As a business owner and entrepreneur, you’ve worked hard to build a profitable business. At some point in your life, and this happens to just about every business owner, you will pause and consider the future of the business. Maybe you have reached “retirement age.” Maybe you want to pass the business on to your children. Maybe your employees want to buy the business from you. Maybe you’re just ready for something new.
Some business owners develop exit plans early on in the life of their business. However, many small and medium-sized business owners do not have formal exit plans. Regardless of the existence of a plan or not, sometimes circumstances arise that cause a business owner to consider selling their business.
There are also some cruel statistics to consider. For instance, an estimated 70% of privately owned businesses on the market don’t sell, particularly businesses valued at less than $5,000,000.
But if you, as a business owner, find yourself considering a sale of your business, what do you do?
What’s your next move?
In this series, we’ll look at nine steps to successfully plan and execute the sale of your business. Conceptually they are simple, but they can be difficult to implement. If you put in the effort and discipline to follow these steps, you’ll be better prepared, and your sale will go more smoothly.
Step 1: Clarify your Goals
If you’re like most business owners, your main goal for years has been to build the business, without much thought for your exit strategy. It sounds simple, but the first step is to clarify both your business and personal goals.
Do you want to sell? Are you actively looking to sell your business? Are you still getting the personal satisfaction from running it that you did before? Do you see that your industry is contracting, and you don’t want to manage the business through yet another tough time?
Did you get an unsolicited offer? Perhaps from a private equity firm, competitor, or strategic partner to buy your business at what looks like a good price? Maybe you haven’t thought about selling yet, but the thought intrigues you. If this is your situation, you probably want to evaluate your options; but you also don’t want to lose the existing offer.
Is it the right time to sell? A good time to sell your business is when you have a buyer. A better time is when you have two buyers. Not all business owners have that luxury. Have you just started a new sales initiative that may take two years but will result in a much higher company valuation? Are you just about to close a big contract that will improve revenues for the next five years? Could you improve value by cleaning up some issues with the business that might take a year or two? Have you just pivoted to deal with the COVID-19 pandemic? These factors might mean you want to postpone the sale. On the other hand, if you postpone the sale, the market may have reduced the EBITDA multiple it’s willing to give your business, so your overall valuation may be lower when you want to sell.
COVID-19 Concerns. In the COVID-19 market, some businesses have been badly hit by the pandemic and the economic shut-down. If yours is one of these, you may not have many options.
If, however, your business is “COVID proof,” providing goods (such as PPE) or services (such as home food delivery) you may be able to command a premium for your business.
What is your Next Act? Are you ready to retire? Do you want to move to the Bahamas and buy a sailboat? Or do you have a great idea for a new business, and your plan it to sell this business to finance your Next Act?
Do you want to hand your business down to your children? Many family businesses are handed down from one generation to the next. If this is your goal, you’d want to consider if the next generation is really interested in running the business or not. Do they have the skills and experience they need? What do you need to do to prepare them in order to pass the business on successfully? There are many succession planning issues that we will discuss in other articles.
Who Is Your Buyer? There is likely only a limited number of serious buyer candidates for your business, and you likely know many of them. If you are looking for a buyer, how do you find a good one? For a company valued at over $5,000,000, a private equity firm may be a good candidate. For smaller companies, buyer candidates may include business competitors, strategic partners, strategic investors, key vendors or customers, or your management group. If you can identify these buyers, you can plan how to best to approach them. You may want to engage an investment banker to market your company to a group of qualified buyers.
If you have received an offer to buy your company, what do you know about the buyer? Some preliminary due diligence on the buyer can save you time and troubles later on.
“Soft” Qualifications. Many sellers add “soft” qualifications for their buyers. You may want the buyer to continue your commitments of quality and service to customers; your commitment to employees and stakeholders; commitment to charity; or other important aspects of your business culture. Some sellers care less about the character of the buyer and more about the price and terms. Each seller must make their own decision as to which, if any, “soft” qualifications are important.
Allocate Management Time and Resources. The sale of the business will take a lot of time and attention from management, possible for an extended period of time. These same managers will be needed to keep the business operating. These conflicting demands can be balanced with some advance planning.
It Takes A Team.
While you might have built your business on your own, it will take more than you to sell it. You will need a team of experienced professionals that should include:
- An M&A Attorney. The sales planning process involves a wide range of legal issues. You’ll need an attorney with experience in buying and selling businesses to help you. Frequently a company’s general business lawyer is not equipped to deal with a complicated M&A transaction.
- An Investment Banker or Broker. An investment banker or broker (this is dependent on the size of the deal) can be critical to the sale of a business. For some small businesses, owners may be tempted to sell the business themselves to save the fees. Consider the advantages of an investment banker or broker before deciding to sell the business yourself.
- An Accountant. An accountant with experience in M&A will be critical. Frequently in small and family-owned businesses, the accountant who handles the books and does the tax returns may not have the expertise for an acquisition or sale.
- A Valuation Expert. If you don’t hire an investment banker or broker, you may choose to rely on an independent valuation expert.
- An Estate Planning Attorney. Selling your business may be the biggest financial event of your life. Just like any transition event, you will want to manage how the proceeds from this sale may or may not pass to the next generation. If you don’t have a formal estate plan, now is the time to create one and a good estate planning lawyer is the key to a good estate plan that addresses your desires and needs.
- A Financial Advisor. With luck, you’ll have a lot of cash after closing. A financial advisor can help you plan how to invest the proceeds of the sale to meet your personal financial goals. If you don’t have a financial advisor, find a good one now.
Is it time to sell the business? Consider your goals, both business and personal. Look at your options. Talk with your board members and other owners. For many small business owners, a discussion with a spouse is the single most critical item. Do some soul-searching.
Then make your decision.
In the next section, we’ll discuss the process of selling your business in some detail. Understanding the selling process is crucial to a successful sale.