CEO Advisor Newsletter August 2020
10 Key Items Before Selling Your Business
Focus on the following 10 items to gear up for the sale of your business:
1. Put Together the Right Team of Advisors as a First StepUnless you have previously managed the sale of a business from A – Z at least 3 times, you should not try to sell your own business. In fact, you should never try to sell your own business for many reasons. If you wouldn't sell your own house – which is an extremely simple process compared to selling a business – then don’t pretend to have the expertise, experience and time to sell your own business. Hire an M&A advisor like CEO Advisor, Inc. to advise you and manage the entire sale process.
2. Prepare in Order to Maximize ValueCEO Advisor, Inc. has over 3 decades of M&A advisory experience. We provide a full service from preparation to closing.
Focus on these areas and others with an M&A advisor in preparation of a successful sale process:
- Business Structure: Cleaning up the Capitalization Table can simplify the transaction and avoid problems when the business is sold.
- Management Team and Key Employees: Your key management team members are critical to selling your company. What will keep them from leaving, or competing with the business? Will they have an incentive to stay and help the business be successful after the sale? Review any key employment contracts to make sure your management team will work toward a successful sale.
- Financial Reporting: Are your financial statements clean and up to date? Do they reflect the latest GAAP accounting methods? Have you considered audited financials by a respected CPA firm?
- Intellectual Property: Is it clear who owns your IP? Ownership ambiguity often diminishes value and creates bumpy negotiations with a buyer or investor. Intellectual assets are often the most important asset in your company (other than your key people).
- Management Presentation: Optimize the value by creating a Teaser presentation and a comprehensive Management presentation to inform and educate potential buyers on the full value of your business.
3. Be Ready for Due DiligenceDue Diligence is an extremely intense and rigorous process. You will be expected to provide a lot of information about your company to the prospective buyer in a very organized and systematic process. Preparing in advance and placing certain information in a virtual data room will greatly enhance your value and sale process. Your M&A advisor will advise you and manage the entire preparation process in advance of Due Diligence, as well as, the entire Due Diligence process.
4. Understand the Value of Your Business from a Market PerspectiveIt's very common for a business owner to fixate on a sale price in advance. There are several ways to approximate business value and comparables of similar sold companies can be extremely helpful. It’s important to determine who the likely buyers are and why they would want to buy your business. Your M&A advisor will provide reports with comparable sold companies to assist you in understanding valuations.
5. Understand Your Key MetricsAll businesses track metrics and face operational issues along the way. It can be difficult to be completely objective. You and your M&A advisor need to make realistic assessments and track key metrics. This will better position the company for a successful sale. Make sure that you address the operational weaknesses. This allows you to better plan how best to disclose and control your message to potential buyers.
6. Control the Sale Process to a Great DegreeUsing the experience and expertise of your M&A advisor, define your list of targeted prospective buyers. Prepare and have a plan for an optimal exit. Create a LOI template for the buyer to use and set deadlines for both Indication of Interest letters and Letters of Intent. Manage and control the Due Diligence process and get sign off on the Due Diligence process before getting sucked into the legal contracts, time and expense wise. Use what leverage you have as a seller to close timely and on your terms.
7. Make Sure Your Management Team Stays Focused on the Business It is all too common for buyers to come back to the table right before the deal closes to ask for a price concession because the financial results for the months just prior to closing didn't meet the Forecast. The primary cause of the weaker results is because everyone on the management team was focused on the deal instead of on running the business. Make sure you assign who is managing the business and who is working on the transaction. This is another advantage to using an outside M&A advisor. Your management team may be seasoned at growing and operating your business, but the odds are they are not skilled at selling a business, and this can lead to a disastrous result absent the expertise and experience of an M&A advisor.
8. Consider Your Situation Post-DealYou should go into the sale process by planning on working for the buyer for at least 2 years. Your plan to sell should anticipate the extent to which you wish to give up control of the company, as well. These are just some of the considerations that you need to evaluate long before completing a deal, and your M&A advisor should lay out your options for you. If you wish to continue to lead the company or retain some upside opportunity after a deal, make sure a clear Earn Out or stock participation is in writing, and that they are reviewed by your transaction attorney.
9. Consider Your Tax Exposure Well In Advance of a DealThe largest impact on a primary shareholder will be on the deal structure, especially an Asset sale vs. a Stock sale. An Asset sale benefits the buyer in both protection against liabilities and in taxes, but a Stock sale is highly advantageous to you tax wise as a seller. The purchase price and the amount of cash received at closing are also major factors from a tax perspective. There are many tax issues that come into play and your M&A advisor will provide business advice and your tax advisor will provide tax advice to save you substantial money.
10. Have a Solid Post‐Sale Personal Financial PlanYour business may be your most valuable asset. Seek advice on how you will invest the proceeds to make sure you have adequate assets to reach your long‐term financial goals. Your plan should consider the following:
11.The projected tax to you on an Asset sale vs a Stock sale.Whether you should take more cash at closing, accept any stock or consider an Earn Out and for how long.
- How will you fund the tax liability associated with the deal?
- How should the proceeds be invested to replace the income from operating the business?
You’ve worked extremely hard to create a successful business. Selling your business is a rigorous task. The rewards for early and careful planning will be well worth the effort and pay huge dividends.
Contact Mark Hartsell, MBA, President of CEO Advisor, Inc., for a free initial business consultation at (949) 629-2520, by mobile phone (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us today at www.CEOAdvisor.com for more information.