The decision to sell your business is typically one of the most important inflection points in the lifecycle of your business. Chances are that when you arrive at this decision point, either because you have affirmatively decided to go to market to sell or you have been presented with a viable offer from a third party purchaser that:
- You have never sold a business before.
- You do not know where to start the process.
You are not alone as most sellers identify with the points above. But remember the golden rule that applies to all closely held businesses—you will leave your business one day, voluntarily or involuntarily. It is the only absolute truth in business. According to a recent Securian Financial Group survey, only twenty-four percent of business owners have a formal exit strategy in place. Hence, most business owners are not forecasting their eventual exit—and designing a plan to optimize such exit. For business owners, this failure to plan not only poses significant risk, but a lost financial opportunity. Without a plan, optimization of a sale is left to chance and chances are high your sale will fall through or fetch a disappointing price. Pre-transaction planning reduces uncertainty while making your business more attractive to buyers. The short overview below concentrates on the basics of pre-transaction planning: the first considerations when getting your business ready for sale, which parties are involved, what to look out for, and what to do next.
The first steps to a successful merger and acquisition (M&A) of your business are to commence the planning process. Ideally, such planning begins long before the actual sale of the business, many times a few years beforehand. During this pre-transaction planning phase, you will want/need to work with your key advisors (accountant, attorney, etc.) to identify your company’s value drivers as well as its weaknesses and areas of concern. Know that the sale of your business may be the largest legal and financial transaction you will ever take part in. You will want to maximize this opportunity. After all, most business owners get involved in business, among other motivations, to make a profit and to ultimately secure their family’s lifestyle and future. Given that so much rides on the success of such transaction, having advisors that are experienced in this area of practice (M&A) is a must. Few sellers get a second bite of this sale apple (so to speak) so it must be handled correctly from inception. An experienced legal advisor is a must for protecting your assets and negotiating your best interests. Along with your attorney, you should meet with your accountant, as well as an M&A consultant. Your accountant will be able to provide you with detailed financial information, so you can ballpark your valuation and manage your expectations. An M&A consultant will lend outside perspective based on the overall business sales climate in your industry and region. Together, you, your attorney, your accountant, and your M&A consultant will discuss the specific terms of and objectives for the sale: What’s your timeline? How much do you require to fund your future lifestyle and family’s goal?
The Game Plan
At this point, your task is to find and eliminate any skeletons—that is, anything negative that could deter a buyer from the sale. Common skeletons include:
- Operational inefficiencies
- Outdated equipment/technology
- Disorganized or missing records
- Gaps in management
- Loss-making investments
- Damaged property
- Misconduct, ongoing lawsuits, or other legal issues
While the onus will fall on your buyer to conduct proper due diligence of their own, any liabilities you can mitigate or eliminate now will increase the probability of closing a deal down the road. Detailed recordkeeping is essential. For example, it is recommend to retain at least 3–5 years’ worth of tax returns, expense reports, gross receipts, payroll, and other supporting business documents. Consider the ways your business can demonstrate value to a prospective buyer. How bankable is your inventory? What property—physical and intellectual—do you own? Who are your most talented staff members? How desirable is your location? Finally, assess the market. You will need to competitively price your business against others of similar trade and size. Your M&A consultant can help you interpret market trends and research asking prices as well as future sales opportunities.
Once you have adequately assembled your team, prepared your exit plan, conducted preliminary research, and eliminated any outstanding skeletons, it is time to commence the sale process. Determining when to do so is also very important. Know that selling your business will require you to work two full-time jobs—your current position to maintain the strength of your company and a new position actively selling your business. Whether your business is already primed for sale or you are just starting to consider selling, make sure you partner with an experienced business transactions attorney, like the ones at Offit Kurman Attorneys at Law.
ABOUT MIKE MERCURIO
Michael N. Mercurio is a leading attorney in the field of mergers and acquisitions (M&A). He serves as outside general counsel in buy-side and sell-side M&A, as well as in all business law and real estate law matters. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on the many challenges, issues, and opportunities companies face throughout the business lifecycle—from start-up to eventual exit.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing full-service law firms in the United States. With over 200 attorneys in 14 offices that stretch from New York to North Carolina, we represent privately-held companies and families of wealth throughout their business life cycles. Our mission is to provide our clients with “The Better Way” to grow their organizations, protect their businesses’ and families’ wealth, and resolve their most challenging legal conflicts. In addition to our quality of attorneys and breadth of legal services, Offit Kurman is distinguished by our unique operational structure, which encourages collaboration rather than internal competition. The same approach that makes our firm attractive to legal practitioners gives clients unlimited access to experienced counsel in every area of the law. Trust, Knowledge, Confidence—in a partner, that’s perfect.
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