While selling a privately-held business can be a time-consuming, complicated and emotional process, the personal and financial rewards can be profound for a business owner. Even if a business owner does not anticipate selling their business for several years, laying the right planning foundation can help maximize the selling price and avoid mishaps in the future.
Keep the End Goal in Mind
Well before immersing themselves in the complex intricacies of the business monetization process, business owners need a deep understanding of what their post-sale personal financial needs and goals are and if a business monetization can get actually them there. Ideally, a business sale would result in enough money to replace income previously provided by the business, provide for a financial safety net in the event of unexpected financial developments and fund aspirational goals like philanthropy and family wealth transfers. (For more, see: Why Successful Business Owners Sell Out.)
It’s best to project a range of expected values for various potential exit options (cash sale, recapitalization or other monetization alternatives) on an after-tax, after-fee basis. Then analyze how the proceeds of the sale would perform over time under a range of projected market returns to see which goals can be funded with confidence and which goals are less likely.
Planning and Organizing Key
By planning well in advance and getting organized, a business owner has the greatest potential to maximize the business sale price. Building out the management team so that the company is not overly reliant on the business owner and ensuring that key employees can be retained would make the company more attractive to an outside buyer.
Also, many small businesses have sales departments that are highly reliant on a few key individuals. “Institutionalizing” the company’s sales process can make the company more valuable. Organizing the company’s documents and getting the company’s financials audited by a recognized accounting firm would also be beneficial.
View Your Business from a Buyer’s Perspective
While a valuation or business appraisal report is a good starting point for building the case for the best price a business owner could get, a business owner selling his or her business must develop a convincing justification for a sale price from both strategic and financial buyers’ perspectives. Understand why a strategic buyer might want your business and try to quantify the potential synergies. Also, understand that buyers have deal preferences to which you may be opposed. Buyers typically prefer asset purchases to avoid potential liabilities, while sellers prefer stock sales to get capital gains treatment and avoid double taxation. (For related reading, see: Prepare to Sell Your Business.)
Identify and address any potential red flags, such as high customer concentration or changes in performance or legal claims. When due diligence by a buyer is conducted, be upfront about skeletons in the closet and potential problem areas.
You Need the Right Team
Often times, business owners are inexperienced in the process of selling a business and negotiate with buyers with much more transactional experience, so having the right team for a business monetization can have a tremendous impact on the success of the transaction. The team’s CPA, investment banker, corporate attorney, trusts and estates attorney, and financial advisor all bring different skill sets and motivations to selling the company. It’s best to choose each wisely.
When it comes to the legal structure, the in-house counsel can add a lot of value to the selling process since he or she will have the extensive institutional knowledge, while a mergers and acquisitions attorney brings specialized skills. Having both on the team can be very helpful.
As the business owner builds the business sale transaction team, they can help the owner understand the business, tax, legal and financial implications of various selling options.
Visualize Post-Monetization Life
In all likelihood, the mental wiring for many business owners is programmed to run a business, not exit a business. The exit process can be hard, but waking up every day and not running a business for many successful business owners could be even more difficult. The importance of actively thinking about potential post-business exit activities and interests well before the actual business monetization should not be overlooked.
Have a Backup Plan
Having a backup plan in case the planned transaction does not close could save the day. If a business sale fails completely, the business owner should have a business strategy in place to continue running the business.
Without proper planning, a business owner could pay too much in estate or capital gains taxes, leave wealth on the table or, at worst, fail to realize their personal financial goals. The key ingredient for successfully navigating the business sale process is to start planning well in advance. Having a plan in place will save you from headaches later on but most importantly, it will help you capitalize on your profits. (For more, see: 7 Steps to Selling Your Small Business.)