So You Want To Sell Your Business? – Part 1
How to Prepare to Sell and Other Presale Considerations:
You are past the expansion phase and now you want to cash out. What do you do? Before you put a “for sale sign” in the front yard and begin courting potential buyers, it would best serve you to do presale planning.
In this two-part blog, these are the first steps you’ll need in order to get ready to sell your business:
- Is this the right time? The time to sell your business is when you are going strong. If your business or industry is in a lull, the focus should be on growing your net revenue and profits. This can be done in many ways, such as decentralizing your client base, focusing on your core competencies, and good old-fashioned cost-cutting. Buyers will want to see strong metrics, most commonly EBITDA (earnings before interest, taxes, depreciation and amortization). The stronger this is, the higher multiple you can command.
- Polish your books. The buyer will be focused on metrics. Avoid red flags by having at least 3 years of manicured financials and tax returns. Having an independent CPA prepare these financials will give a buyer more confidence than financials prepared by an internal bookkeeper or do-it-yourself software. From the practical side, if your business is family-owned, do your best to remove any unnecessary expenses (e.g. your leased luxury vehicle, your child’s part time position for “website consulting,” loans from your business to you, grocery store trips, and so on). Selling unnecessary or personal assets can also be beneficial. Remember, you are selling a polished piece of kit here, not a fixer upper with potential.
- Know your worth. Engage a reputable business broker or certified business valuation professional to give you a realistic idea of where you stand in comparison to similarly situated businesses in your industry. This will also help you identify where you need to focus on improvement.
- Secure your key employees. Every business has some element of human capital. Develop an action plan to incentivize long term commitment. Some approaches include incremental compensation increases and bonus programs, profit sharing pools, and equity incentive plans. Each of these have pros and cons, so be sure to pick the method that works best for your situation (e.g. giving an employee equity sounds great, but is not always the best solution). Also, you may consider having your employees enter into non-competition, non-solicitation, and confidentiality agreements to prevent them from leaving with your customers and starting a competing business across the street before you can sell to a potential buyer.
- Document ownership of your business. Make sure you have clear provenance to the company equity that is held by each owner. Have a document for when each owner came on (e.g. equity purchase, grant, or founder’s equity agreement) and when each past owner left. Remember that web developer you promised equity to in exchange for a website when you did not have cash on hand? Do your best to document the transfer of that equity or consider a repurchase and release to prevent any problems down the road.
These are just half the steps that should be taken to prepare your business for sale. I will discuss more in part 2 next week.
If you have questions about buying or selling your business please contact Daniel Hofherr at email@example.com or 703.745.1818.
ABOUT DANIEL HOFHERR
firstname.lastname@example.org | 703.745.1818
Daniel Hofherr is an attorney in the Business Law and Transaction practice group. He advises clients that are in all phases of the business lifecycle from startup, to growth and expansion, and maturity and exit.
As a business lawyer, Mr. Hofherr assists clients in matters such as developing internal corporate governance framework, admission and separation of equity owners, private equity financing, employee retention incentives, customer contract management, intellectual property licensing, and business succession planning.
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