Selling Your Business? Do This First

Have you created a company that someone will want to buy? Your children won’t necessarily want to take over your business, so an exit strategy is essential to getting the outcome you want. You must prepare your firm for the transition – and you must be prepared as well.

When should the planning begin? Think five years away from the date of sale – at least. You could even start ten years before.

Readying yourself. Have you thought about what your life will be like after selling the business? If you have what amounts to a lifestyle company, to what degree has it paid your personal expenses? Can you arrange new income streams to replace the business income? A needs analysis may help you estimate how much money you will need to keep living well.

Readying the business. Look at your company and its immediate rivals. How attractive is it in comparison? What do you think it is worth?

What kind of unique selling proposition (USP) has your business developed? Has the service and performance of your employees strengthened your USP, or weakened it? Is your customer base growing, or stagnant? Does your online presence need a facelift? Do your financial systems need improving? Make a to-do list of some potential business upgrades and schedule their implementation.

What would a buyer want most when purchasing a business in your industry? Strong potential for further growth? Superb profits? Significant working capital that converts to cash in reasonable time? Freedom from having to make new capital investments? In addition to determining this, you will want to figure out the strategic value of your business with respect to a particular buyer, not simply the stand-alone value.

Marketing & preparing your company for sale. Who are you going to market to – a strategic buyer or a financial buyer? Do you think it would be better to sell your company to a major player in your industry, an up-and-comer, or even an old friend? Would a private equity firm be intrigued? Would a foreign buyer be a better bet? Your marketing strategy should be strong enough to attract multiple offers, whether pursuant to an asset sale or a share sale.

Dealing with the taxes. What will the tax impact of the sale be, and to what degree can you reduce it? Would changing the business structure help?

Negotiating the sale. If you use a business broker, use a properly licensed one (if you don’t, you may be inviting regulatory risks depending on your industry) and certify that he or she really wants to see you get a good deal (as opposed to just closing any deal). Set a sensible floor price, and walk away if an offer comes in beneath it; a pause after the receipt of a lowball offer sends the wrong message.

If you want to sell a company and start up another in the same industry, the buyer may demand that you hammer out a non-compete agreement, stating that you will not start a company in industry A, B, or C (or in your geographic region) within the next 5 or 10 years. Some states permit non-compete agreements and others prohibit them (most notably California).

You might be able to convince the buyer to accept a non-solicitation agreement instead. These agreements promise that you won’t raid your old client base or hire your former employees as you build your new business, or alternately that your new firm won’t sell specific products that the business you sold still sells.

The prospective buyer may suggest an earn-out to you. Earn-outs are irritating conditions of sale in which the buyer links some of the seller’s eventual compensation to the business reaching certain financial milestones in the future. Earn-outs amount to stealth non-compete agreements, as they discourage a seller from remaining in the same industry. An earn-out might be acceptable if the remaining compensation comes to 10% or less of the sale price, or if bonuses can be arranged for you should the business perform exceptionally well under new ownership in the near term.

An extensively detailed, non-binding term sheet is critical in a negotiation. It can go on for several pages if needed, and it can serve as a precise cue sheet for any attorneys hired to write up the final sale agreement.

Handling change. You may want (or need) to put someone else in charge of things during the ownership transition. In addition to being a good manager, that person needs to care about your clients/customers as much as you do and uphold the values with which you started the company. That is non-negotiable.

Selling a business is a big effort, but a necessary one. Turn to a financial or tax professional to help you plan for the sale and the transition.