Jun 08, 2017
Planning to sell your business? Key considerations for every business owner
With the growing activity in the economy, business owners may be thinking about positioning their business for sale. The process of selling a business may seem overwhelming to many owners but there are several considerations business owners may make in advance to help devise and execute their ultimate exit strategy.
Understand the value of the business
Valuing a business can be a difficult and emotional task for sellers, especially for business owners who have built their business from the ground up. However, it is wise to get a realistic idea on how the market or potential buyer might value it. A valuation will take into account various factors of the business, market trends and industry--including without limitation valuations based on a multiple of earnings, sales revenue, discounted cash flow and growth potential. The circumstances of a sale also will affect the value of the business. Owners should consider engaging a valuation firm or appraiser who is knowledgeable in the industry in order to provide an independent perspective on its value in the market.
Identify post-sale goals
Doing this will assist a business owner in determining a desired structure of the transaction. Business owners may desire to be involved in some capacity in the ongoing business post-closing and this may take the form of employment or consultant arrangements post-closing or rollover equity in the buying entity. Other owners desire to sell the business and move onto the next chapter lives without looking back.
The seller’s end goals may or may not mesh with those of a buyer who may require the seller’s participation for some period of time and/or require non-competition covenants. However, by having a general plan and idea of the end goal, a seller may easily be able to identify an acceptable price, forms of consideration and structure in advance. Realistically, a seller may need to be somewhat flexible in order to get a deal done but thinking in advance about the ultimate end goal will help a seller navigate successfully through the selling process.
Engage in a “corporate checkup”
Business owners should perform a corporate checkup and this due diligence may expose some issues that can be addressed prior to marketing a business for sale. Even if a business owner is not interested in selling the business, a corporate checkup is a prudent and sound practice to help tighten up loose ends and expose potential issues.
For example, are your customer contracts in force and in effect or have they termed out and expired? Do you have sound restrictive covenants for your employees? Do you have a solid team of key employees who are vested in the business’ success and ongoing future? Are your corporate books, minutes and records up to date? Are your valuable assets protected, such as intellectual property including, without limitations, trademarks and patents? Are all required taxes paid and tax returns filed?
Checkups reveal issues that can be addressed and assist sellers to get organized for the due diligence process that may be conducted by a third party. An organized company presents well to a buyer which may be helpful in negotiating representations, warranties and indemnification provisions in a purchase agreement. Critically examining various facets of a business from time to time such as human resources, financial, regulatory, intellectual property, sales and customers, and operational issues allows a business owner to identify strengths of the business and exposes weaknesses that might be able to be remedied. This type of information might prove helpful for a business owner negotiating purchase prices down the road.
Understand different deal structures and tax ramifications
Buyers will often demand sellers provide a target working capital, specific inventory or accounts receivable levels at closing. Sometimes, buyers may offer all cash or a combination of cash at closing and a promissory note or rollover equity. There may be an earn-out component whereby a portion of the purchase price is deferred and not paid unless and until certain benchmarks or targets are reached post-closing. Earn-outs might be suitable arrangements for sellers who seek to stay on with the buyer as an integral part of the operations moving forward. Different structures result in different tax effects for the parties so it is important for a seller to understand the after-tax value of a deal from their tax attorneys and accountants.
Identify third-party consents
It is common in sale transactions that an approval from a third party such as the government or private party may be required. For example, there might be a valuable customer or supply contract or lease that requires consent for a sale. Moreover, there will likely be internal approval required as part of the seller’s corporate governance. In transactions involving sales of equity, there may be rights of first refusals, options or notices that must be provided, giving a third party an opportunity to purchase the business on the same terms. It is important to identify these potential hurdles early on as it could establish a realistic time frame for closing and facilitate the deal at a later date.
In conclusion, always keep in mind that it is up to the individual business owner to determine the timeline and pace with which they seek to position a business for sale. Keeping the considerations above in mind, a business owner stepping on the path to sale might have a more successful journey.
If you are considering selling your business, the Chuhak & Tecson corporate transactions and business law attorneys will be happy help you with this process.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: Anne M. Wolniakowski, Principal
This alert originally appeared in the Summer 2017 Corporate Focus Newsletter.