Guide To Selling Your Business & Building Your Transition Team
“I’m not ready to sell now. I’ve got several years left.” A key follow-up question to ask yourself is: “Is now the right time to sell?” As the Fed continues to raise rates to combat inflation and the risk of recession looms on the horizon, how will your business fair in this environment? We encourage you to consider these external factors when weighing whether or not this is the right time to sell.
Hopefully you’ve read PGP Advisory’s article, “What to Expect When You’re Ready To Sell,” which highlights the preparation timeline and how to set realistic goals for the process.
The team at PGP Advisory has formed a step-by-step guide to ensure businesses are sold at the right time, for the right price, and to the right buyer.
Step 1: Be Informed
Do your research and educate yourself on the selling process. Consult with an M&A advisor.
An M&A advisor will help you establish a strategy tailored to your business and manage the complexities of the sale process so that you can stay focused on running your business. They’ll identify and qualify buyers, secure an offer(s), and negotiate the eventual sale with the best possible terms.
If you’re invested in selling your business for the best possible value, choose a leading M&A advisory firm to broker the deal.
Step 2: Get Your Finances in Order
Purchase price is important, but so are the terms on the deal. Accurate financials can make the difference between getting 80-90% of the purchase price at close (via bank financing) and you becoming the bank (in the form of seller financing) for a significant portion of the purchase price over several years.
Do your due diligence by organizing your bookkeeping and financials and getting ahead of items that could prevent bank financing or slow down the sale (such as sign-off from other shareholders or active lawsuits or legal proceedings).
Consider your business’ employee contracts, intellectual property issues, and federal and state tax requirements. To ensure you have time to fix all potential red flags, hire a third-party accounting firm to assess your financial statements and advise on an exit-friendly tax strategy a year or two before the sale.
Step 3: Get a Business Valuation
Turn to experts (e.g., business brokers, M&A advisors) to understand how much your company is worth and to whom. Value is more than a number on a paper. The value that matters is what a buyer is willing to pay for your business. A trusted advisor will help establish a range that you would expect a reasonable buyer to offer for the business.
Step 4: Build Your Transition Team
“Great things in business are never done by one person, they’re done by a team of people.” – Steve Jobs. Putting together a team early can prevent a lot of stumbling down the road. Here is our list of professionals that business owners should have on their team (before your business goes to market) to smoothly and successfully sell their business:
1) M&A Advisor – Expert on sale strategy and process
2) CPA – Expert on your financials and tax strategies
3) Lawyer – Expert on identifying and managing legal risks with both the business and sale
4) Financial Advisor – Expert on planning for post-sale impact on your overall financial objectives
Summary
As experienced M&A Advisors, we are at the center of your business sale transition team. If the issues are not unaddressed, you will spend valuable time and resources prior to and after the sale trying to “fix” things. Your business is likely your most valuable asset, and building a successful company can take years of time and effort. If you’re considering selling your business at some point, schedule some time to discuss how we can help you make an informed decision – and maximize the price you receive for the sale.
How to Transfer Your Business to a Family Member
Are you thinking of transferring your business to a family member? This occurrence is fairly common, especially among small businesses. Here are some considerations that will help with your planning and decision making.
Do You Have a Good Contract?
Sometimes close family members are tempted to skip a contract, but it’s always a mistake not to have things in writing. When you create a buy-sell agreement, it helps keep things clear between the parties involved. Make sure that your documentation is thorough. It should cover a wide variety of details including the amount being paid, your continued involvement, and the business value.
Does Your Family Member Need Financing?
When it comes to selling businesses to family members, seller financing is common. You could even consider agreeing to a private annuity. This will allow payments to be spread out over many years. One benefit to providing financing assistance is that you will receive a steady stream of income along with interest on the loan as well.
You could also consider a self-cancelling clause on your installment note. This would allow debt to attach to your will in case of your untimely passing before the payments were complete.
Are You Selling or Gifting Your Business?
