Selling your business may be the single most important business decision you'll ever make because unlike most other business decisions, you'll only do this once. To ensure a successful financial and personal outcome, you must understand the selling process, formulate your plan carefully, leverage the help of professional advisors, and think through your motivations and priorities in advance.
Before you begin the process of selling your business, there are several questions you should consider:
What are my primary motivations for selling the business?
What are my priorities for a sale?
When should I sell (transaction timing) and how long will it take?
Which professional advisors do I need?
Primary Motivations
A successful exit plan begins by understanding your primary motivation for selling the business. Sometimes the reason is obvious and may include reaching certain life stages, business development initiatives, market timing, or just hitting a wall with your existing capabilities.
Understanding your motivations will help shape your exit priorities. For example, if your motivation is to retire or to start a new business, then staying on for an extended period of time after the sale is probably not an option and the deal structure should reflect this. Conversely, if the primary motivation is to take advantage of current market factors then the time to market and valuation may be critical. It is important to know where you want to end up after completing the process before starting down the path.
Priorities
Once you've decided why you are selling your business, you will need to determine what aspects of the sale are the most important to you. Do you want an all-cash deal, or are you willing to finance part of the sales price? Is it important to you that all employees or perhaps a family member remain with the business? How important are certain tax advantages that may accrue as a result of the sale? What is your bottom line price, under which you will not consummate a transaction?
As in most negotiations, neither party will get everything it wants. An eventual deal will be a series of compromises. Rarely will a sale meet all of the seller's objectives, so it's important to identify your "must haves" before beginning. In most transactions, the terms and conditions are driven by the buyer, while the pricing and form of consideration are driven by the seller. The more flexible you are on the terms and conditions, the closer you will come to realizing your expected purchase price.
Your motivations and priorities are fundamental to everything that happens in the sale. Write them down and refer to them when talking with your advisors and during deal negotiations. Your professional team needs to understand your goals to do the best job representing your interests to prospective buyers.
Transaction Timing
Timing the sale of one's business can be more 'art' than science or analysis. The truth is that quality businesses get sold regardless of the economic climate, industry trends or current Wall Street conditions. It is true that when these factors are on an up-swing it may be easier to sell, but ultimately a business will sell based upon the needs of the engaging parties and this may be less dependent on outside variables than on the specific strategies of the seller and buyer.
Given these factors, you should always try to target favorable market, industry and economic conditions but know that the existing condition of your business will be infinitely more crucial in getting the deal done.
On average, once your business is on the market it may easily take up to a year to find a qualified buyer and complete a deal. If you plan to sell to existing management or family members it could take considerably longer based upon the deal structure.
Planning for a sale should begin as much as two years in advance of the expected exit strategy. In a future installment we'll discuss preparing your business for sale and when to implement these strategies.
Professional Advisors
Even if you are comfortable in areas of finance, valuation and law, selling your business is not a job you should attempt to do with only "in-house" resources. Even for a small business, there's a complex set of federal, state, and local regulations, tax issues, various contingent liability and indemnification provisions to consider. Using the right professional advisors at the appropriate time will help minimize natural risks associated with the transaction.
Perhaps a more important consideration is that the process of selling can take a lot of time. The more involved you are with it, the less time you'll have to spend actually running the business at the very time when you need your business to run most successfully. You'll be much better off leaving some of the work to experts and instead maintaining focus on your existing business operations.
There are a number of professional resources that will come into play during the process, although it's possible that the same individual or firm may fill more than one. Your advisory group might include an experienced accountant, lawyer, business broker or investment banker, valuation or appraisal expert, tax expert, and perhaps key members from your in-house team. Not all of these professionals will be required in each and every deal; it depends on the size and nature of your company and the potential complexity of the transaction. Expect at a minimum to involve a transaction lawyer and CPA versed in the applicable tax implications.
Summary
There are a host of considerations and complexities to take into account as you contemplate selling your business. The key first steps are to clarify your motivations and priorities, understand the process, and surround yourself with a professional team of advisors to help guide you through it.
In next month's issue, we'll look at the steps of getting your business ready for sale, valuation, targeting the right buyers, and managing the sales process.
