Before You Jump Off That Cliff
You have invested your capital, energy and passion into your business for as long as you can remember. The economy is strong and you are thinking about selling your business. Here are ten things to consider before you embark upon this journey.
Begin with the end in mind. Are you charitably inclined? Do you want to transfer wealth to your kids and their kids? The sooner these issues are addressed, the more powerful the planning can be. Waiting until after the sale may mean passing-up opportunities to accomplish your goals while paying less tax.
Work with a trusted financial advisor to do pre-transaction planning well in advance of taking your company to market. Understand what you ultimately need to receive from a transaction on a post-tax basis to fund your lifestyle going forward. You need to know that the after-tax proceeds will allow you to live the lifestyle you are accustomed to (or the one you desire). This transition can be difficult for people because they felt like they were in control of their business and markets are unpredictable. Having a plan in place will significantly reduce the anxiety and uncertainty around selling your business.
Surround yourself with legal, tax and investment experts. This is not the time to use www.dolegalstuffyourself.com. You could sell your house yourself but will you get top dollar? You could file your own taxes but what savings are you missing? You could manage your money yourself but will you stay invested, rebalance when necessary, and focus on after-tax returns? The money you spend to engage an expert advisory team will be repaid exponentially.
Find out what your company is worth. A regular valuation is critical for many reasons. These include ownership transfers/opportunities within your team, a benchmark for unsolicited offers, an idea of your firm’s currency if you decide to buy rather than sell, and changes in your capital structure. This is another area where you want to work with professionals – do not cut corners on this step or you may set yourself up for future disappointment.
Engage an Investment Banker or Business Broker. Responding to unsolicited offers will very rarely produce the best outcome for a business owner. There are countless successful PE firms that would love to buy your business without their competitors knowing you are for sale. These are friends of ours; great people and very smart but you will benefit from getting multiple offers. Having an experienced Investment Banker or Business Broker to help you conduct a controlled auction for your company significantly improves your chances of successfully completing a transaction.
Keep it quiet (for now). The sale process can produce significant anxiety and distractions for your employees and competitors will use the opportunity as a competitive advantage when they are talking to customers. Limit the people that know about a pending sale to only those employees that absolutely need to know and consider having them sign non-disclosure agreements and providing them with bonuses for assisting you in the sale process.
Run your business as if you are going to sell it. Even if a sale to a third party is not your exit strategy, run your business as if it were. Understand your value drivers and maximize them. Develop and incentivize your management team. Understand your financials and keep good corporate records. If you decide to sell to a third party then you will have far fewer distractions in the due diligence phase of the transaction. If you decide, however, to transition to family members or employees, then you will hand over the reins to a well-run company.
Once you decide to market your company for sale, conduct a legal, financial, and tax review. Make sure that there are no gaps in any of those areas that need to be addressed or corrected prior to a sale. Trying to correct these issues while simultaneously negotiating a transaction is one of the quickest ways to invite a purchase price reduction or create deal-killing distractions.
Don’t take your eye off the ball. Deals are distracting by themselves. Deals can take months to complete and the last thing you want to do as a business owner is get caught up in the deal and let the performance of the company slip before a deal is done. Outsource as much of the deal activity as you can to your advisors. Incorporate employees to help with due diligence as much as possible. Limit the distractions of the deal to the extent you can and run the company as if the deal will not close.
Perhaps more than any other piece of advice, have a plan for what you want to do after a sale. The biggest source of consternation for business owners after they sell is that they don’t really know what to do next. After a liquidity event there will be no shortage of people asking you to invest in this or that, or non-profits asking you to serve on boards or committees and write big checks. Have a plan for what you want to do in the short term, mid-term and long-term after a sale. Having a plan leads to a more comfortable post-sale transition.
Eric Holt is the President and Founder of 7258 Wealth Management, Inc. He has over twenty years of experience and has worked with countless successful entrepreneurs throughout his career. Lyle Wallace is a corporate and transactional attorney at Sherman & Howard, LLC having represented clients in more than 300 transactions throughout his career.