1. ASSEMBLE YOUR TEAM
Most Sellers place reasonable and prudent reliance on the expertise of others who have been through the business sale process before. The typical participants include an accountant, attorney and tax adviser (often the attorney or accountant doubles in the role of tax adviser). Other potential team members include a business valuation expert, investment banker or business broker.
In determining whether to use a business broker or investment banker, understand that either will ordinarily ask for a contract with a 180 day or more exclusive right to sell the business. Business brokers charge a fee usually as a percent of the purchase price. Ten percent is typical. Investment bankers usually charge lower percentage fees since the transactions they work on are larger. In exchange, the intermediary often prepares a presentation package for prospective buyers and assists in other aspects of the sale process.
2. PLAN FOR & COMMIT TO THE SALE PROCESS
Timing is everything in the sale of business. Planning and commitment helps the wise business Seller avoid the big three common mistakes that can thwart a successful sale -- Impatience, Indecision and Indiscretion (telling others [e.g. suppliers, customers and employees] too early or too late). Intelligent business owners offer the business for sale as part of a carefully thought out operational and marketing plan pursued ideally over a three to five-year period. Potential buyers for the business are targeted in advance. The business is put on the market at its peak valuation in a time of prosperity.
Planning and commitment maximize the potential for a successful sale. Without it, not only may the maximum sales price not be achieved, employee morale and efficiency, as well as customer and supplier relationships, may be unnecessarily disrupted. Commitment equals peace of mind. Without it, the business owner faces useless distraction and stress.
3. PERSONALIZE THE DECISION TO SELL
Answer to your satisfaction questions such as: Why do I want to sell the business? What will I do once I have sold the Company? Do I have a price in mind at which I would be willing to sell? How will my family and customers react to the sale of the Company? How do I feel about someone else running the business? What impact will new ownership have on my employees and the community it which it operates? Am I willing to offer a loan, take back paper or provide other financing to the new owner? Am I willing to continue in the employ of the new owner? On what terms?
4. UNDERSTAND THE VALUE OF YOUR BUSINESS
Understand that what is being sold is a business opportunity. Potential buyers look at a business with an eye to the future. Sellers are often stuck on past performance. Equally important is for the Seller to have a realistic understanding of how valuable the business actually is. Dig in and thoroughly understand why someone would want to buy your business and what would increase the value of the business in the opinion of the buyer. Consider hiring a valuation expert. All of the foregoing should be undertaken with the aim of obtaining multiple, enthusiastic potential buyers for the business.
5. DEMONSTRATE PROFITABILITY POTENTIAL
Many privately held businesses are operated in a manner to minimize the owner's tax liability. Unfortunately, these same operating techniques can work to minimize the value of a business. Although it is possible to reconstruct financial statements to reflect a different method of business operation, this process may also put the owner in the position of having to pay additional taxes with regard to prior years. This is one reason why advance planning is valuable. A track record of three to five years of maximum profits is preferable to restating the financials. If undertaken, the recasting of financials should be undertaken with the objective of showing what the business would have achieved if run like a public company in which earnings and profits are maximized.
6. PLAN FOR DISRUPTIONS TO OPERATIONS
Consider how selling or attempting to sell the business will affect basic operating issues and have a written plan for dealing with them. Relationships that can be disrupted include those involving key contracts, suppliers, customers, employees and competitors as well as activities such as product development.
It is often imperative to have a detailed plan for dealing with employee morale. Employees can be upset by change even if the Buyer will offer better terms and conditions of employment. Diverting an employee's energies to the sales process can negatively affect normal operations. Steps that can be taken to combat this include "stay" bonuses, accelerated vesting of options and other benefits and other retention programs.
7. REMOVE POTENTIAL DEAL OBSTACLES
The wise Seller puts herself in the shoes of the Buyer and properly prepares the business for sale, getting its house in order and handling potential problems in advance of sale. To the extent feasible, correct any weaknesses in the business, such as those due to existing or threatened litigation, contractual disputes, or other outstanding legal, tax, banking or financial issues that could slow down or complicate completing a deal. Possible obstacles to handle in advance include perfecting the ownership and registration of patents, copyrights, trademarks and other intellectual property rights; obtaining any consents that will be required to complete a transaction; settling lawsuits and claims; and environmental cleanup responsibilities.
8. PREPARE FOR BUYER’S DUE DILIGENCE EXAMINATION
Undertake a thorough review of the of the Company minute books, stock books and other corporate records and ensure that all are complete and up to date. Take any necessary corrective measures, such as adopting curative minutes. Similarly, make sure that all tax returns and other government filings, licenses and the like have been completed, filed and are current.
Anticipate other items that will likely be requested for review by a Buyer and prepare a strategy and plan for confidentially providing same. Often a staged disclosure plan is prepared, revealing more sensitive information only after the sale process progresses. Review a typical due diligence request checklist to understand what will be needed. Gather the required information, take any advisable remedial action and be ready to respond to the Buyer’s requests.
9. REQUEST & EVALUATE OFFERS.
Sometimes a formal auction process is used to solicit offers, particularly if an investment banker has been engaged. In any event, the Seller ordinarily is called upon to evaluate the Buyer’s offer often set forth in a letter of intent. The LOI serves to outline the agreement of the parties on fundamental issues and commits the parties to an exclusive period of negotiations.
Price is the central bargaining issue in the transaction, but price cannot be understood without thinking about terms. Terms are often more important than price. It makes a big difference, for instance if a $10 million dollar offer is for stock or assets. The tax consequences for buyer and seller are significantly different depending on the choice. Better for the buyer because of a step up in basis, and worse for the Seller because of double taxation. Similar considerations apply to liability issues and the timing and type of payments to be made. For instance, asset deals leave the seller exposed to liabilities that are not assumed by the buyer. Stock deals require the buyer to assume the liabilities of the business. Installment payments are worth less than the same amount paid at closing. Payment in stock of the buyer brings its own set of valuation issues.
10. NEGOTIATE DEFINITIVE DOCUMENTATION.
The Purchase and Sale Agreement can be a complex document. The major bargaining issues include: price; structure; seller’s representations and warranties; the conduct of the parties pending the closing; and conditions to the closing. In a sense, the entire negotiation process involves the apportionment of liabilities between buyer and seller. This process often is crystallized in a hotly contested negotiation of the agreement’s indemnity provisions. The parties must agree on who is to bear the risk of post-closing liabilities, both those that have been disclosed and those which are contingent or unknown. The seller wants to sleep at night. The buyer counters that the buyer is paying good money for a business that exists as the Seller has described. The buyer wants protection if the business turns out not to be as advertised. Resolution usually involves agreement on time limits for making claims and limits on the seller’s exposure for certain types of liabilities.
11. SATISFY CLOSING CONDITIONS.
In addition to the buyer obtaining financing, there may be several other conditions to be met before the purchase is closed. Typical closing conditions include: satisfaction with the results of the due diligence investigation; receiving required opinions, approvals and consents; entry into ancillary contracts; and the absence of certain events such as threatening litigation. Typically, buyer and seller cooperate to satisfy the closing conditions in advance of an agreed upon closing date.
12. CLOSE THE TRANSACTION.
When the closing date arrives, and all of the conditions to the closing have been met, save those that will be satisfied at the closing, the parties and their representatives ordinarily assemble and lay out the paperwork. In neat piles on tables are found bills of sale, required consents, officer’s certificates, opinions of counsel, and other transfer memorabilia. After dealing with the inevitable last minute snafus, documents are signed, wire transfers are completed and the business changes hands.
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"Getting to Yes"...[by] Fisher and Ury...[who] call their approach "principled negotiation". It contains four key elements:
