blood, sweat and tears over that time, business owners want to maximize their value when selling.
Many of the qualities that make a business owner successful will benefit a business seller, too. However, not many owners have much experience in selling a business. It is a long, complex process. Here are some of the major issues business owners should consider before, during and after a sale to secure the best value for their hard work.
Preparing For The Sale
No matter what sort of business you own or how big it is, determine why you are selling and what your priorities are. Do you want to hold out for an all-cash sale, which may be harder to successfully negotiate, or are you willing to consider an installment sale or taking equity in the acquiring company? Do you have a minimum price determined by factors other than the business’s value, such as your retirement plans? Do you want to preserve the jobs of family members or long-term employees? These and other considerations may seem obvious, but it is essential that you articulate them to yourself before you begin.
Be aware that many lawyers or other advisers will expect you to sign retainer agreements up front once you have decided to hire them. This protects both parties, but it can mean a substantial outlay of money at the beginning of the process. Also, if you have a business that is very small, you may have trouble finding a broker who is interested in your transaction. Many brokers who specialize in business sales look for businesses valued at several hundred thousand dollars or more. For very large businesses, an owner is more likely to hire an intermediary, who generally functions as a consultant and offers more sophisticated services.
Once you have hired a team, work with it to understand how the sales process will unfold before you start. The better you understand the process, the more purposeful you can be with your choices throughout. One key aspect to have in order early is your bookkeeping and records. Consider conducting a mock due diligence process to make sure you are thoroughly prepared for a prospective buyer’s examination. You may also want to obtain an objective third-party valuation. This will give you a realistic idea of your business’s worth and will help you decide on a realistic asking price.
Finally, don’t neglect personal preparation for letting your business go. Create or revisit your personal financial plan. Try to work out several scenarios for the sale to see how it will affect your short-term and long-term goals. For some business owners, especially founders, letting go of a business can also have an emotional component. Know what you plan to do next and accept that the new owners will change your business once you are gone. Both you and your business will begin new chapters after the sale closes.
After The Sale
In most business sales, your involvement with the business does not end on the day it’s sold. Founders and key executives often receive employment contracts to stay on and help the business transition to the new ownership. Depending on how the sale was negotiated, this can also include additional incentive payments, or “earn-outs,” which are contingent on how the business performs during the first few years after the sale. Earn-outs are common when founders and key executives stay on through the transition, providing them with incentives to keep the business running smoothly. Most business sale contracts include noncompete provisions, under which an owner’s ability to continue to do business in a certain geographic area or industry can be limited.
Remember that Uncle Sam will take a healthy share of the business sale proceeds. Work with your accountant to prepare all necessary tax filings following the sale. The tax impact could extend over multiple years if you receive payments under an installment sale.
Selling a business is complex, and this article discusses only some of the legal and financial considerations involved. Do not hesitate to bring in a team with experience and to take the time you need to educate yourself before you proceed. Most business owners only sell a business once. It is important to get it right.