Three challenging steps to selling your business
If you’re thinking of selling your business someday, remember it’s a long, complicated process that you should start well in advance. The recent sale of a client’s manufacturing business, reminded me once again that a successful sale requires considerable time and effort – before, during and after the deal is made. Rigorous planning and preparing for the sale, working hard to get the price and terms you want, then closing the deal and managing the transition to new ownership.
This deal began about five years ago with the casual comment, “I’m thinking it’s time to sell. What do you think my business is worth?” Always a challenging question, loaded with high expectations and a lot of ego. I did the analysis and presented my estimated range of potential values based on standard valuation techniques. As usual, the owner was disappointed that the number, but was eventually persuaded that the rationale was reasonable.
It helps to ask, “How much would you pay to buy this business if you were not already the owner?” And it also helps to remember that every investment is justified on the expected rate of return and any sale, including the equity in your business, only happens when the buyer values it more than the seller. Never when it’s the opposite.
Pride and ego can persuade the owner to price the business much higher than any rationale buyer can see or be willing to pay. We could look for a crazy person with lots of money, but the two are not often found together.
So, once the decision is made, what are the three steps required to sell your business?
First Step: Packaging for Sale
If we have agreed that the current valuation is not sufficient, then we have to work on short-term action to improve on the value and make the business more presentable to prospective buyers.
The value is always increased if the business can improve on net income and reduce the risk associated with sustaining it. The immediate requirements to stabilize revenue, reduce costs and clean-up the balance sheet are usually obvious, if looked at from the perspective of an outside investor. But often the most difficult and important issue to be resolved in order to enhance the value of the business is to reduce its dependency on current ownership. That may mean introducing a stronger management team and removing the owners from an active role. You cannot sell and exit the business, if it will fail immediately after you leave. (Seems obvious, I know.)
Ideally, the business should already be managed to make it as valuable as possible by continually addressing the key issues of sustaining growth, reducing risk and building a strong management team. When those issues are all reasonably resolved and the tough questions can be answered, then you are ready to start presenting your business for sale.
Second Step: Presenting for Sale
Preparing for sale requires some strategic planning. We need to know how to present the business for sale and to which potential buyers.
Strategic buyers will always pay the best price because they will have access to synergies in reduced overhead or expanded sales that will add to their return on the investment and consequently to their perceived value. Who are they and where do we find them? Would you consider selling to a competitor? What if they plan to buy your business to close it?
Are you willing to consider passive investors who are seeking low risk returns and will probably offer the lowest price? Would a new owner-management team be a better scenario for continuity of the business and a smooth management transition?
What are your preferred terms to maximize the after-tax cash value and to accelerate the payout? What is negotiable and what is not?
When these strategic questions are answered you can prepare a marketing pitch and Offer for Sale to attract interested and qualified buyers. The package should have enough information to appeal to an investor without disclosing too much confidential or competitive information. You may even wish to remain anonymous and have the initial package presented by an agent or business broker. After the prospective interested buyer has been qualified and signed a non-disclosure agreement, then a more detailed package should be available to provide the company background and financial history and support the valuation and asking price.
As proposals are exchanged and alternatives are considered, negotiations can begin. There may be several prospects that do not lead to an accepted offer, but eventually a deal gets made. Unfortunately, you’re still not done.
Third Step: Closing the Sale
The third step is closing the sale, completing the transaction and making the business transition to new management.
This final step can be a grinding process with all the conflicting, complicated and costly input of your accountants, lawyers and bankers. (Of course, they should all have had some prior warning and the chance for input before the deal is signed, but now it gets more serious.) You need the professional expertise to properly document and process the negotiated Buy/Sell Agreement to avoid any subsequent liabilities, minimize the tax consequences and maximize the cash payout. You will get conflicting advice, especially from the buyers’ advisors, as the best terms and conditions for you may not be in their best interest. More negotiating and compromises will be required.
Then, once the deal is properly documented and the closing gets done as planned, the parties can all work together on the transition to new management and ensure that the business stays on track for continued profitable growth any balance of sale gets fully paid.
Now you can make your graceful exit and focus on managing, or spending, all that cash.
Have you decided to sell? Then it’s time for you to get started on the first step.
Your Uncle Ralph, Del Chatterson
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