ALP: I am Considering Selling My Business, What are Some Key Issues I Should Consider?

June 2007

Selling your business may be one of the most important events in your life.  Some entrepreneurs will grow and sell multiple businesses in their career, while others spend an entire career growing and establishing their business.  Regardless of your experience, the sale of a business can be taxing both physically and emotionally.  There are many issues to consider in determining whether to sell your business.  Whether you are a first-time seller or a seasoned pro, there are at least three issues every business owner should consider in planning a sale.

HOW DO I VALUE AND MARKET MY BUSINESS?

Valuing your business can be difficult.  Some business owners have a good idea of the value of their business from watching their competitors being bought and sold, but many will seek the assistance of professionals to determine a price (or range of prices) to set for the business.  To get an idea of the value of your business, research what similar businesses in your industry and geographic region have sold for in the past year or two.  Try to research businesses similar in size to yours if possible (if you do not find similarly sized businesses, don't be discouraged – you can still get a picture of the price range within which your business fits by comparing other sale prices to the size of the business sold).  A tax or financial advisor can help compare your business to those that have sold recently.  Another method you can use to get an idea of the value of your business is to determine the value of the business assets and add the value of goodwill associated with your business.  Your tax or financial professional advisors can assist with this method as well.

You have two options when it comes to marketing your business – market it yourself or hire a broker.  Most business owners will avoid using a broker (and avoid paying the commission) if they already have potential buyers in mind (such as employees or local persons, businesses and competitors that have expressed an interest in the past).  Many owners have also turned to the internet to market their business.  There are a number of websites with message boards where you can market your business.  Your attorneys and accountants can assist you in proceeding with a sale without a broker.

When hiring a broker, give yourself some options.  Interview at least two brokers to compare their experience, particularly in your industry, and their commission structure.  You also should find out exactly what services the broker provides that are incidental to marketing the business (i.e. valuation analysis, preparation and detail of marketing materials, management of the bidding process).  Make sure you are comfortable that the broker you have chosen will market the business to get you the best price.  Keep in mind, however, that no matter which broker you hire, you will still be doing a substantial amount of the work associated with selling your business.

IS MY BUSINESS PREPARED FOR A SALE?

To determine whether your business is prepared for a sale, analyze financial statements, company records, and agreements from a buyer's perspective.  Ideally, you will begin preparing your business for a sale two to three years in advance.  Potential buyers will normally come in with a team of financial and legal advisors to fully evaluate your business.  You will be allowing access to all of the company's material documents and records.  You should consult your attorneys to ensure that a review by potential buyers is protected by appropriate confidentiality agreements.

Analyze financial statements with a buyer's criticism.  Most buyers will want to see clean and audited or reviewed financial statements.  Buyers also want to evaluate the growth potential of your business in determining whether the price is attractive.  Prepare projections that show the company's growth potential and revenue to give potential buyer's a picture of the company's future profitability.  You should also list and evaluate all of the company's assets.  Eliminate unprofitable assets that may be unattractive to potential buyers.  Your accountants can help you clean-up your financial statements for potential buyers.

Company records should be well organized and should formally document the company's transactions (i.e. loans, other financings, acquisitions).  Records of director and shareholder meetings and actions should also be organized and complete.  If you have a number of shareholders, the last thing a potential buyer wants to acquire is a dispute with a disgruntled shareholder.  Accurate and complete records give potential buyers a picture of exactly what they will be buying.

Analyze your material leases and agreements with customers and suppliers from the buyer's perspective.  Unprofitable or unattractive agreements should be terminated if it can be done without substantial expense.  You should also ensure a potential buyer will not be required to begin negotiation of expiring contracts during or immediately after the sale.  Expiring contracts could have an impact on how potential buyers view the company's future prospects and growth.  If you have unwritten agreements, reduce them to writing.  Potential buyers want to know exactly what they are buying, and an oral agreement with a customer or supplier creates uncertainty that could make potential buyers uneasy.  Also, you don't want an unknowing buyer terminating profitable relationships you spent years building.  Your attorneys can assist you in reviewing the company's records and material agreements and leases and with any amendments that may be required.

You should also consider how the sale will impact your employees, especially key employees.  If you depend on key employees, you need to determine which employees are prepared to stay with the company after the sale.  A buyer will depend on these same employees to keep the business operating and profitable.  You also want to be the one to inform your employees of your intent to sell.  Employees often feel abandoned when learning of the sale from a third party.

HOW SHOULD I GET PAID FOR MY BUSINESS?

Most business owners receive cash when they sell their business.  However, for tax reasons, some business owners may prefer to receive stock in an acquiring company (most often when the acquiring company has publicly traded stock).  Other business owners may help finance the buyer's purchase of their business.

If you are considering accepting an acquiring company's stock as consideration for the sale of your business, you should do your own due diligence on the acquiring company.  You should understand the value of the investment you are accepting in return for your business.  Your attorneys and financial advisors can assist you in evaluating whether the acquiring company's stock is appropriate consideration for your business.

It is becoming more common for business owners to help finance a buyer's purchase of their business.  Seller financing may attract more potential buyers because it eliminates the burdensome process of traditional financing and may attract potential buyers who cannot obtain traditional financing.  Seller financing can result in a higher purchase price than when potential buyers are relying on traditional financing.  If you are considering helping finance the potential buyer, there are a few things to keep in mind.  First, you must be willing to accept payment for your business over a period of time.  Second, you should be comfortable with the down payment provided by the buyer.  This directly impacts how much of the purchase price you put at risk by financing it.  It is common in seller financed arrangements to see the seller finance as much as 50% of the purchase price.  You also should conduct your own due diligence of the buyer by analyzing the buyer's credit rating and background.  If you are financing the buyer, you should be confident that the buyer has the ability to make regular payments.  Finally, you should ensure that the amount financed is properly secured by collateral.  Most often, the collateral will be the business and its assets, but also most often, seller financing and the related collateral are subordinate to the buyer's debt issued to make the down payment and provide working capital for the business' ongoing operations.  It is also common for the seller to stay on as an employee or consultant with the company through the financing period to ensure the business is profitable and maintains the ability to make the payments.  You should consult your attorneys when considering financing the buyer to ensure the credit arrangement and other terms are properly documented.

There are any number of issues to consider when selling your business, many of which will be personal to your particular business or situation.  You should consult your financial and legal advisors to determine the proper course of action for your transaction.

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