6Key Steps to Successfully Sell Your Business

Transcription

1 6 6Key Steps to Successfully Sell Your Business

2 STEP ONE EMOTIONAL AND FINANCIAL PREPARATION It s widely understood that every successful entrepreneur puts tremendous energy into growing and sustaining their business. But when it comes to selling the venture, that personal investment can be a barrier. In fact, when an otherwise healthy company is marketed but does not sell, most seasoned advisors agree it s because ownership was not emotionally or financially prepared to exit the business. For this reason, a sound exit strategy must begin with a personal inventory, which can help you better work through vital pre- and post-sale issues. Here s a sampling of some questions that should be on the list: Why am I really selling my business? What are my personal and financial exit goals? What exit strategy should I choose? How will selling the business affect my family? When I am no longer a business owner, what will I do? As you ask yourself these questions, remember this critical point: The more specifically you define personal motivations for selling the company, the more effectively you prepare for new personal and professional opportunities. For instance, as a business owner, were you both skilled and enthusiastic about certain roles, such as communicating with staff and customers, negotiating deals and contracts, or getting deeply involved with financial analysis and forecasting? If so, you may be able to leverage those natural strengths in a new volunteer or paid endeavor. 2

3 During this inventory process, it may be helpful to seek input from family and friends regarding how your talents match up with personal and professional interests. If you d like a more structured approach, consider a formal assessment, in which an expert third-party can help you work through these tough questions with the goal of a fulfilling post-sale life. Once you ve completed your personal inventory, it s time to focus on postsale financial needs. In addition to basic expenses, such as a mortgage, vehicle payments or routine medical costs, you also need to understand how college expenses (for yourself or dependents), charitable giving, family estate and trust goals and any potential long-term care costs affect your overall financial health. As you work through this financial planning process, it s wise to include close family and trusted financial advisers in your deliberations. Collectively, they can help you develop a realistic roadmap to achieving short- and long-term financial objectives. KEY TAKEAWAYS: You must be emotionally and financially ready to sell your business. A comprehensive exit strategy includes a personal inventory that helps you understand your reasons for selling, and identify fulfilling interests for post-sale life. By having a comprehensive exit strategy, you can effectively communicate the why to potential buyers, which will increase their trust in you and help increase the prospects of a successful sale. Finally, a sound exit strategy also includes a thoughtful, detailed financial plan that ac-counts for both short- and long-term objectives. 3

4 STEP TWO EVALUATING PROSPECTIVE BUYERS Now that you ve gained clearer insight on the reasons for selling your company and considered how to direct both your interests and finances in post-sale life it s time to review options to successfully market the business. If you are a solo entrepreneur who has decided it s time to retire, you can simply stop accepting new clients, finish existing projects or commitments and just wind down the business. However, if you have employees and are activity engaged in selling goods or services, start preparing for a potential sale by drawing up a list of potential buyers. For example, are there thirdparty candidates, such as strategic buyers or private equity groups? Are there qualified family members with the desire and drive to successfully take over the company? Or, is the current management team (or select individual leaders) well-suited to purchase the business? Note that each of these options typically require different levels of planning and operate on different timelines. Let s take a closer look at considerations for each segment of potential buyers. Selling to a third party. While this is a very common exit option, many business owners are not prepared for the emotional transition it can create. A third-party sale often involves a much higher level of due diligence, which can be time-consuming. If you pursue this type of sale, make sure to clearly define your own exit terms. Start by obtaining an accurate valuation for your company, which will help you establishing an appropriate sale price. Then, determine how you want the deal to be structured (i.e., cash up-front or a promissory note for payments over time). Additionally, be precise about establishing other terms that are important to you. These may include a time limit on sale duration, a designated executive to run the company from negotiations to closing, a transition agreement that covers employee wages, benefits and job security for a 4

