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Succession Planning: Part 5 – Selling Your Business

March 31, 2016

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Ask former business owners to describe the sale process and you’ll hear a wide variety of answers – rewarding, stressful, exciting, time consuming, complicated. The one adjective you will rarely hear is “easy”. The sale process is almost always hard and longer than business owners anticipate.

Contract Signing

A detailed discussion of the sale process could be its own blog series, so we’re only going to scratch the surface today. Of all the succession planning options we have discussed, a sale to a third party is the most complicated, but usually results in the biggest financial payout as well. With the other options (family and management succession), there are personal relationships involved and negotiations are generally amicable. With a third party sale, getting the highest price for the business is the primary (and sometimes only) goal.

Maximizing the price for your business takes thorough planning. Put yourself in the shoes of a potential purchaser. If you were looking for a business, what characteristics would you be willing to pay a higher price for? At the end of the day, a purchaser’s primary goal is to make money from the investment. In preparing your business for sale, your goal is to make your business appear as profitable as possible with the least amount of business risk. A few things to think about are:

  • Focus on the bottom line. Revenues are great, but purchasers ultimately pay for profits. If the purchaser does not see a way for the business to be profitable, your revenues will not matter.
  • Down play your importance. Purchasers won’t pay for a business for which the success depends on the outgoing owner. Take the time to transfer key knowledge and relationships to your employees. Make the purchaser think that they can easily replace you.
  • Keep it clean. When you are operating your business, you try justifying personal discretionary expenses as business expenses to get the tax deductions. When you are selling your business, your goal is the opposite as you want to show the highest profit possible. Although you can “normalize” your profits when talking to purchasers, each item you need to explain is an item that could increase the purchaser’s perceived risk.
  • Actual profits are worth more than potential. If you say your business has so much potential, expect the purchaser to ask why you haven’t done it yourself. If the purchaser is the one taking the risk for new business opportunities, why would they pay you for it? Emphasizing growth opportunities is important, but there needs to be a proven track record first.

Once you are ready to show your business to potential purchasers, you need to have a plan for the sale process. Will you go into direct negotiations with a single party, or will you go through an auction process? How much information will you give out upfront? Which employees will you need to help you respond to due diligence requests? Are you going to negotiate directly or will you have advisors handle negotiations instead?

A sale process can take anywhere from a few months to a few years, so you need to be prepared. One of the worst things that can happen is you allow your operations (and profitability) to suffer because you are spending too much time on the sale. By the end of the negotiations and due diligence process, if the actual profits have dropped, expect the purchaser to require a price decrease. During the entire sale process, your focus needs to still be on running your business, so you are going to need help.

Selling your business is the culmination of your entire career’s work. This is not a process that should be taken lightly. Having a team of experienced transaction advisors (including financial, legal, tax and marketing) is critical to maximizing the price and making the process go as smooth as possible.

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