Selling a Business: 7 Considerations
Selling a business takes planning, patience, time and talent. If you’re thinking about selling yours, print this post out and keep it on your desk or tape it to your mirror so you see it everyday.
1) Type of Buyer
As a rule, buyers fall into three categories. Financial BuyersFinancial buyers make up the largest portion of the buyer pool in the Main Street and Lower Middle markets. Financial buyers are looking for something to do that will generate a handsome cash flow. In many cases, they are corporate refugees that want to get out on their own; to control their own destiny. This could be a solo entrepreneur or two or three friends or co-workers.
Strategic BuyersStrategic buyers are oftentimes larger companies that are seeking a competitive advantage by buying a smaller competitor to extend their customer base or a way to broaden their product or service offering by acquiring a business that offers a product or service that complements the acquiring company’s products or services.
EmployeesAn employee buyout – in whole or in part – offers loyal employees an opportunity to participate in the business’s future growth, a fact that will have the ancillary benefit of motivating them to preform at their highest level.
2) The Valuation
While not always the most important aspect of the transaction, the value of a business is usually what is the most contentious.
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3) Transaction Experience
The sales process is an intricate one. One of the choices facing business owners initially is whether they’ll handle the transaction internally or hire professional advisors. A business owner trying to sell his or her own business is comparable in its wisdom to an internist trying to replace his own liver. And remember the old adage that a lawyer that represents himself has a fool for a client.
4) Identify What You Want in a Buyer
Before the process begins and with the help of a team of talent, list a number of specific attributes you think the ideal buyer must have. Such a list might include factors like any necessary technical expertise, financial capacity, future planning and, in the case of a partial sale or “earn out“, compatibility with the seller and key employees. Such a list will be critical in evaluating the buyers and such evaluation is important from the standpoint that, in most case, all buyers are not good buyers. How so? Well, somewhere north of 80% of all business transfers involve some component of seller financing. If the seller is dependent on the buyer making payments for the purchase, the seller has a vested interest in the continuing success of the business. Beyond that interest is the seller’s legacy. Many sellers have spent years building their business and see it as how they’ll be remembered. The question to ask late at night is, will the buyer preserve that legacy?5) Prepare for the Due Diligence Process
A major aspect of the sale and purchase of a business is the buyer’s due diligence. A buyer is going to want to dig deeply into all aspects of the business to make sure he or she is getting what they think they’re getting. This process can seem intrusive but the seller should ask themselves what they would want to see if they were buying the business.
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6) Tax Consequences
In most countries and jurisdictions, the sale and acquisition of a business has tax consequences – sometimes significant ones. If a seller isn’t familiar with them – or been advised by someone who is – both the short and long term financial results could be wildly different from what the seller was expecting Such consequences will vary depending on how the transaction is set up. This is where an experienced transaction attorney and good tax advisor will pay for themselves many times over.7) The Actual Transition
Most smart buyers will want the seller to stay on for some period of time. The complexity of the business will impact this as will the seller’s day-t0-day involvement as the “face of the company” in the several years leading up to the sale. We’ve been involved in transactions that required the seller to stay on for as little as 30 days and as long as three years. The value of the seller’s time is part of the purchase price the parties negotiate. The seller can be paid as an employee or an independent contractor. This aspect can also be part of an “earn out“, a concept that the price paid for the business is dependent on its performance over a certain amount of time.The Bottom Line
Selling a business has an enormous impact on the sellers and, if not handled properly, can result in years of regret. The issues mentioned in this post are just some of what must be considered by a business owner. And to do this correctly and to assure the best result, planning – and plenty of time – is required.