5 defined period, and a written memorandum that details any future role you wish to maintain in the company once the deal has closed. Selling to family members. Clearly, many sale considerations to family members are similar to those noted above, though the due diligence and transition issues may be less intense. However, a key question typically revolves around the nature of funding for a potential buy-out. While family members often lean toward a handshake arrangement, it s better to put your feelings aside and draft a more formal purchase agreement. This means getting a valuation, negotiating a fair market sale price, and closing via a formal process that ensures that all parties fully understand their post-sale rights and obligations. Selling to the management team. This exit option is a hybrid of considerations necessary for a successful sale to a third-party or family members. Since your management team is often your work family, it s important that they are treated both professionally and fairly. To that end, have a candid discussion about their goals for the company s future, with an emphasis on how they would achieve those goals. If you re satisfied with the answers, set a fair sale price based on an accurate valuation, and negotiate terms on how the transaction will be funded (i.e., will you require cash up-front, or allow the management team to take on debt?). If you choose the latter option, it s wise to discuss how the debt will affect earnout payments or the company s overall operations. KEY TAKEAWAYS: If the time has come to sell your company, start by drafting a list of potential buyers. When considering third-party buyers, such as private equity firms, be prepared for a higher level of due diligence and a longer time commitment from negotiation to closing. 5

6 When considering family buyers, avoid the temptation to do a handshake deal. Instead, negotiate a fair price and draft a formal purchasing agreement. When considering buyers from the current management team, make sure to review their goals for the company s future and steps they would take to achieve those goals. If you like what you hear, negotiate a fair sales price and a formal purchase agreement. STEP THREE WHO SHOULD BE ON YOUR TEAM DURING THE SELLING PROCESS? Once you have decided on an exit strategy and uncovered a qualified buyer, the next step is to decide who will be on your team throughout the deal process. This step should not be taken lightly, since the individuals you choose for your exit dream team can help maintain operational continuity and minimize deal lapses during negotiations. Ultimately, a strong team effort can maximize the final sale price. The first person you should consider for your team is a financial advisor. This professional can help you evaluate future financial needs, determine how to fund those needs, and recommend investments that align you re your goals, risk-tolerance and timeline. In addition, it s wise to choose a CPA for your team, since this professional will help you understand the tax implications of various exit strategies, prepare audited financial statements, and assist in the due diligence process. Finally, hire an attorney to structure and prepare the transaction documents, and an investment banker to source a buyer, negotiate the transaction, and coordinate overall activities. While you may already have relationships with a financial advisor, CPA, attorney or investment banker, make sure to carefully evaluate if these advisors have the right skills for your transaction. Since these professionals 6

7 are critical to ensure a successful sale, take time to interview potential advisors, since this step will help you determine if they will be a good fit for your team. Here are some key questions to consider when interviewing potential advisors: How long they have been an advisor? How many recent transactions they have successfully completed? Are they knowledgeable in your industry? How many transactions have they done in your industry? Are they willing to provide client references from previous transactions? How are their fees structured? How do they source potential buyers? During the interview process, it s also important to pay attention to questions you receive (or don t receive) from prospective advisors. For example, if an advisor asks a number of probing questions about your business operation, it s likely they want to gain a detailed understanding of your company. On the other hand, if an advisor asks only high-level questions, they may not be the right choice for your team. In addition, beware of advisors who guarantee unrealistic results (such as an overly aggressive closing date), or those who float an irrationally high potential sales price for your company without tangible valuation and market analysis to support it. Remember, here is often a gap between what you think the business is worth and what a buyer will pay. As a final note, it s smart to protect all confidential and proprietary information during the advisor selection process. While you may need to share a fair amount of information about your business and exit plan with potential advisors, do not proceed until each one signs a nondisclosure agreement. As the old saying goes, Better safe than sorry. 7

8 KEY TAKEAWAYS: A strong support team can help you maximize the sales price for your company while minimizing day-to-day business disruptions. Key players on your sales support team include a financial advisor, CPA, attorney and investment banker. Even if you have relationships with advisors in these specialties, make sure you assemble a team that is best able to refine and execute your exit strategy. For that reason, take time to interview prospective team members for skills, success in similar situations and overall fit. Make sure all prospective and final team members sign nondisclosure agreements, which will help protect your company s confidential information. STEP FOUR STRUCTURING THE SALE Now that you ve made the decision to sell and have assembled the right support team, you need to consider how to actually structure the sale. An outright sale is probably the simplest way to exit a business, and there are two primary ways to cash out: Asset sale. This approach entails selling the company s physical equipment, facilities and customer lists, as well as intangibles (such as trademarks and goodwill). If you pursue this option, be aware that you re still liable for any prior claims against the business. For example, you could be responsible if an environmental claim made while you were operating the business prior to the sale. 8

