by Kathy Tremmel, Business Attorney
It takes significant planning and preparation to successfully exit a business. You need to consider what you want to accomplish and put a process in place to help you reach this goal.
Selling Your Business Part 1: Strategy
When will you sell? The first step is figuring out what you need to get out of your business. What are your retirement needs? What are your lifestyle objectives? What will you do once you sell your business? If you have a partner, do you have a succession plan or buy sell agreement in place so the business or the other owners can reacquire the ownership interests of the person who leaves the business.
What is your business worth? It is very common for business owners to think their business is worth more than it really is. Have you had your business valued? The main approaches for valuing a business are (i) the income approach, which focuses on the business’s cash flow and examines what return a potential buyer can get on his investment, (ii) the asset valuation approach, which calculates the current market value of the business’s assets, the (iii) the market approach, which compares the sales prices of similar businesses. The general economic outlook and the growth projection for your industry affect both the sales price and the time it will take to sell your business.
Who are the potential buyers of your business? Potential buyers may be a competitor, a third party, your employees, or family members. Oftentimes a competitor knows the market and understands the business, so he may better appreciate the value of your business. He may see the acquisition of your business as an opportunity to expand and offer you the best price for it. You will need to develop a “story” for selling your business covering the business’s financials, sales, business plan, industry projections, recent improvements and other important aspects of the business. This story may be adjusted somewhat depending on who you target as your potential buyer.
How will the transaction be structured? Buyers generally prefer an asset purchase rather than buying the ownership interests of the business. There may be important reasons why an entity purchase makes sense, such as to keep exiting contracts, permits or licenses in place. As a seller, in most cases, you will need to be prepared to offer some amount of seller financing. A buyer may also insist on certain arrangements, such as earn-out agreements, revenue sharing agreements or holdbacks, to help ensure that the business will perform at its existing level.
What are the tax consequences? You need to take time to analyze and understand the tax consequences of a potential sale.
What are your obligations after the sale? You will need to train the buyer and help him transition into running the business. It is also very common for a buyer to require you to agree not to compete against the business for a certain period of time.
Selling Your Business Part 2: Preparation
Clean up business records. You need to be sure your business’s legal entity has been properly set up and the company’s minutes are up to date. There should be a clear record of the approvals of major transactions and business decisions. If your business name has not been trademarked, determine whether a trademark of your name and logo would help the sale of your business. If the business operates under an assumed name, the assumed name must be properly registered.
Clean up existing contracts. The business should have written agreements with its employees and independent contractors which protect your business’s confidential information, intellectual property, and prohibit employees and independent contractors from competing against the business. Agreements with customers should be in writing and clearly state the scope of the services and products you are providing or selling. Be sure you know the dates any agreements with suppliers and vendors will be renewed.
Clean up financial records. It is imperative that you keep complete and accurate financial records. At a minimum you will need 3 years of the business’s financial records. These need to be clear and easy to understand. Address any outstanding IRS issues, other tax issues, or issues with lenders. Remove any personal expenses from the business’s financial records. Oftentimes privately-held businesses minimize profits on their financial records in an effort to reduce income taxes. These financial statements may need to be recast to properly reflect the true monetary benefits of the business.
Explore opportunities to increase revenues. Be alert to possible ways to increase revenues. Are there new verticals you should explore? Are there marketing strategies you can adopt which will improve sales? Are there investments you should make in the business that will make a significant impact on sales?
Implement a plan to remove yourself from the daily business operations. Business owners frequently hold a tremendous amount of information about how to run the business in their heads. These processes and procedures need to be clearly documented so you can transfer this knowledge to others. A potential buyer needs to be confident that he will be able to successfully run your business.
Article and information is courtesy of Kathy Tremmel, Business Attorney at Tremmel Law, PLLC. Amplify Credit Union does not endorse or guarantee the perspectives, the advice, the users, the businesses, or the products or services sold by any users or businesses that appear in this article.