Preparing Your Business for Sale: 5 Keys to Success
If you’re thinking about selling your business right now, you’re not alone. The pandemic has added to the sense of urgency for owners who were already inclined to sell, and it probably has many others, who were previously uninterested in selling, wondering if now might be the right time.
While COVID-19 has impacted some transaction dynamics, it hasn’t significantly changed the issues that owners face when considering the sale of their business. Whether you’re considering selling to reduce your risk, to take your business to the next level, or due to retirement, here’s how you can best prepare your business for sale and new COVID-19 dynamics you should consider.
1. Plan for Your Financial Future
When planning for the eventual sale of a business, owners still focus primarily on the question “How much can I get for my business?” But, the first question an owner needs to be prepared to answer is, “What results do I want to get from this transaction?” Many times, when owners are asked this question, the response is based on what they think the business is worth or what a peer recently sold their business for, even if that business was in a different industry.
However, the best answer to this question focuses on the owner’s personal needs and goals. For example:
- Are you looking to transition the company to the next generation of your family or to top employees?
- Is the goal to find a willing buyer in the open market and maximize the sale price?
- Are you planning to retire and live off of the proceeds from the sale for the rest of your life?
- Would you be willing to invest some of your equity with the buyer and work for the new owner?
- Do you want to reinvest in a new opportunity?
- What other legacy goals do you have (e.g., paying for college educations, contributing planned amounts to charity)?
In an ideal situation, these questions would be asked and answered several years before the owner wants to take the business to market. This timeframe would allow for appropriate estate and investment planning. Plus, having a longer timeframe allows owners and their advisors to consider what actions can be taken to increase the value of the company before going to market and leaves time for implementation.
In today’s economy, many owners who feel motivated to sell because of the pandemic are forced to consider these possibilities in a very condensed timeframe. Regardless, having these questions answered early in the process helps owners evaluate unsolicited offers that may come in well before they originally planned to sell.
So, how might the pandemic modify an owner’s answer to this question? Whether you’re thinking about selling for the first time or have already developed an exit plan, the current circumstances are likely to affect your answers.
If you’re more motivated to sell now because you are close to retirement and don’t want to manage the business through this turmoil, or you want to sell quickly for fear of losing more value, you will need to evaluate the expectations you had for the money you planned on receiving from the sale. Work through a variety of projections to prepare yourself for a possible range of offers. You may be willing to accept a lower amount in order to exit now, but if a lower sales price translates into changes in lifestyle or legacy, you may determine that’s not an acceptable result.
Transactions in the current market have been shifting risk to the seller in a couple different ways. Buyers may utilize a seller note that is payable over a longer period of time, or they may set the deal terms to shift price to an earnout so that the seller stays on in some role for a set amount of time and remains at financial risk for company performance after the transaction closes.
As a seller, it’s key to make sure that the cash received at closing of the transaction meets your goals for what you want out of the sale. The money received from a seller note or an earnout can be a nice bonus, but you don’t want to count on contingent funds when it comes to meeting your requirements for post-transaction financial security.
2. Build a Support Team
Many owners don’t realize at the start of the sale process that they need a team of professionals who specialize in buying and selling businesses. The attorneys that have traditionally handled the day-to-day legal needs of the company and the accountants who have prepared tax returns and consulted on financial statement projects for you over the years may not have the in-depth knowledge of issues that arise during a transaction.
The legal and tax implications of a business sale are complex, and a slight error in structuring the transaction can result in significant financial consequences. Specialized transaction attorneys and accountants will work as a team with investment bankers and valuation specialists to make sure you are properly represented.
In addition, the earlier you involve a transaction team, the more time they will have available to help you maximize the after-tax value of your sale. If you’re beginning to plan on a five-year horizon, you can even look at elections to change your type of business entity in ways that can make a transfer much more efficient from a tax and legal standpoint.
3. Be Realistic About the Value of Your Business
Unfortunately, it’s common for business transactions to fall apart before reaching the finish line. One common reason deals fall apart is because of a difference in opinion between buyers and sellers on the value of the business, especially as issues come up as part of the transaction process.
Part of the process of preparing your business for sale is understanding the current value of the business in today’s market. A sell-side quality of earnings report can help do just that.
A sell-side quality of earnings report is an independent analysis of a business’ financial information and is a unique tool that helps sellers understand how buyers will likely see the business. It focuses on several key areas of interest to buyers and also discloses potential issues up front. This can help manage expectations and eliminate surprises that can drive a price down prior to closing.
When performed prior to going to market, a sell-side quality of earnings report can also serve as a checklist of financial and operational metrics that can be improved in order to support higher valuations and more lucrative offers.
The investment banker on your transaction team can use the sell-side quality of earnings report and their knowledge of what similar businesses have sold for to help guide expectations on sales price.
4. Avoid Common Deal Breakers
Differing views on the company’s worth is one type of deal killer, but other common causes of failures include undisclosed liabilities that come to light during the buyer’s due diligence work, declining business performance, IT concerns such as data breaches, and human resources concerns.
In the COVID era, the extent to which a business has utilized funds from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program can also impact a sale. While beyond the scope of this article, there is still quite a bit of uncertainty surrounding transactions and PPP loans. For example, is the PPP loan considered debt that would typically reduce the purchase price if the PPP loan is expected to be forgiven?
5. It’s Never Too Early to Start
Whether you’ve decided that you need to sell your business as soon as possible, or you’re thinking that it’s time to start creating an exit strategy that will help you meet your goals, it’s always the right time to start planning. For family-owned businesses, today’s low interest rates provide an additional estate planning incentive to begin generational transfers using trusts and other vehicles that help to maximize the after-tax value of the gifts.
If you would like to learn more about planning for the transfer of your business, please contact your KSM advisor or complete this form.
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