9 Stock sale. In a stock sale, you are selling your interest in the company itself, which means that any prospective buyers are responsible for all issues they may inherit when the sale closes. For that reason, expect a much more in-depth due diligence process from buyers when you sell stock along with negotiating the seller representations and warranties. Within these two options, there are other decisions you need to consider. For instance, you can choose a stock sale, but elect to treat it as an asset sale for tax purposes. This election will adjust the buyer s tax basis of the assets to fair market value. As a result, the buyer may enjoy incremental tax benefits relating to amortization and depreciation of the assets purchase price for federal income tax purposes. Since these tax benefits may be substantial for the buyer they may be willing to reimburse you for incremental tax cost- you incur by treating the sale as an asset sale for tax purposes By working with your support team early in deal planning to choose a sales structure, both you and a buyer can save time, money, and resources during the due diligence and closing process. Even better, you ll be in a strong position to exit your company as successfully as you built it. KEY TAKEAWAYS: There are two primary ways to cash out of your business: an asset sale or a stock sale. An asset sale involves the purchase of physical equipment, facilities, customer lists and other intangibles, though it still leaves you liable for any pre-closing claims against the business. A stock sale is the purchase of some or all of your interest in the company, including any legal issues that may exist prior to closing that will need to be negotiated and provided for in the representations and warranties section of the sales agreement By making early decisions about the right sale structure, you can be in a better position to successfully achieve your strategic exit goals. 9

10 STEP FIVE NAVIGATING THE DUE DILIGENCE PROCESS So far, you ve drummed up interest in your company, built a strong support team and made sure that interested parties have signed non-disclosure agreements. Now, these players are ready to engage in the due diligence process, in which sellers gather, sort and present key company information. Prospective buyers, in turn, use that information to make an informed purchasing decision. At the start, potential buyers will submit an Information Request List (IRL). Generally speaking, an IRL seeks the following documents: Legal and corporate documents. This includes articles of organization, operating agreement, bylaws and important vendor and customer contracts. Employee documents. This includes core human resources documents, such as compensation structure, benefit plans and employment agreements. Operational documents. This includes business process narratives and identification of key suppliers and customers. Financial documents. Typically, this includes three years of financial statements, fore-casts and prior tax returns. To prepare for an IRL, your team should gather and vet this information before an official request is received, and save it in a secure virtual data room to avoid any potential business disruption. Since the protection of personal and confidential information is extremely important, make sure you designate a knowledgeable resource that team members can go to with issues or questions in this regard. Finally, have a trusted advisor review all prospective IRL data to ensure the information is timely and accurate. These steps will help ensure that when the IRL arrives, your company s information will be presented cleanly and correctly. 10

11 While you work on the IRL, ask key members of your management team to prepare presentations that address the company s strengths and potential weaknesses. Choose leaders who are familiar with the company s strategy and are expected to stay on after the transaction is completed. At a minimum, a presentation should be given by a team member who is well-versed in the company s financial data and outlook. As with any other performance, make sure designated leaders rehearse their presentations, ideally with senior management and trusted third-party advisors. After potential buyers review the IRL, serious contenders will approach you with a letter of in-tent that outlines basic terms of a purchase agreement. These letters should be carefully analyzed with your team of advisors, since the information contained in each one provides key details about what may or may not be negotiable in a final agreement. Remember, the more letters of intent you receive, the more leverage you have on price and overall terms. Letters of in-tent typically include the following information: Pricing. How much the buyer is willing to pay? Structure. Is the offer in cash or stock, based on whether you are selling assets or equity (such as stock or partnership/llc interest)? Exclusivity. Is there a clause that restricts your ability to shop the business to other buyers within a fixed time period (generally between days)? Closing. The target date for closing a final purchase agreement. Termination fees. This specifies the amount that must be paid if either party walks away from a deal (note that this penalty is generally limited to advisory fees). 11

