Selling Your Company Is A Process
By Maurie Cashman
Selling your business is a process. It is not like selling real estate. Confidentiality is maintained so that employees, customers and suppliers donâ€™t know that the business is for sale. According to Business Broker industry data, it takes on average six to twelve months to sell a business. There are many tasks that are performed in selling a business. Here are some examples and the time that you should plan to spend on each task.
Deciding to Sell Your Business
When there are several owners, make sure there is a consensus. If it is a family business, does your spouse agree? Do your children want to take over from you?
Use Experienced Professionals
Use professionals that are experienced in the issues involved in selling a business. Professionals could include: a Certified Valuation Analyst (CVA), broker, CPA, attorney and personal financial planner. Professionals should work as a team.
Clean Up Financial Statements
Most privately owned business have some expenses that are discretionary and would not likely have been incurred except that it benefited the owner personally, however, they are business expenses per the IRS. Some buyers may find it hard to justify adding back these expenses to determine adjusted profits. If there are expenses like this in your business, clean them up in the two or three years before you want to sell to improve the credibility of your financial statements.
Identify uncollectible account receivables and outdated inventory. If a potential purchaser uncovers these items during due diligence, they may think that you are hiding things and lose interest in the transaction.
If the business has underutilized, take action now. The selling price is not likely to reflect these assets.
Identify Important Risks, Problems, and Off Balance Sheet Items
Identify important risks, problems, and off balance sheet items early in the process. If they are not identified until due diligence it could kill the deal. Examples include: lease escalation clauses, deposits from customers, contractual obligations, employee incentives and legal threats.
Decide on Asking Price and Expected Price & Terms
Understand ahead of time what you are trying to achieve. This will have a profound impact on whom you contact, how you position a discussion and how you will resolve problems that will come up during negotiations.
Set Time Frames and Target Dates
The following time schedule is an example:
- 1 month – Complete Confidential Business Review, set price & terms, and identify potential buyers
- 3 months – Contact all potential buyers to create multiple bids
- 2 months – Meet and qualify bidders
- 2 months – Facility tours and pre-due diligence
- 2 weeks – Receive letter of intent and negotiate acceptable agreement
- 2 months – Due diligence, secure financing, closing.
6 – 12 months – Total time scheduled. This will vary with each client. The important point is to have and follow a plan
Contact Potential Buyers
Identify and contact synergistic and/or strategic companies that would place the most value on your business
Be prepared to answer critical questions both verbally and in writing. A Confidential Business Review should answer many questions such as:
- Why is the seller selling the business?
- What are the business’s competitive advantages and disadvantages?
- Is the business dependent on the owner?
- Are the add-backs justified?
- Are the majority of the sales with just a few customers?
Recognize Deal Breakers
Sometimes deals do not close even after there is an agreement as to the price. Examples include:
- The actual financial results for the quarter right before closing are not as good as expected; consequently the buyer gets cold feet and withdraws.
- Buyer cannot finance the deal.
- Professional interference (Ex. Seller’s CPA may lose a long-term client if client sells.)
- The buyer and seller do not get along (This absolutely happens!)
- The purchase agreement contains unacceptable terms. These may include:
- reps and warrantyâ€™s;
- collateral requirements for note;
- personal guarantee requirements;
- non-compete and non-solicitation requirements;
- employees signing employment agreements;
- assignment of contracts with suppliers.
- Due diligence uncovers an undisclosed material fact that should have been disclosed.
- Seller has higher than anticipated taxes.
- Seller has second thoughts about selling.
- Because information is slow in getting to buyer (most likely because it was not prepared beforehand), the buyer walks away.
Implementing a well-designed process designed by a qualified team of experts will help you to achieve your goals when it comes time to sell your business.