Gifting a business takes place more often than you might think, due to the tax benefits involved. Also, when you gift a business, you can still maintain some level of control.
The federal gift tax exemption changes every year. In 2022, the annual gift tax exclusion is $16,000. The lifetime gift exemption limit is $12 million. While you may owe some federal gift taxes if the amounts exceed the exemption limits, the good news is that after you have transferred your business, any future growth of the business won’t affect your financials.
Is Everything Accurate?
Unfortunately, many business owners have acted unethically when it comes to transferring their business to their family members. As a result, the IRS tends to give this kind of transaction extra scrutiny. You will want to ensure that all your paperwork is in proper order and highly accurate.
You may very well want to hire the services of a lawyer and accountant to assist you with this matter. Of course, a business broker or M&A advisor will also help you with the details of this agreement and figuring out what benefits you and your family members.
Copyright: Business Brokerage Press, Inc.
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Why Is Confidentiality So Vitally Important
When it’s time to sell a business, you will want to keep confidentiality first and foremost in your mind. The reality is that many deals do not succeed when confidentiality is breached and others learn that your business is for sale. Let’s take a look at why this is the case.
What Can Occur When Confidentiality is Compromised?
If vendors or suppliers find out that your company is for sale, it can negatively impact your business in different ways. One common occurrence is that vendors begin to change the terms they have established with you. Even a small change might end up not being minor at all, as it could impact cash flow. The same can be said for word of your business being for sale reaching your creditors, as they could also suddenly change their terms.
Another major issue that could be caused when confidentiality is breached is that your employees and customers might begin to worry. Employees could even start looking for new jobs. Your customers might worry about the new ownership and preemptively stop patronizing your business.
It goes without saying that you won’t want your competitors knowing that you are selling your business. This might make them more aggressive, and they could even start using this knowledge to take your customers.
On some occasions, business owners set out to sell their business on their own. Unfortunately, this decision can put them at higher risk for confidentiality breaches to occur, which start to cause things to go wrong. When you are in the process of selling your business, you will want everything to appear as steady and reliable as possible.
Keeping Up Appearances
When a buyer is carefully vetting your business for a potential acquisition, you won’t want anything showing up on the radar that could give them pause. It’s important to show that the business is continuing to operate in a successful manner and there have been no recent changes.
The good news is that business brokers and M&A advisors have proven strategies that will keep the news that your business is for sale confidential. Your brokerage professional will be sure to vet all prospective buyers, and they will use the most reliable confidentiality agreements that will protect your best interests.
Copyright: Business Brokerage Press, Inc.
The post Why Is Confidentiality So Vitally Important appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Selling a Business Means You Should Expect the Unexpected
No one ever said selling a business was predictable. However, the truth of the matter is that every sale is different. Even the reasons behind a business owner deciding to sell his or her business vary tremendously. If you are getting ready to sell, it’s important to be aware of the various aspects that could catch you off-guard. If you are prepared for the unexpected, you’ll be mentally ready for the sales process, which often does not go as planned. Even the smoothest and most streamlined sales encounter a few road bumps along the way.
Price Considerations
When it comes to the price structure for a potential sale, many business owners have numbers in their minds that do not meet with reality. As a result, a potential offer could be far less than what they expected, and this causes conflict and delays. Your brokerage professional will prepare you with a thorough valuation so you can have a clear idea of the fair market price of your business. Be sure to ask any questions that you might have so that you feel fully informed when it comes to prices.
Confidentiality
Throughout the sales process, confidentiality must be carefully guarded. Otherwise, this too can interfere with a sale. Your business broker or M&A advisor will have effective strategies to help maintain the highest levels of confidentiality. Even with the best safeguards in place, there is a small chance that a rumor could begin to circulate and word could get out to your employees, customers or supplies. In the case of this incident, it’s important to have a contingency plan in place to quell the rumors.
