Selling a business is the most popular exit strategy for business owners. In some cases, there are no successors who want to continue the business; in others, it was always the business owner’s plan to sell the business at a certain point in time. Whatever the reason for selling, a business owner should consider the following:
Consideration 1. Timing for the sale of the business.
Business owners should think through their exit strategy when they form a company. However, this does not typically occur. Most business owners sell a company because of an unexpected event that occurs. This is the worst time to sell a business. You’re already dealing with an extremely difficult time in your life and trying to sell a business only adds additional stress. Also, if a potential buyer is aware of the reasons for the sale, they will leverage this against you in their offer.
The right time to consider an exit is when the business owner is healthy, and the business is thriving and successful. This is the best time to consider an exit strategy.
Consideration 2. Clearly state what you’re selling.
An initial step in an exit strategy is to determine what are all of the physical assets and other assets that comprise a business and what are the assets that will be included in a sale. A sale typically consists of the tangible assets (cash, inventory, real estate, etc.) as well as the intangible assets, such as goodwill or IP such as patents, copyrights, trademarks, license or franchise agreements, brands, customer lists, etc. These are considered to be intangible assets because they are not physical in nature but may comprise a large portion of the value in the business.
If the business is incorporated, the business owner will need to determine whether to sell the assets in the business (an asset transaction) or sell the stock in the business (an equity transaction).
Consideration 3. What is the value of the Business?
Ultimately a business is worth as much as it will procure in the marketplace. But determining just what that price might be is crucial. There are several valuation methodologies that may be utilized depending on circumstances, including market approach, income approach, replacement cost approach and asset based approach to determine the value of a business. In addition, industry trends, economic data and current market trends should be considered as part of a valuation analysis.
Having an independent, professional business valuation performed is important for the business owner to understand the value of the business as well as the value drivers and risk factors. A valuation from a professional designated valuator will also provide credibility and defensibility to the purchase price. The valuation also provides compelling information and data that can be utilized during negotiations.
Consideration 4. Prepare your business for a sale.
It is imperative when you explore an exit strategy, that your business is ready for the due diligence that will occur. This includes reviewing the human capital, processes and systems to ensure everything is in order.
Are there job descriptions for every position in the company? Are there employment agreements and non-compete agreements in place? Are the systems maintained and working properly? Are they integrated with each other or are there problems that need to be resolved prior to a sale? Does the company have processes in place for the operations, customer support, marketing and sales? Are the financials and other information readily available and in good condition for a prospective buyer to review? Is the inventory up to date or obsolete? Are there long term leases in place? Has the Company reduced their liabilities as much as they can? Are there any pending lawsuits or workers compensation issues?
It is important that every aspect of the business be reviewed and analyzed to determine what needs to be resolved prior to the exit of the business.
Consideration 5. Seek Assistance from Professionals.
Selling a business is a complex transaction, one that is very emotional for a business owner. Value and other strategic advisors provide invaluable insights and expertise to guide you through the selling process. Additionally, it helps the business owner maintain the objectivity required to successfully sell the business versus getting caught up in the emotional aspect of the sale.
Which professionals should you hire?
- A value advisor to be the conduit among the advisors. The value advisor works with the business owner developing the exit strategy and brings in the appropriate advisors to work as part of the team to complete the transaction for the client.
- A professional valuator will determine what your business is worth. The valuation will be much more credible to a potential buyer than anything created internally from the business owner.
- An investment banker or business broker has the expertise to source the deal and find and deal with prospective buyers and help you navigate the sales process.
- A transactional attorney to perform legal due diligence and draw up and/or review the transaction documents necessary to sell the business.
- A CPA or tax attorney to review the transaction terms and provide advice on the tax benefits or pitfalls to be aware of during and after the transaction.
One Last Consideration…
Selling a business is a serious endeavor. The business owner should take the time and trouble to do it right. Careful preparation and using professional resources are the keys to securing as high a price as possible when selling a business.