ALP: What are the key issues to consider when selling a business?

December, 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. Regard-less 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 two 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. (If possible, try to research businesses similar in size to yours. 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 attorney(s) and accountant(s) 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 review 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. Consult your attorney(s) 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 buyers 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 negotiate 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, an unknowing buyer could terminate profitable relationships you spent years building. Don’t leave it to chance—your attorney(s) can help you review the company's records, material agreements and leases for any amendments that may be required to preserve those relationships.

Also consider how the sale will impact your employees, especially key employees. If you depend on key employees, then determine which employees are prepared to stay with the company after the sale. A buyer will depend on those same employees to keep the business operating and profitable. You also should 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.

Because there are numerous issues like these 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 advisor(s) to determine the proper course of action for your transaction.