By Rajnish Puri
Part one of a four-part series.
In this four-part series on the subject of selling your business, I plan to share with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.
You have labored hard to build a profitable business and are now contemplating an exit. So, where to begin? In today’s economy, where mergers and acquisitions of large businesses frequently dominate the front pages of major newspapers, what goes largely unnoticed, and, therefore, little discussed, is the corresponding activity in the world of small- to medium-sized, privately-owned businesses and the tough decisions that confront their owners. Whether it is identifying the right buyer, determining the correct value of the enterprise, selecting the most tax efficient structure, or optimizing the timing – these are only some of the many complex decisions you must make. If you are one of those potential sellers, here are initial steps in the planning.
Identify Your Goal. Sellers are motivated by different reasons to sell their businesses. What is yours? Is it retirement, tying up with a strategic partner for further growth, a new-found opportunity, or something else? The answer to this question sets the stage for the remainder of the process. If retiring, the primary goal often becomes maximizing the value of the business being sold; a strategic alliance would focus one’s attention on seeking the right partners; and a new interest might influence the timing of the deal if capital is required to fund the new venture. Your ultimate goal may also affect what you intend to leave behind –financial security for the family, a legacy for those who helped grow your business or both. It’s important for your advisors to understand what your goal(s) are early in the process to effectively implement tax planning tools for the benefit of the sellers and others impacted by the transaction.
Build a Team. Just like you are undoubtedly the architect of your business, the art of selling businesses, too, has its specialists. Similarly, as you trusted your talent to grow your business, trust the experts to help you with the sale process. The four key advisors on your team should be – a tax advisor capable of addressing both income tax and estate planning needs, an attorney experienced in mergers and acquisitions, a valuation professional with experience in similar-sized businesses, and a point person within the business to ensure normal operations of the business during the sale negotiations and to be the liaison between seller and buyer.
Get Your House in Order. Has curiosity ever tempted you to walk into an open-house in your neighborhood (even if you were not in the market to purchase real property)? And, if so, did you notice the curb appeal, the landscaping, the fresh paint or the artwork on the walls, the kitchen with utensils neatly tucked away in the cabinets, or the clean bathrooms? Doesn’t the appearance make the property more attractive, which also justifies, and, in some markets, even drives up, the price? Or, at least, lays the groundwork for a buyer to be prepared to pay a good price? Optics play a role. Selling a business isn’t much different in terms of preparing it well to ensure the seller can demand a fair price. In the context of selling a business, getting your house in order means addressing multiple fronts, prior to putting up the “for sale” sign. Some of the simple, but often overlooked, tasks are: ensuring the accuracy of corporate records; evaluating and managing the risks stemming from pending litigation, expiring contracts, aging receivables, and cyber security; knowing your financial statements; examining the application of regulatory framework; and confirming the condition of the operating assets. Careful planning in managing these areas plays a role in attracting good value for the business and a faster closing schedule.
Timing the Deal. Finding the perfect timing to complete a transaction is by far one of the most unpredictable elements of deal making, though there is no single factor that is controlling. There may exist a willing seller, but is there an interested buyer? Does the economy favor a strong valuation for the seller’s business and also allow buyer to tap into credit markets for financing? Are there tax issues, prevailing or looming, affecting the timing of a closing? Does the seller wish to reward key employees upon closing and, if so, are the desired plans in place? And, so on and so forth. All of the stars need to be aligned for a transaction to succeed. Your preparation must weigh all the elements prior to beginning the sale process to ensure the best outcome.
In the next part of this series, I plan to focus on Letters of Intent – often the first formal step that commences the negotiations between a seller and buyer. Stay tuned for another conversation on ClarkTalk!!
Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. You should certainly consult legal counsel of your choice when considering the sale or purchase of a business. If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at firstname.lastname@example.org or telephonically by calling the author at (213) 341-1322.