Before putting your business up for sale you must give careful consideration to your reasons for doing so. You will probably be asked about your reasons for selling by potential buyers, who will need to be comfortable with your motivation and answers.You need to consider four key questions:
- What are my objectives as the owner of the business?
- What are my objectives as CEO of the business? For example, you might want to retire as soon as possible, or prefer to have an on-going involvement with the business.
- What are my objectives for the business itself? For example, the business might need new investment in order to grow.
- Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.
Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. You may also sell a majority of your business providing upside in the future due to additional growth from the investors.
There's a range of other exit routes that may suit your needs better. If you want to retire but already have enough money, you could pass the business on to your children, or you could sell to your employees.
Methods to Sell
There are various ways you could sell your business, with the options available depending on factors like your business type, size and market. Most businesses are sold in an Asset Sale to another business, usually to a public or private company operating in the same or a related field.
Other options available to you could include:
- Selling all or part of your business to a private equity firm (typically requires $10 million in sales and $1.5+ million in EBITDA (earnings before interest, taxes, depreciation and amortization)
- Finding a private buyer who wants to run his/her own business
- A management/employee buyout - perhaps with the help of a venture capital firm or bank loan
- Attracting a private investor who acquires and invests in the business without managing it and typically sells it in 3 - 7 years
There are several different sale options - the one best for you will depend on your individual circumstances. The buyer will also have an opinion on deal structure and how they wish to make an acquisition, so you'll need to know what you want to achieve and how you would like to structure a sale early on. This will save time and money, and avoid unnecessary delays, taxes and other issues.
Instead of selling the business itself, a buyer will typically provide a Letter of Intent (LOI) to purchase the Assets - the property, customers, contracts, etc., without the liabilities, obligations and unforeseen lawsuits. In this case, the buyer will extend an offer to most or all of your employees at closing. You will be left with whatever assets and liabilities are not included in the sale. In this case, the needed business advice is an essential factor in deciding the most suitable deal structure.
Immediate or Phased Payment
You can ask for payment in full at closing or you may be prepared to accept payment in installments. The buyer may well prefer to pay in installments, and you may gain tax advantages, as well. But you will be at risk if the buyer cannot make future payments.
Some buyers will want to make a series of payments based on profits, in the form of an Earn out, in which case you may be contracted to stay with the business for a period of time to meet certain sales and profit goals for additional compensation.
LOI - The Offer
There are many variables that can be presented in a Letter of Intent (LOI). Your goal is to attract an LOI or an offer to buy your business from a strong buyer that represents a good fit to your goals. A non-binding LOI typically will come early on in the process, after a meeting or two and a review of your financials. Since the LOI is non-binding and typically the optimal scenario (the buyer may reduce the offer after due diligence), it is critical to have a 3rd party negotiator to assist you and help you maintain a good relationship with your buyer. A seasoned business advisor can add tremendous value in negotiating the best offer and in getting the deal done.
Preparing to Sell
It usually pays to start planning a sale well in advance. This gives you time to solidify the business - fixing any issues that could dramatically affect its value and making it as attractive as possible to potential buyers.
You also want to make sure your financials are in order and are ready for the due diligence process. More importantly, you want to operate your business to ensure you have recurring revenue with one, two or three year contracts to provide real value as a seller.
When to Sell
Selling at the right time can have a significant impact on the price you get for your business. If possible, plan ahead so that you can pick the best time rather than being rushed into a quick sale. For example, if you plan to retire in three years' time, it's a good idea to start planning the sale of your business now.
The reality is that a great buyer may call next month and you need to be prepared at all times.
Choosing Advisors When Selling Your Business
Experienced business advisors such as a corporate transaction attorney, tax advisor and business advisor, are essential for an effective sale. The right business advisor can have a big impact on the preparedness and success of your sale, and the amount you receive. It is extremely important to have an experienced, third-party negotiator help you through the process and negotiate a deal to your liking.
CEO Advisor, Inc. has several decades of experience in buying and selling companies. Contact us today for a free consultation at (949) 759-8676 or email Mark Hartsell, MBA and CEO of CEO Advisor, Inc. at MHartsell@CEOAdvisor.com.