Figuring out the right time to sell your business is never an easy decision. Combining advanced planning with a team of experienced deal advisors can help facilitate a smooth, streamlined transition process. Here are a few helpful hints to consider.
Build a team: When deciding whether or not to sell, one of the first steps that most sellers should take is to begin assembling a team of experienced professional advisors including attorneys, accountants, and depending on the size of the business, sometimes investment bankers or other financial advisors to help navigate the process. Advisors who regularly assist with the purchase and sale of businesses tend to more closely follow the market and industry trends and may be able to use that knowledge to add value while also helping sellers avoid traps that may be less obvious. One common mistake that many sellers make is choosing an advisor based solely on the seller’s personal relationship with that person and without considering what experience or expertise that a person has in handling similar sales. While Cousin Jimmy may be the world’s best divorce attorney, that doesn’t necessarily mean he’s the most efficient choice to sell your technology business.
Prepare a strategy: Before marketing a business for potential sale, sellers must ensure that they have a clear vision for what they want to achieve and how they want to achieve it. In many cases, this begins with financial and tax planning so that the seller’s advisors understand exactly what the seller desires to accomplish, whether retirement, planning for posterity, or simply transitioning into a new business or phase of life. While preparing a strategy is an important early step, even the best-laid plans are meaningless if you aren’t able to execute them. By working with advisors that you trust to give you candid, accurate advice throughout the process, sellers can arrive at a plan that doesn’t just sound good on paper but is actually achievable in practice. Frequent planning considerations include whether to sell the entire business or bring in a strategic partner; timing considerations for taking a business to market and closing a sale; arriving at a realistic valuation of the company based on current market data and trends, and ensuring that the desired tax treatment is achieved.
Initial due diligence: After determining a plan for the sale, the next step is to ensure that the “corporate house” is in order to avoid any unwanted surprises later on in the transaction. This usually begins with basic due diligence which, in the initial stages, often includes the following:
- Financial statements: The company should work with its accountants or other financial advisors to prepare current financial statements for the company. Even if you’re not normally the “financial person” in the company, owners should familiarize themselves with the company’s financials and also ensure they understand topics that are often used in valuing deals, such as EBITDA and related adjustments as well as add-backs to EBITDA. Companies that have also not historically followed GAAP should work with their financial advisors to understand the implications that any deviations from GAAP may have on value if a buyer elects to value the business on a GAAP basis.
- Contracts: The company should confirm that all of its important contracts are in effect, executed, and accurately reflect the current relationship between the third-party and the company. Beginning to compile these contracts and providing them to the company’s legal advisors at an early stage will allow the legal advisors time to review the contracts and address any potential issues or concerns. While most contract issues can ultimately be resolved, it will almost always be easier and less expensive to address a third-party’s right of first refusal to purchase a company nine months before a sale, rather than three days before a multi-million dollar sale is scheduled to close.
- Licenses and permits: Almost every purchase and sale agreement will require that the seller warrant that the company is properly qualified and licensed in every jurisdiction that is required by applicable law. Many sellers aren’t even sure what that means, let alone whether their company actually is. By reviewing and analyzing these issues, as well as other similar permitting and regulatory matters like the transferability of important business licenses, sellers are able to navigate the process at an early stage with greater confidence, knowing that their business is being operated in accordance with applicable laws.
- Taxes: Working with accountants and legal advisors, the company should ensure awareness of all tax filings that it is required to make, both with respect to the types of taxes and returns that the company files and pays such as franchise, employment, business privilege, sales and use, property, and other similar taxes. The company should also be aware of the jurisdictions in which these returns and taxes are due.
- Organizational matters: The company should also confirm that its organizational documents, such as bylaws or operating agreements, depending on the type of entity, reflect how the company is actually being operated on a day-to-day basis. It is also critical to ensure that all equity interests in the company are properly documented and have been issued compliant with the company’s organizational documents and applicable law.
While there is no one-size-fits-all approach to selling a company, it is our experience that the steps outlined above will add value in the sale of almost any business. One final point that every business owner should keep in mind is that no matter how carefully planned a transaction might be, surprises frequently will (and almost always do) happen at some point during the life of a deal. As scary as those surprises can be, assembling a trusted team of experienced advisors at the outset of the process will not only help avoid them but will also enable you to work through any surprises that do appear with confidence and comfort knowing that you have a team of professionals on your side to help navigate the process.