Your Stockholders
Oftentimes, business owners of privately owned companies forget that their minority stockholders have rights too. You will not be able to sell your business without dealing with all parties involved. When you get a “fairness opinion,” it can go a long way to convince your shareholders of the best price and terms. Even if your shareholders are members of your family, they will have to be successfully dealt with before the sale goes through.
Expect to Allocate Time
You may have hired an experienced business broker or M&A advisor, but you should still be prepared to spend some time dealing with the sale of your business. You’ll be expected to do everything from prepare documents to meet with prospective buyers. This fact that selling will take up your time is particularly true if you haven’t begun making preparations years in advance. That’s why we advise clients to start working with us early on.
You’ll want to make sure that despite your need to focus on elements pertaining to the sale of your business, it is necessary to keep your business running smoothly. Otherwise, any signs of weakness could interfere with your potential sale and your efforts could backfire. This issue just stresses the importance of preparing to sell years in advance.
Through the sales process you must still run your company as well as ever. You’ll want to make sure things are progressing nicely, even if you don’t plan to own the company in the near future. Obviously, your buyer will want things to look reliable and any dips can trigger a red flag.
Copyright: Business Brokerage Press, Inc.
The post Selling a Business Means You Should Expect the Unexpected appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Thinking Of Selling Your Business? Start Here.
What to Expect When You’re Ready To Sell
There are several reasons small business owners decide to sell their companies — they want to move to another city or state, sales are down, they’re looking for a new challenge or it’s time to retire.
The prospect of selling your business can feel overwhelming, and you want to receive a fair price for the assets you’ve worked so hard to create. To make the process as easy and profitable as possible, you’ll want to start planning early. Whatever the reason, once you decide to sell, you can’t just hang up a “for sale” sign and wait for the offers to come rolling in. Selling for the right price takes time and preparation.
What’s Your Goal in Selling?
Owners often focus primarily on the question “How much can I get for my business?” However, the first question an owner needs to be prepared to answer is, “What results do I want to get from this transaction?” Business owners will typically focus on what they think their business is worth or how much a peer recently sold their business for, even if that business was in a different industry.
PGP Advisory suggests focusing on the owner’s personal needs and goals. For example, consider these questions:
- Do you want to transition the company to the next generation of your family or to employees?
- Is your goal to find a willing buyer in the open market and maximize the sale price?
- Do you plan to retire and live off of the proceeds from the sale for the rest of your life?
- Are you looking to invest some of your equity with the buyer and work with/for the next owner?
- Are you looking to reinvest in a different opportunity?
- What other goals do you have (e.g., paying for college educations, contributing planned amounts to charity)?
Understanding the Realistic Timeline is Essential
In an ideal situation, the questions above would be asked and answered several years before the owner wants to take their business to market. This timeframe would allow for appropriate estate and investment planning. Plus, having a longer timeframe allows owners and their advisors to consider what actions can be taken to increase the value of the company before going to market and leaves ample time for implementation.
Having time on your side can really pay off when selling a business. Whether you’re ready to retire or simply want to move on to a new venture, it’s imperative to keep in mind, that the completion of a sale can take well over a year, so keep that in mind as you plan your exit strategy.
At PGP Advisory, we explain to our clients that it’s reasonable to prepare for this to be a 2-year process, roughly from the time you decide to sell, all the way to the completion of the sale. Wrapping your head around this realistic time frame is a necessary first step. This critical preparation will help you to improve your financial records, business structure, and customer base to make the business more profitable. These improvements will also ease the transition for the buyer and keep the business running smoothly.
Selling a business requires an enormous amount of planning. As you begin the process, it’s important to focus on the step you’re in and the long-term objective. Otherwise, you may end up making short-term decisions that go against your ultimate plan.
Takeaways
Knowing what you want/need as a result of the sale and understanding the realistic selling timeframe, will set you up as much as possible for a smooth and successful transaction.
In our next segment, PGP Advisory will walk you through the first steps owners will want to take to begin the selling process from an advisor perspective, including helping you construct your transition team.
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