Planning for the sale of a business is at least as important as the creation and operation of your business. The time to plan for the sale of a business begins the day it is formed. Why? Your business may be great for you, but no one wants to inherit problems. A “clean” business gives comfort to a buyer that can result in a larger sales price,or a quicker sale. Here are our tips to make your business attractive to a buyer.
- Form an advisory team. Selling a business is extremely complicated. Seek counsel from your attorney, accountant, banker, financial adviser, appraiser and business broker. Plan several meetings and assign roles to each person that fits their skills and temperament. Being prepared won’t scare away a buyer; they expect you to seek professional guidance.
- Increase the profits of the business. Many owners minimize their profits for tax reasons by maximizing equipment purchases and other business expenses. Increase the bottom line and show a trend of increasing sales and profits. Those actions will give you an increased valuation and a larger purchase price.
- Conduct a legal audit of the business. Many owners wait until a sale is pending to conduct a “due diligence” review. This will delay the sale or reduce the selling price. Instead, update the corporate books; finish any patent or trademark applications; get confidentiality signed agreements with key employees; review leases, purchase order forms, and contracts with key vendors and customers. Many of these agreements have restrictions on assignment that can hinder the sale. Make sure any pension and benefit plans are in compliance. Review and revise the employee handbook and policies. Settle or win any outstanding litigation matters prior to putting the business on the market. No one wants to buy a lawsuit either before or after the sale.
- Do some personal and business tax planning. The form of the organization can severely impact the taxes on the sale of the business. Tax planning is imperative and must be started early. Most buyers want to buy assets of a company rather than the stock so that no liabilities are inherited. Sellers want to sell stock to benefit from the reduced capital gains rates. Sale of assets in a “C” corporation can result in double taxation to the shareholders. In an “S” corporation gain on the sale will pass directly through to the shareholders. Sale of equipment can result in recapture of depreciation at ordinary income tax rates. Sale of personal “goodwill” can help reduce the gain in the corporation and consulting arrangements are also used to funnel cash outside the corporation to the owner.
- Figure out the potential buyers of the business. There is a regular supply of middle managers leaving larger companies who have the desire to run their own business. Often, these managers have stock options, severance plans and other sources of cash to purchase a small business. Other potential buyers are key employees, competitors, family members or partners. If you can’t locate a buyer, a business broker can help find buyers and screen potential purchasers. Buyers should be qualified financially to put at least a 25% down payment on the purchase price.
- Prepare a package for potential purchasers. You will need a one- or two-page financial summary, an executive summary and a more detailed description of the business for potential purchasers. Don’t provide more information until the potential purchaser signs a confidentiality agreement. Buyers expect to see five years of financial statements and tax returns, accounts receivable aging, accounts payable aging, key employee agreements, key customers and vendors, corporate records and a host of other documents during the due diligence process.
- Avoid trollers. Some interested purchasers are bottom fishing for “deals” or just fishing for information on your business. Be careful how much information you disclose in the initial meetings until their true intent can be identified. Be especially wary if a competitor wants to purchase your business.
- Prepare a “letter of intent” prior to drafting sale documents. A non-binding letter of intent contains the key business sale terms which are then turned into sale documents by the attorneys. Problems in a deal can be uncovered as the letter is prepared. Failure to address key issues in the letter of intent will doom the sale.
- Keep your employees happy! Your business will be more valuable if it has loyal and well-trained employees. Sale rumors arise despite your effort to keep the deal a secret. Employees get anxious about business sales and their role with the new owner. Consider sharing some of the sale profits with your employees in the form of a “bonus”. That will keep them motivated to keep the business healthy.
- Plan what you are going to do after the business is sold! Amazingly, some sales fail because the business owner discovers seller’s remorse at the last minute. They cannot part with such a big part of their life. To cope, some sellers remain with the business as a consultant to help with the transition. If you can’t retire on your proceeds, use them wisely to start your next business venture or purchase! Above all, take a break after the sale to do some of the leisure pursuits you always wanted to do.
Buckley Law P.C. is well equipped to assist both the seller and buyer in the business purchase transaction. Our firm of 22 lawyers and 16 staff (including experienced paralegals) help give us the efficiency and depth to handle complex transactions. We work with our clients and their advisors for a successful transaction. While we protect our client’s interests we want to be known as dealmakers, not deal-breakers!
For more information on our business sale and transaction services, please call Rob LeChevallier at 503-620-8900 or email me at email@example.com.