Selling a business is much like selling any other big-ticket item. You wouldn’t sell your house, for example, without appropriate renovations, understanding your property value and the market at large, and assembling the right team to facilitate the sale. The same is true with your business.
First off, you’ll need to put the right team together to see the business sale from start to finish. An accountant or tax advisor can help with valuation and recordkeeping, as well as identify how to structure a tax-friendly sale. A mergers and acquisitions attorney can review necessary legal documents, as well as navigate negotiations and the sales process, including drafting business purchase documents that account for the business entity itself, operating assets, intellectual property, real estate, financing, security agreements, and the like.
Valuating Your Business
Identify Strengths and Weaknesses. Your best tool in preparing to sell your business is an understanding of how much it’s worth. This should be no surprise. But less obvious is that a professional, comprehensive business valuation can expose both the strengths and weaknesses of your company. Get an early business valuation by an accountant or another expert who has access to trending national data and experience selling businesses in your industry. Then, identify areas where your business is devalued and focus on improving them between now and when you start entertaining buyers.
Find your Negotiating Range. You and your auditor should be careful to identify special, non-ordinary expenses that skew financial statements and in turn affect profitability determination. When you’ve come down on a value, identify your price range: the space between your ideal return and your bottom line. Knowing this will give you the insight to negotiate confidently.
Organizing Your Documents
Financial Records. Commercial buyers will need a sufficient sample size to properly evaluate the health of your business. Be prepared to provide at least three years of financial information for analysis. And you’ll of course want that information to showcase a smoothly-run operation; if you have the luxury of time, develop your records in conjunction with a practice strategy to improve weak areas identified in your valuation. Consider having financial statements prepared externally by an expert – this will make an impression on buyers and ease their due diligence process.
Legal Documents. As with your financial records, do a legal document review. Ensure that you have your bylaws or operating agreement, licenses, leases, customer and vendor contracts, and any other documents that coincide with operations. Most importantly, make sure these legal docs are up to date and accurately reflect the state of your business. If you have assets that are unsecured (for example, “handshake deals” or contracts that are up for renewal) secure them – it’s an easy way to add value. If agreements may be unattractive to a purchaser, renegotiate with the supplier or client. If you have a business process or invention, explore a patent; seek trademarks for your brand and copyrights for qualifying products. These are all viable ways to curb risk and bump business value
Sales Kits and Buyer Identification
Once you have your documents and operations in order and a good idea of what kind of return your business should fetch, the next step is to attractively market to buyers. Your advisors should be able to help you put together materials for a sales package (and a marketing expert can bring added value here). Such a package might include advertising materials, financial and asset summaries, branding and other IP, and goodwill.
If and when you get some interest – don’t stop marketing! Identify multiple potential purchasers. This will not only create leverage between competing buyers but also present you with a fallback plan in case your preferred buyer backs out. You should ask for pre-qualification for financing, which will narrow your field to worthwhile suitors.
If you’re integral to business operations or have key personnel who are and who may leave during the transition, it’s imperative to develop a management succession plan. This should coincide with your valuation and document organization initiatives. In essence, you’ll need to determine how you can step away without the business valuation taking a hit – otherwise buyers won’t be interested in the business entity, they’ll be interested in you.
You may want to stay on as an employee. Otherwise, you should look to bring on or groom a transitional manager, CEO, and/or COO. If there are other key personnel, lock them into a long-term contract – their commitment is a valuable asset to a purchaser, after all, and can be accomplished with what’s called a “golden handcuff” incentive program.
Each arm of preparation for selling a business is interrelated, intensive, and rewards foresight. The best takeaway advice for a business owner is to start planning early.
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