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, you would be best served to do presale planning.
Welcome back for the second part of So You Want to Sell Your Business (see part 1 here). Here are some additional steps to get ready to sell your business:
- Square away your intellectual property. It is not uncommon for a large part of your business’ assets to be intellectual property. Whether that is branding/trademark, proprietary software, or process know-how, these items add value to your business. Buyers want to see you have a good and clear title to them. Consider having your employees sign instruments that make it clear that you own the application code or product-tooling design that you are paying them to develop (often called an employee invention agreement). Also, review your third party vendor and contractor agreements that involve creative material (e.g. website content, mobile application, and marketing materials) to confirm that the work product is assigned to your business. If this is unclear, now is the time for curative action. You may also consider applying for federal trademark registration to secure your brand. This is one more feather in your cap to sell. The buyer will be happy to hear that you have taken the time to secure your brand.
- Make a paper trail. More often than not, business is conducted by telephone and email without an underlying contract. This works until there is a problem. Get ahead of the curve by having signed agreements with your vendors and customers. Even if you have a signed agreement, I can tell you that there are very few snack vendors, HVAC contractors, or lawn maintenance providers, for example, that use contracts with the to-be-sold business in mind. If you use a broad range of vendors and they frequently hand you their contract to sign, you may consider having a simple 2-page addendum that you can add at the time of signing (or renewal) with provisions that cover the basics (e.g. termination without cause by you, assignability to your buyer without consent, indemnification, clear independent contractor status, and confidentiality to name a few).
- Know yourself. You need to know your strengths and potential to develop a meaningful pitch deck. What are you selling and why? What is your EBIDA, Cost of Goods Sold, and Net Revenue? What is your largest expense category? What are the synergies of your business ecosystem as a whole? Who are your top 10 customers and vendors? Remember that you are selling an assembled kit that generates revenue, not just pile of assets and a few financial statements.
- Make the magic transferable. That is, de-emphasize your role and cross-train others in your organization to make your business easier for the buyer to integrate post-sale (this is on the forefront of their minds, believe me). To prevent transition problems, get others involved with the relationship side of your business (e.g. give your employees customer and vendor contact). Human capital may be an attractive part of your business, but a buyer needs to know your revenue machine will plug into their brand and continue to operate when you are no longer at the helm.
- Get organized to make the buyer’s homework easy. Start organizing now. Your buyer will hand you a due diligence request list of things you must provide so that they can evaluate your business. If you have less than perfect housekeeping habits or a long operating history, you may consider finding a basic due diligence checklist and working it backwards to prepare for the big day. Recordkeeping has powerful optics. If your records are thorough and organized, the buyer will infer that your business has been run with the same precision. Conversely, if you provide a banker’s box of archaic financials and an amalgamation of disjointed paperwork and .pdf files, your buyer will be less confident and may see a long tangled mess ahead.
- Get help. Assemble your team both internally (e.g. key employees) and externally. Interview and hire a reputable accountant, attorney, business broker/investment banker, and other professionals to advise you during this process. The thought of engaging professionals may strike you as an unnecessary expense, but know that working with someone who has done this before and knows what is important to buyers will save time and help you in your quest to achieve your maximum value for your business.
In all, working through the above will assist you in getting ready to sell your business and will help you put your best foot forward when you enter the market.
If you have questions about buying or selling your business please contact Daniel Hofherr at firstname.lastname@example.org or 703.745.1818.
ABOUT DANIEL HOFHERR
email@example.com | 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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