Thinking of selling your business? Of course not. Our economy is in a significant recession, credit is tight, markets are down, and buyers are scarce. But, it is an excellent time to start thinking about selling your business, if that is consistent with your long-term plan. There are several questions that you should ask yourself now – in anticipation of the economy rebounding – so that you are well prepared and in a position to act quickly when the time comes. Our experienced lawyers can assist you with determining the right questions to ask and how to prepare to cash out and maximize the value of years of your sweat equity.
Things to Keep in Mind
There are several things you should keep in mind when you decide to move forward with a sale. Arriving at the difficult decision to sell is just the beginning. Preparing your company for sale requires an exit strategy set up months and, perhaps, years in advance. If you have been a careful planner, you likely have a succession plan in place, or at least the outline of your sale strategy. Thinking through a sale now, while you have ample time, will almost always pay big dividends down the road.
What is Your Company Worth?
What is your company worth in today’s market? And more importantly, what may it be worth in a better market when you are prepared to sell? There is no handy formula that can neatly and accurately predict a business’ value. Most private transactions are based on a multiple of cash flow. There are other methods as well, but if your company has a stable cash flow, that is a good starting point. You can also pay attention to what the market says other businesses comparable to yours are worth. Although there are often few direct comparables, similar business of similar size can be a helpful predictor. Gather as much data as you can about sales of businesses in your area. Trade associations and business groups also sometimes have very good data on how their members’ businesses are valued.
More Profit or More Taxes?
Look closely at how you are running your business and paying your taxes. Small companies often reduce profits so that they pay less taxes. If you show more profit and pay the tax on it now, you will be more than compensated for it with a higher valuation later. Also, if you are running any expenses through your business now that either the IRS or a potential buyer may question, now is the time to identify these items and plan to phase them out.
Financial Statements
You may also want to invest in either audited financial statements or, at least, financial statement reviews by a reputable accounting firm. Audited statements provide a potential buyer with a level of comfort that could translate into lower deal costs and a higher purchase price for you, with less chance of a future claim that your financial statements did not properly represent the financial results of the business.
Pending Lawsuits
This is also a good time to resolve any lawsuits or potential lawsuits involving your business, since any potential buyer will be keenly interested in any litigation where your business is the plaintiff or the defendant. Legal strategies and settlements are sometimes complicated and require time to set up, so planning now to extricate your business from any pending litigation will make things easier later.
Selecting Your Deal Team
You may think you can sell your business on your own, but the prudent owner recognizes the value that a team around him or her can provide. At a minimum, you will want your lawyer and your CPA with you from the beginning. Depending on the circumstances, you may also want to consider a deal advisor or business broker. The type of advisor you may add will likely depend on the size of the deal. Smaller deals may benefit from the use of a business broker, particularly where the broker knows the type of business and has a ready list of contacts. Usually, brokers are paid on commission, on a sliding scale basis. Larger deals may require the services of a regional investment banking firm. Often these arrangements call for a cash retainer and a success fee based on a percentage of the purchase price. They can be expensive, but offer you the benefit of significant experience, resources, and obtaining multiple bids or purchasers. After you and your team have determined a targeted price range for your business, you should then develop a list of targeted buyers. You may already know of someone who has expressed an interest. You may know of strategic buyers that can see the benefits and synergies that might come from the acquisition of your business.
After the Sale
Lastly, you may want to think preliminarily about what you want to do after the sale. Do you want to have a role in the business after it is sold? Do you want to buy a boat and sale around the world? Often, if the buyer does not have the expertise, they may be willing to pay a premium to retain you in the business, either as an employee or consultant. Most buyers desire the seller to remain for a period of time to “transition” the business. This may range from a few months to a year or more.
Plan for Success
Timing of your sale is critical. You want to sell in an up market, with up trends. However, now is the time to plan to meet that goal.
Our experienced lawyers can assist you with every phase of your planning and sale, be it pre-sale planning and advice, tax advice, pre-deal legal audits, real estate advice, or assisting with an offering memorandum, letter of intent, purchase and sale agreement, or other deal documents.
For more details, or if you would like to discuss selling (or buying) a business, please contact one the lawyers in our business practice group.
For more information about our firm, please go to www.dempseylaw.com.
