How To Sell Your Business: What To Do Before, During, And After The Sale
The time has finally come: you’re ready to sell your business. Planning for the sale of a small business may seem daunting. Perhaps you’re not sure where to begin or how to go about selling a business. To make the process as easy and profitable as possible, you’ll want to start planning early. Having time on your side can really pay off when selling a business. Whether you’re ready to retire or just move on to a new venture, here’s a primer on how to sell your business.
Selling a business requires a lot of planning. As you begin the process, it’s important to focus on the step you’re in and the long-term objective. Otherwise, you may end up making short-term decisions that go against your ultimate plan. Here’s an overview of the process and post-sale considerations.
Get organized and know your numbers
The first step is to get your business financials in order. Clean up QuickBooks, prepare financial statements, projections, and ready key metrics for your industry. Understand the numbers. What is the financial position of the business? Outstanding liabilities? Relative growth in gross sales and net income? Number of customers and relative size? Alignment with your forward projections?
Again, this is why it’s best to start as early as possible, so you have time to make adjustments. Perhaps you use cash to refinance, pay down debt, or cash out minority shareholders. Even if you don’t need to make any substantive changes, messy or incomplete books can kill the deal before it even gets started. It may also be worth considering an independent audit of your financials to help give buyers confidence.
Gather your team of advisors
When selling a business, having a team of trusted advisors around you is crucial. Here’s why: chances are you haven’t sold a business before and likely won’t again. We don’t know what we don’t know. and you only have one shot to get this right.
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In planning for the sale, get your team of business and personal advisors in place ahead of time. Your business advisory team may consist of: a business broker/investment banker, valuation expert, accountant, tax advisor, and transaction/M&A attorney. On the personal side, your financial advisor, estate planning attorney, and CPA/tax advisor should be involved throughout the process.
There’s a lot of complexity to consider: structure of the deal, ways to retain key employees, tax planning, cash flow planning post-close, etc., so it’s really important to work with a team of specialists that can help you navigate your options.
What’s your business worth?
Understand the real-world value of your business in the current market by working with a valuation expert, business broker, or investment banker. When wondering how to sell your business, ask what buyers would be willing to pay today?
It may be helpful to discuss different estimated valuations under various sale structures too. For example, the valuation of the company if sold using an employee stock ownership plan (ESOP) likely wouldn’t be as high if the business was sold to a competitor. Similarly, selling a non-controlling stake in the business would be less desirable than a full acquisition.
Define your goals and financial needs
Before going too far down the path of exploring all the ways to sell your business, first consider your goals for the transaction. Do you want to sell 100% of the company at closing and walk away with the cash? Do you want to pass the business to family members or employees? Are you willing to keep working for 3-5 years after selling all or a portion of the business? How important is it that the brand continue? What are your cash needs?
There are a lot of ways to sell your business and attorneys can be quite creative. But there’s no sense in spending time on options that don’t align with your objectives or financial needs. So before getting wooed by complex deal structures and tempting tax-minimization strategies, take stock of your wants and needs.
In working with your personal financial advisor, discuss your plans after the sale of your company. What are your income needs? Do you have plans for a major purchase? This will help determine how much cash you need from the sale of your business and whether to consider the pros and cons of arrangements like an installment sale.
Sold! What to do with the money from the sale of your business
Once the deal is done, you’ll need to make some important decisions about what to do with the money from the sale of your business. You’ll also want to consider other aspects of your situation, such as estate planning, gifting, trusts, and asset protection. Whether you plan to fully retire, start a new company, or something in between, you’ll want to get a plan in place to maximize the value of the proceeds.
When you own a business, your net worth is highly concentrated in one asset. Selling gives you the opportunity to diversify your investments and create an income stream for retirement. If your company was producing significant cash flow, it’ll be critical for you to assess whether the sale proceeds will allow you to maintain that lifestyle.
A key part of deciding what to do with the money after the sale of your business is understanding your risks and options. To feel confident that it isn’t too early to retire, your plan should include a Monte Carlo simulation to account for market volatility. This is the best way to stress test a retirement plan.
Legal Considerations When Selling a Business
Below are critical legal issues you should consider before embarking on this process. After reviewing each issue, you will decide if you are ready to sell the business or need to make changes in the company or the management team before it is too late.
Competent Legal Counsel
Books and Records
Letters of Intent
A letter of intent (LOI), which is non-binding, is an offer by the buyer outlining all the proposed transaction’s significant terms and conditions. The LOI will include details such as the transaction’s structure, total purchase price, closing date, and other matters like escrow or indemnification.
A portion of the purchase price is typically held in escrow for some time by a third party, usually 12-18 months. This is done to verify that the seller has fulfilled the warranties and representations in the business purchase agreement.
Limitation on Liability
The buyer can insist that there be no limitation of your liability for any misrepresentations or representations made by the seller. You will want to minimize your liability in such cases.
Sometimes, the buyer may ask you to stay on for a transitional period or continue running the business for two to three years. The buyer may not be willing to move forward unless you have committed to working for them for a certain period.
You should be prepared to accept a job offer if you want to remain. Buyers are more likely to bring this up at the end of the process when they have the most leverage and everyone is on track to close the deal.
Share Purchase Agreement
Mistake 5: Selling to the Wrong Person
Taking the first offer may not be a wise choice. This may not necessarily be your BEST offer. Selling your business for top dollar with little or no money down along with an extended contract may lead you to lose it all.
Business sales often go bad after the new owner takes over. The new owner may lack business experience, have a closed mind or be a poor leader. The list goes on and on. A successful business owner makes it looks easy, but change that mix and disaster may strike. When this happens, the new owner ends up going out of business and leaves the previous owner holding an empty bag. It saddens me to see a business fail after years of success due to this lack of business sale judgement.
Evaluate your options and make the best selection for the long term. Ask yourself, is this the best person to buy and run my business? Or, can they quickly connect with my customer base and learn how to market effectively? When the business sale goes as planned, it creates a tremendous opportunity for both business owners and the success continues.
Debbie Allen is the author of “Confessions of Shameless Self Promoters and Skyrocketing Sales.” She has been featured in Entrepreneur, Selling Power and Sales & Marketing Excellence.