Perhaps there’s a health emergency in your family. Or you’re ready for your first real vacation in years. Maybe a significant financial upsurge or downturn is signaling the time is right for you to sell. Whatever the reasons for wanting to sell, it is essential to understand there are key steps you can take to maximize your financial and emotional yield.
Recognize a defensible selling price
Before marketing your business you should educate yourself on the selling process. Start by setting an aggressive, but realistic selling price. If the price is too high you may not attract any buyers. If you set the price too low you may wind up settling for a price well below what your business is actually worth.
By determining a realistic sales price many other crucial variables may be determined; primarily your true financial yield (not what you sell for, but what you actually get to keep) and your estimated tax burden at the point of sale. With these two figures, tax minimization and wealth preservation strategies may be introduced to “preserve” as much money as possible.
Clean up, physically and financially
Another important step in selling your business is to get the premises cleaned up and in order, both physically and financially. Of these two, the most important is getting your bookkeeping in order. Many small business owners are intimidated with the thought of “cleaning-up” financially. However, both buyers and lenders want to see financial statements which are accurate and organized. This nominal investment will be returned to the seller many times over upon the sale. Without cleaning up the books, many small businesses are not even saleable.
Tax preparation/planning
Once financially clean, your CPA can then advise on the pre- and post-sale tax liability. For some there are excellent options which result in the entire transition being a non-taxable event. Others may pay upwards of 40 percent in tax liability. With your life’s work at stake, asking the right questions up front of your CPA or tax specialist will prove priceless in preserving your wealth. Again, it’s not about what you sell for, it is about what you get to keep.
Find the right buyer confidentially
Selling a business is not at all like selling a home or a commercial piece of property. Confidentiality is critical. Handled properly the ideal buyer can be identified and information disseminated without any public knowledge. Handled poorly, employees, clients, vendors and suppliers will know of your plans, typically hurting the value of the business.
Competitors may make the best buyers, but they are also the highest risk. They are least likely to keep sale information confidential and typically will use this “negative” information against you in the near future. It must be done discretely with the appropriate documentation signed. The quote is true, “Good news travels fast….bad news travels faster.”
Deal structure
Once the best buyer(s) are identified, the deal structure and terms are typically identified in a LOI or an Offer to Purchase with Earnest Money. The key issues will no doubt include price and terms. Most sellers desire 100 percent cash at closing. If there is a lender involved however, they may require the seller take 10 percent to 15 percent on contract, typically called a Seller Carry Back Note. They do this to ensure the seller has some “skin in the game.”
Further details include: stock sale vs. asset sale, asset allocation, how long the seller will stay and train the buyer, non-compete parameters, key employee contracts, consulting agreements, etc.
When a few basic steps are followed, the entire selling process is much smoother and will eliminate much of the emotional angst involved in many sales.
Jeff Kraai is president of Exit Strategies Inc., specializing in confidential business sales and retirement transitions. He can be reached confidentially at 360-696-5812 or at info@perfectexit.com.
