What’s the best way to sell your business

Key Takeaways:
  • Preparing early and anticipating buyer questions helps keep the sale moving and prevents deals from falling apart.
  • The true value of a sale depends on terms, taxes and timing, not just the price.
  • Owners who plan ahead often close faster, secure better terms and keep more value.

 

Once the decision to sell a business has been made, timing is an important issue that can make or break the success of the transaction. Specifically, making optimal use of the time between the decision to sell and the actual sale requires step-by-step preparations that can accelerate the journey to a successful close – or not.

There is a saying in the merger and acquisition world: “Time kills deals.”

It’s true. A business sale can take 12 months or more to close, if not more, with multiple steps along the way. And any one of which could go awry and derail the deal. Once delays slow the process, buyers can lose interest or become skittish about whether the business is worth the asking price, or they can divert their attention to other similar companies in the marketplace.

This is not the time to let obstacles delay the deal. The best way to avoid delays is to invest the time and energy in preparing to address the buyer’s questions and needs.

Preparing a business for sale is not a simple task. It is time consuming and complex, even for well-run companies. Compare it to preparing for an exam to get into a post-graduate school, or for a professional license. Your “test score” – or in this case, the sales price and underlying terms & conditions as part of the sale – will be contingent upon how much time you invest in studying. Having a good business isn’t enough. You also must be prepared to provide a potential buyer with all the information they need to make a timely decision and prepared to speak in response to the information provided.

Here’s why timing in the final sale phase is so important.

The Three T’s

Before we dive deep into timing, let’s first visit something that we call the “three T’s” of value creation specific to how deals are typically structured between a buyer and a seller:

  1. terms,
  2. taxes and
  3. timing.

Terms: The terms of a deal receive the most attention and rightfully so: what is the sales price? How much cash will be exchanged up front? Will there be an earnout period and if so, how long? The companies better prepared to sell are the ones that typically receive a higher sales price for their business, and typically under more preferential terms and conditions (excluding any industry or other situations specific to certain transactions). And in some cases, regardless of financial performance.

Taxes: Company sales are almost always structured as a sale of the company’s assets (i.e. an asset sale) or a sale of the company’s stock (i.e. a stock sale) Without getting into the specifics – a seller should be aware of not only the pros and cons of each sale concerning taxes, legal liabilities, etc., but also how the impact on each sale structure relative to each legal entity (i.e. C-Corp vs. S-Corp) as well as the structure that “makes sense” given their business and the respective industry.

All this said – the companies who invest in the time to properly prepare their businesses for sale stand a better chance of negotiating structure with a buyer in a more tax-advantageous way for the sellers. It’s a negotiation we’ve seen buyers willing to make for companies they really want to buy.

Lastly: The timing of the deal. The most often overlooked but important value driver when it comes to selling a business. Simply put, using the principles of time, value and money within an exit plan can be one of the most effective “hedges” a business owner can make when it comes to maximizing the value of a company sale. The business owners proactive in preparing their companies for sale are the ones who often find opportunities to improve their businesses while preparing, and in the process, generate more profits and subsequently, can pull more money out of the business prior to sale.

The company owners who are prepared and ready to sell, often sell their businesses on the first attempt, and in a shorter amount of time compared to those who don’t. Which leads to a longer window of time for that money to be invested and grow exponentially over time. Hence why we consider timing to be such an important “hedge strategy” when it comes to maximizing the value of your exit.

In summary, it’s not just the sales price you are offered by the buyer. It’s the sales price, plus “how you are paid” plus the taxation on the sale, multiplied by the timing.

How to Prepare for a Business Sale

A buyer will often provide a checklist of the many pieces of information they want to see during the closing period. This list often includes (but not limited to) the following:

  • Financial statements
  • Income statement
  • Financial forecasts
  • Analysis of recurring and non-recurring income
  • Contracts
  • Vendor lists
  • Customer lists
  • Sales reports and an analysis of any concentrations the company may have in customer groups or marketplaces
  • An analysis of synergies between what your company does and what the buyer does

Don’t wait until you are under LOI to begin organizing your information for a buyer’s request list. This is your study guide. Start studying as early as possible, and just like in school, don’t “cram for the exam” and never try and “wing it

Assembling all this information takes time, and a business owner who anticipates it years in advance can invest the time and management energy in getting the information ready for when it is needed.

Pitfalls that May Impact Timing

There are many pitfalls on this journey, and some are more common than others:

  • Not being mentally prepared. This is one of the most common pitfalls that derail business transactions late in the process. Business owners decide to sell before they think about what they will do in retirement, what their lives will look like and what will happen to their companies. Then, as they’re ready to sign the papers, they back away and cancel the deal, leaving a lot of money on the table.
  • Not investing in the actual sale of the business by understanding and preparing for the questions a potential buyer will ask.
  • Not investing in updated accounting and financial systems and personnel. Many deals are lost due to incomplete or inaccurate financial records.
  • Not investing in the team. Your people are your greatest asset, and buyers want to know key personnel will stay with the company to ensure its continued success.
  • Not being proactive and talking with trusted advisors ahead of time about how long the process will take, and what to do to get it started.

Five Key Considerations

Going into the sale – the “final exam” stage after all your preparation – it’s important to keep in mind five key considerations:

  • Know your life. Have an honest discussion with yourself and perhaps your family about what you want your life to be like after selling the business. Take time to mentally craft a life that you would be happy to transition to. Give yourself something to look forward to so selling the business doesn’t feel like a loss.
  • As you consider your post-sale life, understand how much money you will need to live that life. Perhaps you’d like to travel or buy a second home. Talk with your spouse and a financial advisor to help envision what you will need and how you will get there.
  • Identify the right buyer. Not just any buyer, but the type of buyer that you will feel comfortable transitioning your company to. Are you concerned about your employees? Your long-term customers? Make sure to communicate that to any potential buyer.
  • Consider what a realistic sale will look like. Is your asking price realistic, considering the condition of the company and the current economy? Have you done everything you can to maximize the company’s value? Are you willing to negotiate the deal structure in order to get the price you want? This may include, for example, getting 70% of your price up front and staying on with the company as an employee for a three- to five-year earnout period to get the remaining 30%.
  • Consider your team. Who needs to be involved in the negotiations? Usually, the team includes your CPA, attorney, an investment banker, your wealth advisor, any business partners you may have, and other key stakeholders. If family members are involved in ownership, they should be at the table from the beginning. Get your team involved early and often. A deal can blow up late in the game if a key stakeholder feels they have been left out, or if advisors find issues in the deal structure that need to be renegotiated.

Questions?

Every business owner wants to maximize value, and they know what their value drivers are. But when it comes to envisioning their exit, many owners say they don’t care how long the process takes. Owners must understand that there’s a correlation between the time you invest in preparing for a sale and how quickly you can get to the closing stage. Failing to prepare and, as a result, slowing down the sale process benefits no one.

If you would like to discuss advance planning that will help your company navigate the exit process when the time comes, contact an Adams Brown advisor.