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How to Sell a Business

By Brett R. Pernicano on June 2, 2021
Categories: EXECUTIVE COMPENSATION

Deciding when and how to sell a business isn’t something most business owners do frequently. Unless you are a serial entrepreneur, the sale of your company could be a once-in-a-lifetime opportunity to capitalize on years of hard work. Preparing well in advance with your financial advisor can create a smooth transition while also maximizing the businesses’ value you and your team have built.

Here are the five primary steps involved with selling your business to help prepare you for the process.

Prepare Your Company Management

As a business owner, one of the most important parts in understanding how to sell a business is creating a thoughtful transition plan. This benefits you, your employees, and prospective buyers. Depending on your industry, implementing one or more of these tips could better prepare your business to attract more buyers at a favorable price.

Systemize Operations

Put plans and systems into place that prepare the company’s transition to new ownership. Employee manuals, a business plan, and other key documents show buyers that the company is set up to transition well and maintain profitability. Not only will the new owners have comfort that systems are in place to continue business as usual, but this information can also help them scale and grow more quickly.

Incentivize Key Employees

Consider creating incentives to keep your key management members with the company after your exit. They are critical to the continued growth of the business and will assure buyers that the business will continue to operate in the way that previously made it so successful. In addition, keeping your top employees abreast of the situation can soothe concerns they may have about the impending sale of the business.

Different incentive options to explore include contracts, bonuses, or stock options depending on the nature of the business. You may also include employee agreements with non-compete clauses and non-disclosure agreements. Putting these contracts in place early on can lower the risk of your employees leaving before or right after the sale.  You may want to consult an employment attorney or other specialist to ensure the appropriate level of compliance is maintained during the pre-transaction process.

If you are wondering “what is business exit planning?” or  how to plan your business exit strategy read our blog.

Organize Company Financials

Start preparing your company’s finances early in the selling process to prepare for your sale. This process can take months or years and is critical in extracting the maximum value for your business.

Prepare Financial Statements

Work with your accountant or CFO early on to prepare the company’s financial statements. This information gives prospective buyers the best snapshot of the company’s performance and financial health. Look at both the profit and loss statement as well as the balance sheet. You can also create a cash flow projection to identify upcoming opportunities that will likely impact the business.

Gather Other Documents

In addition to your financial statements, buyers may want to review other relevant documents:

  • Tax returns: Pull at least the last two years of your company’s federal and state tax returns. It verifies profits and gives buyers deeper insights into the business’s true performance.
  • List of tangible assets: This gives buyers an idea of any equipment and property attached to the business. Include both purchase price and current value.
  • Additional explanations: If there is a unique scenario affecting any aspect of the business (past or present), you can explain it in a letter. For instance, you may explain any debt arrangements that may not be relevant after the sale.

Improve Operations

Make your company operations as efficient as possible prior to the sale. You might adjust inventory levels or streamline business lines. You may also want to review your business’s online reputation and make changes based on search results. Bad reviews or poor press could impact your ability to sell the business.

Get a Third-party Business Valuation

A business valuation from a third-party helps to remove any potential blind spots on how the company is perceived. Plus, it gives you a realistic financial projection that you can use when determining your own next steps. Here are some considerations a third-party company looks at when calculating a business valuation.

Net Income

The company financials are obviously a major part of the valuation. Net income is used to gauge profitability. Both current and past financials are used for this part of the valuation. Past data will also be used to figure out how much the company has grown each year and consider if that could easily be scaled into future growth.

Industry and Risk

The valuation looks at the industry and risk. It will look at the sales of other similar businesses to gauge potential market value. It also analyzes risks that may impact the future success of the business. The age of equipment, debt, and other upcoming challenges unique to your company and the greater industry are also considered.

Market Growth

Finally, a business valuation looks at your market’s growth rate and compares it to your business’s unique growth rate. It is better if your business is on or above par with the broader market’s overall annual growth rate. Your valuation could be lower if your company underperforms. Future growth projections are also considered as part of the valuation.

Accept and Evaluate Offers

Navigating the offer process is crucial. Many business owners enlist the help of a business broker or investment banker to prepare, market, and ultimately sell the company. They are your ally in the process and will help negotiate the transaction  on your behalf. Below are a few items to consider:

Pre-qualify Buyers

It is important to make sure you’re moving forward with a buyer who can financially close the deal. If the buyer will rely on lender financing to purchase the company, be sure to review their pre-qualification. A buyer is usually viewed more favorably if they are using at least some of their own capital to purchase the business. This shows they are personally vested and will do their best to help the company succeed — an important factor if you have employees who will remain and rely on the business.

Review Offers

Once you have one or more offers in hand, you can review the terms outlined by the potential buyer(s). If you have a standout offer, you’ll take the next step by disclosing more specifics of the company’s financials. Your broker will walk you through the process and help you weigh the pros and cons while minimizing the risk of a deal falling through.

Establish Your Personal Financial Goals

As you prepare for your next phase of life, whether it’s maintaining a management position at your current company, starting a new business, or entering retirement, it’s imperative you create or update your holistic financial plan to include any current and potential changes to your personal and financial goals. In pre-exit planning, this new plan will be the framework by which you evaluate potential suitors and transaction structures. Working with an experienced financial advisor like Dowling & Yahnke can help you in the planning process to maximize the opportunity.

Investments and Retirement

No matter how old you are when you sell your business, it’s important to make the best investment decisions for both now and the future. Work with your financial advisor to make the most of your sudden wealth, while considering your risk appetite and your overall portfolio diversification.

Tax Minimization

A major windfall in one year can have a major impact on your tax responsibility. Together, your financial advisor and tax advisor can help you balance achieving your goals and minimizing your taxes. Charitable giving is one option, especially if you already have philanthropic causes you support. There are many ways to do this, including through a donor advised fund, a private family foundation, or a charitable trust.

You might also start thinking about estate planning, and how your actions today could potentially reduce taxes for your beneficiaries further down the road. Both your financial advisor and your estate attorney can help you through this process.

Major Purchases

In addition to planning for retirement and minimizing your taxes, you may also consider a major purchase, such as a second home or an extended vacation. Consider how to balance this type of one-time expense with your other financial goals.

The Bottom Line

Selling a business is more than a financial transaction — it’s an emotional journey that has the potential to set you up for even more ventures in the future. Prepare well in advance so you can make the most of selling your business. Also, be sure to understand the implications that come with any major financial decision. By seeking the advice of professionals early on and throughout the process, you’ll feel more confident in every choice you make.

Find out more about how to sell your business by contacting a financial advisor at Dowling & Yahnke Wealth Advisors.

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