For most business owners, the process of exiting the business involves a formal transaction—whether selling to a third party or to a family member. Third-party transactions have some distinct variables, including less control around the timing. A recent RSM Middle Market Leadership Council survey noted that 34 percent of business owner respondents had received a formal offer for their business, but 88 percent opted not to sell, saying it “wasn’t the right time.” So how do you recognize the right time? And once you’ve decided to sell, how can you manage the process to receive the best benefit.
Confirm your plan to sell
When you make the decision to sell your business to a third party, there are a number of considerations that must be addressed. The first is confirming that you truly are operationally, emotionally, and financially ready to sell—both as a business owner and as an individual. Some questions you should ask early in the process and revisit often, over the life of your business, include:
- What after-tax proceeds do you need on the sale to meet your estate planning, lifestyle, charitable and other goals? A realistic understanding of the business value and personal lifestyle is key to the business sale and transition process.
- What strategic steps are necessary to prepare your business for sale and earn maximum return on your investment? Sell-side due diligence is a possible strategy to help with this.
- What role, if any, would you like to play in the business after the sale?
Answering these questions takes planning and will help you identify the right time to sell and evaluate potential buyers or offers. If you receive an offer before performing sufficient planning, you may not be positioned to take advantage of an attractive offer. And, of course, economic, personal or other events could force you to consider a sale on short notice. Having a plan in place will prepare you for any scenario.
Unlock business value
It is possible to be too close to the day-to-day operations of a company and potentially miss warning signs or other concerns that could discourage a prospective buyer of your business. Reductions in the purchase price and deal failures are common when any irregularities are discovered or any issues are inadequately addressed. Sell-side due diligence helps to anticipate buyer concerns and satisfy expectations. It is also a valuable process for helping to ensure the transaction is advantageous for both the buyer and seller.
Pre-sale due diligence can produce accurate financial information for your potential buyer and also can address operational, technology, and human resources issues that make the difference between a successful sale and a long, potentially contentious transaction process. This is particularly true today, where due diligence efforts have intensified and buyer-identified issues can place you in a defensive negotiating position on price and transaction terms. Potential benefits of sell-side due diligence include:
- Identifying risks early and accelerating the closing date
- Improving the accuracy of the historical and projected financial information
- Providing the buyer with a transparent, objective, and credible view of the business
- Identifying adjustments that positively impact EBITDA
- Increasing competition between buyers and minimizing buyer negotiations after the letter of intent
- Maximizing after-tax proceeds by addressing risks and optimizing the deal structure
Consider potential buyers
In an ideal world, you would have multiple buyers on your doorstep, when you want them, with competitive offers. It is more likely that you will need to seek out potential buyers or evaluate an unsolicited offer. It helps to think ahead and identify the attributes of an ideal buyer. Categorize these attributes as absolute or negotiable to create a barometer for measuring future offers. Some areas to consider:
- Hard dollars – Have you differentiated your ideal and your absolute minimum?
- Leadership style – How important is the current management team?
- Location – Will the new owner manage on-site or from afar?
- Purpose – Are you looking for someone to continue your legacy or reward you for your hard work?
- Industry experience – Does your business have unique factors that will be difficult for an outsider to successfully manage?
There are no right or wrong answers, and you may be surprised to learn where your true bottom line lies.
Know your options
Other considerations when preparing for the sale of your business:
- Have you considered applicable state tax and capital gains issues in terms of the sale and where you plan to live post-transaction?
- Rather than preparing for a sale now, have you thought about a “hold and grow” strategy to increase the value of your business for an improved future purchase price?
- Have you assessed the current market demand for your products and services and its potential effect on the sale of your business?
- Should you divest a portion of the business to gain more immediate liquidity?
Considering your needs, goals, alternatives, and tax ramifications are all important pieces to a succession planning strategy. Equally important is considering the time you’ll need to get things right. Rushing may not net the results you want. Allowing enough time will get you the transaction you hope for and need.