How to Get Top Dollar When Selling Your Business

You have worked hard, and slowly, sometimes painfully, built a successful business. It has provided a livelihood for you and supported your family. Now, the thought occurs to you, sometimes fleetingly, sometimes insistently, that the time may be here, or is soon to arrive, when you would be happy to pass your business along to someone new, but it must be the right buyer and the right opportunity. You know all about your business and your industry, but next to nothing about selling a business. So, just how do you go about this?

Are you prepared?

Most small businesses keep the owner’s life very busy. Time to reflect and think strategically is at a premium. Have you given much thought to what you will do after you sell your business? This question may seem off the mark, but it is very much a key issue. Sellers have different reasons to sell, and buyers have different objectives in buying. Whatever they may be, it is true that sellers who have planned for the transition in advance have a much better outcome to their selling experience than those who are either forced into a hurried sale (due to such unplanned contingencies as illness, or loss of their key customer or supplier, or the like. Think of the “lost our lease” signs you occasionally see in retail windows).

In addition to your own personal lifetime planning, most prospective buyers will demand three to five years of financial records and tax returns in order to conduct their own “due diligence” to assess for themselves the value of the business and to look for its future potential for growth and increased profits. Advance planning allows you to implement some strategies to enhance the financial performance of the business which will translate into a better picture when undergoing this investigation and hopefully, bolster the value of the business. The time to get advice and suggestions on maximizing these value-building steps is now, not the month you decide it is time to get serious about selling. You can gain valuable assistance from qualified small business consultants, CPAs, and others who work with small businesses to improve their performance.

Who are your Prospective Buyers?

The most likely source of a successful buyer for your small business will be one of these three: a member of the seller’s family, an existing member or group of members of your existing management staff, or an outside buyer. Family or staff buyers can be good prospects, because you know them, they know you, and they (hopefully) understand the business and what it takes to make it succeed. After all, they have been watching you do it every day for years. An outside prospect may be either a “financial buyer,” that is, someone looking to step in to be an active participant in running the business, who will draw a salary as well as enjoy growing equity over time as their efforts lead to improved profitability, or a “strategic buyer,” that is, someone or a company already familiar with the business or its industry who is looking for synergy and growth potential.

Space does not permit exploration in depth of the differences among these various prospective buyers – family, staff, outside financial or strategic buyers – but suffice it to say that, from your perspective as a potential seller of your business, the differences are many, and they are crucial to your successfully concluding a satisfactory sale and ongoing future peace of mind. Considerations of expertise, ability, resources, financial and otherwise, and many more factors are all affected by the kind of buyer.

You probably already know more than any of your advisors do as to what is going on in your particular industry. Who are the movers and shakers? Where is innovation coming from? Is the competition domestic or international? What trends have you perceived? What do you think the future looks like for your kind of company, and who is best positioned to profit from it?

Some Questions to Ponder

Can we keep this under wraps?

How to keep it confidential is a challenge. Most small business owners would never be so foolish as to allow word to leak out that they were contemplating selling. Why? Because as soon as the competitors find out, you risk their doing something to leverage that potential against your company in the rough and tumble of the competitive marketplace. Think of the slump in sales of Buicks after GM announced the retirement of the brand. Were vendors looking to increase their sales to Buick or manufacturers of Buick-destined components? Not hardly. Nothing saps market confidence and customer loyalty faster than the knowledge that the company’s thinking of cashing it in.

To protect the enterprise value, confidentiality is vital. How do you achieve it? One is to be sure that everyone with whom you may consult about a possible sale or other transition strategy is firmly and legally obligated to keep all information you share with them absolutely confidential. This includes financial consultants, CPAs, appraisers, and intermediaries of all kinds.

Working with an experienced business attorney, you will have the additional assurance imposed on lawyers by the Rules of Professional Conduct to maintain all client confidences and secrets. This can be a good strategy. You retain legal counsel especially for this process and authorize the attorney, subject to your approval, to hire other consulting professionals (appraiser, accountants, and the like). This team approach allows you to conduct an objective analysis and investigation to prepare your business for sale, while at the same time, you keep all the information flow confidential, by virtue of your attorney-client relationship and the attorney’s “work-product” doctrine.

Once a prospective buyer is identified and qualified, then the challenge of confidentiality with serious contenders can be addressed by negotiating a Non-Disclosure Agreement (NDA) before the next steps are taken. NDAs are customary, and no serious buyer should have any hesitancy about entering into one. You just want to be sure that it has teeth, and can be enforced against any violation.

What is the value of your Business?

All valuations are opinions, until after a sale takes place. Only such a sale, at arm’s-length between a willing buyer and a willing seller, with each side being under no compulsion to do the transaction and both sides having approximately equivalent access to information, is a bona fide measure of value of that particular business at that particular time under those particular conditions.

You will find there are many ways to value a small business. Perhaps some multiple of some financial bench mark, like EBITA, i.e., “earnings before interest, taxes, and amortization” or 2 times “net income,” or five-years’ average net revenues plus-or-minus 15%. Different industries have different rules of thumb, and may actually reflect pretty accurately what is going on in their industry.

Professional business appraisers, like appraisers of many kinds of income-producing assets, form their valuations based on looking at three different analyses: a “cost” approach, an “income” approach, and a “market” approach.

Overly simplified, the “cost” approach looks at the cost of replacing or creating the business; the “income” approach takes into account and makes certain assumptions about interest rates, riskiness, the market conditions, and the industry, and tries through financial analysis of the company’s performance, to generate an estimate of value; and the “market” approach looks at sales in the industry of other companies that may be sufficiently similar, with certain adjustments, to give some indication of value. Using all three as the foundation, a business appraiser then forms a conclusion, that is, its opinion of value.

If it all sounds a bit like hocus-pocus, be reassured that no less a flinty-eyed entity than the Internal Revenue Service has published guidelines on what considerations provide the fundamentals of an acceptable valuation, such as may be relied upon in estate planning, gifting, and other transactions where opinions of market value are critical data. Use of similar guidelines in obtaining a private appraisal for planning and negotiation purposes can make for a more persuasive presentation of your estimated value.

What are the Steps and Components to a Deal?

Not all transactions will follow a set pattern, but a common sequence would be:

Preliminary stage: NDA, Letter of Intent (a non-binding summary of the major deal points, such as price, structure, conditions, and timing), due diligence (access to proprietary information to permit buyer to assess whether to proceed).

Pre-Closing stage: Preparation of agreements, obtaining approvals and establishing agreement on closing procedure.

Closing stage: Escrows opened, buyer supplies funds and completes other commitments, seller obtains necessary authorizations (board of directors and shareholder approvals, for example), and mutual execution of transfer documents and delivery of funds).

What Makes for a Successful Sale?

Preparation, attention to details, and keeping one’s eyes on the objective.

For more information or with questions, please contact Larry.

 

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