Building a successful business takes many years of hard work and dedication. Business owners have spent much time and effort building their businesses. They want to sell at the highest possible value.
A business seller can benefit from many qualities that make a business owner successful. Many business owners need to gain experience to sell a business. It can be a lengthy and complex process. These are the main issues that business owners must consider before, during, and after a sale to get the most for their hard work.
Preparing for the Sale
It doesn’t matter how large or small your business is; you need to decide why you want to sell it and your priorities. Are you ready to wait for an all-cash sale which can be more difficult to negotiate? Or are you open to an installment sale or equity purchase of the acquiring business? Are you willing to accept a minimum price determined by factors other than the company’s value, such as your retirement plan? Are you looking to retain the jobs of long-term employees or family members? Although these and other considerations may seem obvious to you, it is important that you clearly state them before you start.
Hiring outside help is usually a smart move. Hire only qualified advisers and ensure that you thoroughly vet them. You should ensure that your experts are not involved in conflicts of interest. Consider hiring an accountant, tax expert, legal counsel, or appraiser. There may be multiple roles, and not all business sales will require them all. Most business owners will need at least an accountant, legal counsel, and an intermediary to help them during and after a sale. A broker or intermediary is a person who can help you identify and work with potential buyers. If they differ from the same person, the accountant will help you organize your books and address issues like how to allocate the purchase price best and handle tax concerns from the federal, state, and local levels. Legal counsel will review and draft the documents and agreements required to close the sale.
Many lawyers and other advisers will require you to sign retainer contracts once you hire them. While this protects both sides, it can also mean you will have to spend a lot of money initially. Finding a broker interested in your transaction may take work if your business is small. Brokers specializing in business sales are looking for companies worth several hundred thousand dollars. An owner of a large corporation may hire an intermediary to help them. They are usually consultants and offer more advanced services.
Once you have hired your team, you need to work with them to understand the sales process before you begin. You will be more effective in your decisions throughout the sales process if you know them better. Bookkeeping and records are key elements to be in order. It is worth conducting a mock due diligence to ensure you are ready for the buyer’s inspection. A third-party objective valuation may be an option. This will allow you to get a realistic estimate of the value of your business and help you determine a reasonable asking price.
Once you have identified a potential buyer, focusing more on compiling and presenting records is important. The buyer will be able to specify the information they want and the format that they prefer. Many potential buyers would like to see papers and books prepared per generally accepted accounting principles (GAAP), which most small businesses don’t use. Converting a business’ books to GAAP can be a complicated process. This should be addressed as soon as possible.
Remember personal preparation when you are ready to let your business go. Revisit your financial plan. It would help to consider several scenarios to see how the sale will impact your long-term and short-term goals. Some business owners, particularly founders, can feel emotional when letting go of their business. Be clear about what you want to do next, and be open to the possibility that new owners may change your business. After the sale, both you and your company will start new chapters.
Selling a business is a lengthy process. The sale can take anywhere from six to twelve months once you start. However, it is possible to extend this time frame. You can make your business more appealing by improving your assets, removing potential liabilities, and generally making your business look great. You can also make improvements to your business. It would help if you also considered the timing of your sale. Avoid selling before the lease expires or any key contracts expire so buyers can only re-negotiate it after arrival.
You must ensure that your business can continue operating smoothly throughout the sale process. If you’re not careful, the sale could take up much of your time. It would help if you managed your time well and did not lose sight of the day-to-day business operations. High performance will make your business more attractive to outsiders and increase employee morale. This is another reason you should hire consultants outside of your business. Too many people could hurt your business and reduce the amount of money that you can get.
You should consider who needs to be informed that your company is up for sale. Any partners or co-owners have a duty. Shareholders may also require a certain amount of disclosure. Employees, customers, and vendors can be anxious if the company is being sold. This can also reduce the final selling price.
It is important to prequalify a candidate once you have identified a potential buyer. You must obtain confidentiality agreements or nondisclosure agreements during the prequalification process. These terms should be acceptable to serious buyers. If they refuse, it is a red flag. The same applies to your adviser team, who must also agree in writing not to reveal sensitive information about the company.
The prospective buyer should submit a letter of intent. This non-binding offer outlines all major terms of the transaction, including the purchase price and structure. This letter of intent is a foundation for you, your buyer, and your respective attorneys to negotiate terms and create the final legal documents. It would help if you had an idea of the terms you are willing and able to compromise on and which terms are deal-breakers. The best way to make a deal is to be thorough and precise in the beginning stages.
Many business owners must decide whether to sell their assets or stock. Buyers prefer to buy assets as they can get a higher basis, allowing them to deduct more tax in the future. A sale of help can also benefit buyers, who reduce their risk. A stock sale is a good option for sellers, as they get clear, long-term capital gain treatment. To avoid double taxation, if the seller has stock in a corporation, he may only have to wait for a stock sale. A sale of assets will attract more buyers in other situations. However, a seller should be prepared to negotiate a higher price due to the potential benefits for the buyer. The sale’s tax treatment will depend on your business’s structure. For example, the sale of a sole proprietorship is treated as an asset sale.
A stock sale is straightforward. However, an asset sale involves the sale of all business assets. Each asset will receive a percentage of the purchase price. The negotiation process involves dividing the purchase price between assets. Buyers and sellers might want different treatment for certain investments to get the best tax treatment. Buyers might prefer to have more of the purchase price allocated for hard assets that can depreciate over time rather than intangible assets and goodwill, which must be expensed over a longer period. Sellers prefer the opposite because hard purchases can be subject to ordinary income tax treatment, while intangibles or goodwill may receive capital gains treatment. Both parties must agree upon the final allocation since the seller and buyer will disclose it in their tax filings to the Internal Revenue Service.
As part of your selling process, you should address the transition issues. To ease the transition, can you stay on for as long as necessary? If you can do so, you will need an employment agreement that clearly outlines the terms of your work. What will you do if the deal is not signed? What time will the key employees be notified of your decision?
As you negotiate and close the sale, follow best practices. Follow any instructions from your lawyer and keep good records. It is a good idea to adhere to strict ethical standards. This also reduces your liability. You have legal disclosure obligations to potential buyers and partners as a seller. You must ensure that all of these obligations are met.