You’ve started, grown, and now are looking to sell. When the exciting moment comes in your entrepreneurial journey to take steps toward offering your business for sale (or responding to a spontaneous offer), it’s important to be prepared. Understanding the process and the players can be the difference between a successful exit and a lost opportunity.
As early as possible, educate yourself and set the foundation for a successful sale. Prevent the death of your deal with the right preparation.
Before even beginning the process of entertaining prospective buyers, there are steps to take as a business owner that will position you to obtain the maximum return with the least disruption. Here are a few examples:
Contract with Sale in Mind: Whether with landlords, employees, contractors, vendors or customers, keep in mind your goals and intent to sell and set the contracts up accordingly. For example, does your lease allow you to assign it to a buyer of substantially all of your company’s assets? Is the non-compete signed by your star salesman assignable? Will your customers with long-term contracts have an out upon sale because you need their consent to assign the contracts?
Keep your Financial House in Order: Simply put, sloppy financial records make buyers nervous and that devalues your company and will lead the Buyer to demand more protections in the form of hold-backs of the sale proceeds and indemnification obligations that can last for years. Make sure you have proper P&L, balance sheets and tax returns for the last 3 years. Are you in compliance with GAAP? How about detailed budgets? Do you know your COGS (cost of goods sold) and profit margins? It’s highly advantageous to have a financial team on your side from the beginning to keep the books clean and organized with your goal to sell in mind.
Understand How Your Company is Valued: If you listed your business for sale today, do you know what price you would ask for it? More importantly, do you understand the valuation method that led to that price, and whether it is the most common method for your goods or services? An experienced valuation expert and an M&A advisor can help you understand how your business is valued – and who will pay the most for it. As an example, a strategic buyer who can leverage your business as a footprint in a new geographic market and apply its economies of scale to your operations will typically pay more than a buyer who is new to the industry. Once you know your valuation metrics and your optimal buyer characteristics you can continue to grow and later package your business in the most desirable manner.
“Setting realistic valuation expectations and having a clear understanding of those factors that could adversely affect valuation will help you mitigate valuation risks and ultimately drive value,” commented Wendy Andrews-Fine, Vice President of Aberdeen Advisors, Inc. “Understanding the current market conditions and how those apply to your business will help you make better decisions. Diversifying your customer base, improving your financial reporting integrity with GAAP-compliant financials and having a strong management team in place are key factors that will help you achieve your target valuation.”
It’s important to include all key players in the acquisition process early and often. Choose a team that has experience with entrepreneurs and has completed acquisitions in the past. Your team should include:
Once you have your team, put together a communication plan and pre-schedule meetings out for three months. And remember to educate your team on your core values and what matters to you most: Is it the bottom line financial outcome of the sale? The legacy of what you built? Protecting employees? Being offered ongoing employment by the buyer? Cutting all ties at closing with an all-cash deal?
With the foundation set and team in place, the acquisition process has six main components with much to consider and plan out with your team. It’s important to set expectations of your involvement and intent early, avoid any litigation, and be ready to walk away if the deal isn’t what you were expecting.
Make sure you are in control of who accesses these folders and that confidential information the Buyer should not yet see is redacted (examples are customer names and social security numbers of employees). This is the time to review your records; you don’t want to have your prospective buyer point out that some of your contracts are unexecuted or expired!
With so much important information at play, there are key questions to consider and decide on with your acquisition team to reduce your risk in the acquisition process.
Protecting Confidential Information
Questions to consider early:
If you are looking for guidance on the sale of your business – or if you are looking to buy a business – get in touch with our mergers and acquisitions team at Hunter Business Law. We can assess your readiness, help you prepare, bring together an experienced team and guide you every step of the way.
DISCLAIMER: This blog is for educational purposes only and does not offer nor substitute legal advice. Additionally, this blog does not establish an attorney-client relationship and is not for advertising or solicitation purposes. Any of the content contained herein shall not be used to make any decision without first consulting an attorney. The hiring of an attorney is an important decision not to be based on advertisements, or blogs. Hunter Business Law expressly disclaims any and all liability in regard to any actions, or lack thereof, based on any contents of this blog.
Thank you for taking the time to consider Hunter Business Law to assist you with your legal needs. We appreciate you reaching out to our firm. However, due to our commitment to current client matters and to ensure we are meeting the needs of our existing client base, we are unable to onboard any new clients at this time. Again, we appreciate you reaching out, and we wish you the best of luck with your venture!