12 While prospective buyers are researching your business, you should conduct due diligence of your own. While letters of intent may have similar financial considerations, note that some buyers may have a vision for your company s future that conflicts with your wishes. Additionally, your due diligence may reveal that certain suitors do not have the best reputational or operational track record in their markets, or do not have the financial resources to comfortably close on the deal. After you ve chosen a buyer and executed the letter of intent, the final due diligence work be-gins. This involves formal management presentations on key elements of the business, face to face meetings between your management team and the buyer, and addressing any buyer requests for additional information. To preserve business continuity, select a point person to facilitate these meetings and handle all information requests. Since the due diligence phase is extensive and time consuming, it can be easy to forget that your employees may become anxious about what may lie ahead for them. In any transaction, it s likely that some employees will no longer have a position. For that reason, you may wish to encourage the buyer to meet employees to outline high-level transition plans after the deal has closed. You may also wish to offer fixed term stay-bonuses to key personnel, which can offer the buyer comfort in knowing that some core employees will be in place while ownership is transitioned. The diligence phase may be difficult for you, since it s not easy having outside parties evaluate something you ve built, especially if they tell you it s not worth as much as you think it is. If that occurs, don t get defensive with proposed purchase price adjustments. Instead, make sure your own preparation, valuation and due diligence efforts are well positioned to defend the purchase price. By taking these steps, you can negotiate a mutually beneficial purchase agreement that meets your personal and financial goals. 12

13 KEY TAKEAWAYS: Take preliminary steps to gather, evaluate and safeguard data for a buyer s Information Request List. Carefully review letters of intent, which outline initial terms for a purchase agreement. Multiple letters of intent mean more negotiating leverage for you. While buyers are reviewing your documentation, take time to conduct your own due diligence on their reputation, operational efficiency, market position, financial capacity and other factors important to your desired exit strategy. Consider how a sale will affect your employees, and take steps to ease the transition for both your team and the buyer. Use a sound business valuation analysis and due diligence process to set and defend a fair sales price for your company. STEP SIX WELCOME TO THE NEXT PHASE OF YOUR LIFE Congratulations, you ve sold your business! Now, the next significant challenge is to discover what s next for you. As a business owner, it s likely that much of your identity and sense of purpose is strongly interwoven with your company. For that reason, it can be extremely difficult to walk away. While some entrepreneurs provide post-sale consulting services for a year or two, many are simply be-fuddled with their new found free-time. To avoid that dilemma, consider the following tips on finding new ways to manage your time and money: 13

14 Take a time out. Building a successful company is a monumental achievement. Take time with family and friends to reflect on (and celebrate) that accomplishment. Build a plan for what s next with your time. The most crucial decision you need to make is figuring out what you want to do with this new stage of your life. If you re a serial entrepreneur, it may mean pushing forward with your next enterprise. If you have long-delayed hobbies, such as volunteering, joining a gym, learning how to cook or playing the bagpipes, plan how you will pursue some or all of these interests to improve life satisfaction. If you re content with traditional retirement, your plan may involve travel, family gatherings or other non-work pastimes that allow you to enjoy the fruits of your labor. Bottom-line: Formulate a strategy that fits your personality and passions, which will help you be mentally and financially prepared for the years ahead. Build a plan for your wealth. As you determine how to fulfill your personal ambitions, you should also consider how to manage your wealth. As a first step, consider working with a trusted financial advisor as mentioned in Chapter Three, who can offer very helpful guidance on managing your assets. Depending on the complexity of your estate, you may also wish to engage an attorney and CPA, who can develop a will to ensure your assets are distributed according to your wishes and an estate plan that mitigates taxes on transfer of wealth. These advisors may or may not be the same team members you used to assist you through the sale depending on their experience. Remember, this can be a sensitive process, so take time to adequately consider your wishes and communicate your desires to family members. In addition, be prepared for potentially awkward discussions with family members who may ask for a loan or try to determine how much you re worth. By preparing for a few of these possible questions in advance, you can have simple responses that can reduce tension and make family life much more comfortable. 14

15 If you get stuck, seek help. Entrepreneurs often are so busy building their business that they often neglect leisure time or financial planning. So, don t be afraid to consult with family and friends about finding a new path for your time and talents. You may also wish to work with a personal coach or mentor, who can provide more structured assistance in these areas. Most importantly, don t forget to have fun with this journey! KEY TAKEAWAYS: Just because you ve sold your business doesn t mean you ve lost your identity. Immediately after the closing, allow yourself a timeout to relax and celebrate a successful career. When you re ready, let your personality and passions guide the process to discovering what s next in your life, regardless of whether that may be paid work, volunteering or simply enjoying family and friends. Build a plan for your accumulated wealth, which will ensure your estate is handled in accordance with your personal and philanthropic goals. If you get stuck in making personal and financial plans, don t be afraid to seek help. 15

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