As a family or private business owner, you know how to sell your product or service. But do you know how to sell the company itself? Selling a business that has been built over the years is emotional and stressful, and for most business owners, a once-in-a-lifetime event. Many privately held business owners are baby boomers approaching retirement age, and often the second-generation family members are not interested in, or capable of, taking over. But don’t wait for a serious health issue or a conflict with partners to trigger a sales process; prepare in advance so when the time comes, you have more control over the entire sales process. Here are some tips for private owners, whether looking to sell soon or just considering the long-term possibility.
What follows is a road map to assist private owners in selling their business.
Be proactive: plan in advance
- Test the waters. An owner should operate a business with a view toward its eventual sale. Every few years, an owner should consult with an investment banker or business broker to get an understanding of the marketplace and a feel for the valuation of the business.
- Consider what you will do after the sale. Careful consideration should be given to what you will do after the sale. Will you retire, or do you want to continue being involved in the business? Determine what your financial needs will be during this new phase of your life. A financial advisor can be very helpful in this regard.
- Consider what you want out of a sale. Most owners have a personal attachment to their business. In addition to a full and fair price, consider the extent to which you want to protect your employees and preserve your legacy.
A few years before beginning the sales process: operate the business as your desired buyer would – maximize opportunity and minimize risk
- Depersonalize the business. Personal assets should be removed from the balance sheet of the business, and personal transactions should not be run through the business in the two-year period leading up to a sale. A potential buyer will not pay for cars, boats, and other personal assets and expenses.
- Develop a system of internal controls. The business should have a system of internal controls commensurate with the size of the business. A potential buyer will take comfort in knowing that the business and accounting records are reliable.
- Prepare audited financial statements. An owner should consider having financial statements of the business audited for at least the two years leading up to a sale. Audited financial statements kept in accordance with generally accepted accounting principles is the gold standard!
- Ensure an autonomous business. Many owners are crucial to every aspect of the business and find it difficult to give up control. An owner should ensure that the business can be operated without his or her involvement – particularly if the owner does not wish to stay on in the business after its sale.
- Limit concentration. The business should not be dependent on a few customers or suppliers.
- Maintain momentum. In the few years leading up to a sale, the business should be operated to maximize year-over-year margins and profits.
- Protect the assets of the business, including its human capital. Make sure that all employees have entered into “work for hire” agreements and covenants not to compete. The business must own its intellectual property.
When ready to sell
Selling a business is a marathon, not a sprint. An owner should expect the sales process to take six to 12 months or longer. The sales process can also be very disruptive to the regular operations of a business.
Selling a business is a marathon, not a sprint. An owner should expect the sales process to take six to 12 months or longer. The sales process can also be very disruptive to the regular operations of a business.
- Assemble a professional team. The team should consist of an accountant, lawyer and investment banker or broker. An owner should interview a few candidates in each profession and should resist the temptation to just use the company’s regular counsel and accountant. It is often the case that a private business accountant and lawyer may not have significant acquisition experience.
- Perform due diligence. Once assembled, the professional team should perform a run-through due diligence investigation to limit the possibility of unwanted surprises. In addition, a secure data room should be established.
- Align employees interests. If the business is run by key employees, consider a bonus pool based on sales proceeds to ensure that these key people stay through the closing and remain loyal to the business owner.
- Plan an auction process. The sales process should involve some level of shopping for the best buyer. A pointed auction process with 10 to 20 potential buyers most likely to be interested in your business will often yield better results than an all-out auction in which hundreds of potential buyers are approached.
- Prepare nondisclosure agreements. All potential buyers should be required to enter into a nondisclosure agreement where they agree to use all confidential information solely for the purposes of considering a transaction with the business owner. Depending on the circumstances, these agreements may also contain restrictions on hiring the employees of the business.
- Consider a letter of intent. While it may be preferable for a private business owner to forego a letter of intent for a definitive purchase and sale agreement, it is often the case that a buyer will insist on a letter of intent containing a period of time when the seller will deal exclusively with the proposed buyer. A seller will have more information about the business than the buyer, and the seller can use the letter of intent to set forth deal positions favorable to the seller. While the principal deal provisions may not be binding, a letter of intent creates a moral commitment to the deal, as the parties are often reluctant to break their nonbinding agreement.
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