As an entrepreneur running a business, you may contemplate selling it one day. While that date may seem remote now, any number of events could give rise to a sale – you may want to raise capital for another venture or sell one part of your business to grow the rest. Perhaps an unsolicited offer unexpectedly appeared or retirement is within a decade.
The question then becomes, "What do I need to do to get my company ready for sale?" The following steps will ensure your company’s readiness, as well as maximize its sales price.
Determine your ideal sale date
Entrepreneurs who want to sell when they are ready to retire should make that decision two to five years prior to their desired retirement date, as most buyers require that the owner and key employees remain with the business for several years to facilitate the transition.
Mentally commit to selling
Before selling, you should fully understand the impact of the potential sale. Carefully consider:
- Why you want to sell your business
- What you will do once you have sold your business
- Your desired price
- How your key employees suppliers and customers will react
- How you feel about someone else running your business
- Whether you are willing to offer a loan, or receive deferred or contingent consideration
- Whether you are willing to continue employment with the new owner
Timing is key
Planning ahead helps you maximize your sales price. It is always best to try to sell your business when it is not a necessity. If a potential buyer senses your immediate need to sell, you will lose significant leverage during the negotiation process. Alternatively, if your business is attractive to several potential buyers, you could generate a substantial premium by creating a bidding war.
Assemble your team of experts
It is extremely important to bring in a team of specialists to guide you through the sales process. The typical participants include an accountant, an attorney, and often an investment banker, who specialize in mergers and acquisitions.
Your team of experts will provide extremely valuable advice on how to maximize your company’s value and help you with the significant workload necessary to get you and your company through the sale process.
Understand the value of your business
Before formally committing to selling your business it is important to obtain a realistic understanding of its value. The most common valuation method is to determine some type of multiple of earnings either by averaging earnings over the course of several years or earnings for your most recent year, if that particular year is indicative of what to expect in the future.
Reconstruct your financials to show your true earnings
Many privately held businesses are operated in a manner that minimizes the owner’s tax liability. Unfortunately, these same operating techniques can cause a reduction in earnings and a decrease in the value of a business. Your professional team can help you reconstruct your financials in a way to maximize value.
Prepare for disruptions to your business
Be aware that selling your company can cause significant disruptions in your business. The due diligence process and educating the potential buyer about business operations are time-consuming activities.
The sale should only be discussed with employees, suppliers and customers when it becomes absolutely necessary or you are certain that a transaction is likely to close. To allay fears of employees nervous about the sale or the possibility of working for a new owner, you may consider offering "stay" bonuses, accelerated vesting of options or other benefits and retention programs. Suppliers and customers often fear that their relationship with the business could adversely change after the sale.
Identify and eliminate potential deal obstacles
Attorneys and accountants who specialize in company sales will help you identify potential deal obstacles. To the extent feasible, it is wise to correct any weaknesses, such as pending lawsuits, contractual disputes, or outstanding tax or financial issues that could slow down or complicate completing a deal. Other possible obstacles include obtaining requisite permits or licenses, fixing employment practice violations, updating corporate board and shareholder minutes, and registering the ownership of intellectual property, such as patents, copyrights and trademarks.
Prepare for the buyer’s due diligence examination
Once the sale process begins, the buyer will thoroughly review every contract, agreement and record pertaining to your company and business. It is important to have your attorney and accountant undertake a thorough review of your corporate records and agreements before disclosing them to the buyer, to ensure that all are complete and up to date. Take any necessary corrective measures recommended by your experts. Having your advisors conduct due diligence prior to the buyer’s review reassures the buyer that your business has been conducted in a competent, professional manner. Additionally, you will be assisting your advisors in minimizing your liability by enabling them to provide complete and accurate disclosure to the buyer in the purchase agreement.
Protect your proprietary information
Prior to commencing the buyer’s due diligence process and any negotiation on the sale of your business, have the potential buyer sign a nondisclosure agreement to protect your confidential information. This agreement should also include a provision prohibiting the buyer from soliciting your employees, consultants, suppliers or customers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
