Selling a Business: The Basics
06 December 2021: Selling a Business/The BasicsThe last dozen or so posts on this blog have been about some of the specific – some might say “esoteric” – aspects of selling a business. Though all of those aspects are important to consider during the preparation process, when selling a business there are a handful of basic issues that should be examined upfront; BEFORE the business is ready for market. Let’s look at a few of the most fundamental of these.
Type of EntityWhat the organizational structure of the business is impacts how the sale might be structured. In the U.S. a business might be structured as a sole proprietorship, owned and operated by a single person; a partnership, limited liability company (LLC) or corporation (either “C’ corp or “S” corp). Any of these – other than a sole proprietorship – could involve multiple owners. But any of them could also be owned by a single person. Many none-U.S. jurisdictions have similar choices for entity structures, albeit with different titles. If you’re a broker, make sure you understand the type of entity your client’s business is and what the options are. You may feel it would be wise for your client to convert before selling. Because the potential liability that attaches to the owner in each of these various organizational structures, our experience suggests that only the smallest businesses are organized as sole proprietorships. For every business with more than one owner – even the smallest businesses – one of the other entity structures is used. _____________________________________________________________________________
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Tax IssuesThe sale of any business should be reviewed – in advance of coming to market – by the company’s accountant and the owner’s financial advisors. Every business sale will have tax consequences and those consequences, as well as the structure of any business sale, will impact what the seller walks away with in the form of net proceeds at sale. The questions that must be answered are: 1) are there ways to reduce the tax bite and, 2) will the net proceeds be adequate for what the seller plans to do post-closing. When selling a business, these questions are among the most basic ones to ask early on – and long before the decision is made to come to market. We’ve often witnessed deals in jeopardy – or even collapse – when the seller realizes at the 11th hour that the proceeds of the sale will be inadequate to fund the life they envisioned after the sale. When this occurs, it’s not pretty.
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Understanding the ProcessWhen selling a business, the business owner must be counseled that selling a business is a process and they must understand that process. Selling a business takes time – anywhere from four to 12 months – and sometimes longer – for a properly-priced business. And “properly priced” is the operative phrase. A business that is brought to market at a price significantly higher than its value almost always guarantees a long, painful, unpleasant and generally unsuccessful experience. We’re approached often – generally by real estate agents or business owners that have tried to do it themselves – asking if we can help salvage what has often turned into a real disaster, all because no one involved understood the process of valuing and selling a business. The seller must be prepared for, among other things, fact that their business will not sell as quickly as a house. They must understand that the due diligence process (more on this in a moment) is likely to seem inordinately invasive – and that they cannot take invasive process “personally”. They have to understand that the buyer simply wants to know exactly what they’re getting – good and bad – for their money.
Due DiligenceWhen used in the context of selling a business, due diligence is the investigative process a buyer goes through when researching the industry and deep-diving into the target business. During the process of studying the business that’s being targeted, the buyer wants to scrutinize every aspect – important and otherwise – of that business. This is when the process can start to feel “invasive” to the seller. The buyer is sure to request all sorts of documents, data and random miscellaneous stuff in an effort to confirm everything the seller is claiming or that appears in the business broker’s Offering Memorandum. The seller must be prepared to provide a host of financial documentation including several years’ of profit and loss statements and tax returns, receivables, loans, financial obligations, balance sheets, payables and past tax filings. And aside from all the financial documentation, the buyer will want to examine all legal agreements and contracts, information on employees, including any employment contracts, salaries, benefit agreements, etc. Likewise, the seller will be asked about any union contracts as well as any potential legal and environmental issues. The company’s reputation – both in the community in which it has a presence and in its industry – is important. The seller needs to know that the business’ social media posts and campaigns will be reviewed. Are there controversial or highly partisan posts on FacePlant or the Tweety Bird? Clean ’em up before potential buyers start looking.
The Bottom LineThese basic issues must all be addressed as part of the preparation process, not three days before a buyer shows up for a walk-through. If you’re a business owner thinking of selling your business, a professional business broker will be able to guide you through the preparation process – including what talent should be part of your team – as well as directing the marketing, negotiations and final sale of the business. But notwithstanding the amount of work this entails, if you still plan to try to sell your business yourself, at least prepare yourself for the amount time a sale is likely to require and the depth a buyer is likely to go through in investigating your business. And if you are such a business owner, it would be wise to remember the old saying about lawyers: “A lawyer who represents himself has a fool for a client.” And for goodness sake, get a business valuation done by someone who does that kind of thing for a living! Putting a price on your business based on what you “want” or what you “need” or what you “think” it’s worth will guarantee one of two outcomes: you’ll leave money on the table or, FAR MORE LIKELY, your business simply won’t sell. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
Searching For…This week’s “Searching For” item comes from our colleagues in the U.K. looking for a hosting or managed service provider with revenue of anywhere between £500,000 and £2.5 million ($650,000 and $3.25 million). If any of you know of something that might fit, please let me know.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.