How to Prepare to Sell Your Business
How to Prepare to Sell Your Business
The world of buying and selling businesses through mergers and acquisitions is a complicated process to understand. To maximize the cash in your pocket at the end of the transaction, it is important to have a plan and a good team behind you to have the best guidance toward a fair deal. If the benefit outweighs the risk, value is created for the buyer, and a fair deal can be reached. Below we describe some tips to help formulate a direction and the role of the people who will help you along the way.
Give yourself time. Knowing that you would like to sell is great but rushing through the complex process will not allow for the best deal. One of the common mistakes is not giving yourself enough time. In the negotiation phase, you must be prepared to sacrifice return in exchange for speeding up the process. if you are desperate, the buyer will not budge, and you will be forced to accept if the goal is to be finished as soon as possible.
Starting early creates time to gather your resources. You can begin to pay off debt and to handle business-expensed items mostly used for personal purposes. This will put you in better shape long term because you will be able to pay off some of the liabilities and make the business more attractive to a buyer. You also have the time to find the best attorney, accountant, and merger and acquisitions broker to advise you, rather than the one that is just the best price.
You must also begin adjusting your tax strategy. There are many loopholes your business can take to minimize the amount of taxes you pay by showing a lower net income. However, this may not be the best strategy. You want to show the highest income possible because your income is what is multiplied by a multiplier to get a value of the cash flows.
CREATING TRANSFERRABLE VALUE
For a qualified buyer to want to buy your business, you need to create value for them beyond the salary they will receive and the value of the real estate and other assets. Otherwise, they are buying a job. This includes having future jobs and clients lined up and handing over current plans for the future. You must also make sure that if your company has them, the new owners receive the marketing plan, financial plan, updated financial statements and tax returns, clientele databases, and supplier contacts. If you do not have this information readily available gather and create the documents. This will ensure the buyer has all the resources needed to revise or continue to implement your strategy for success. Here are two articles written by the Small Business Administration and Business News Daily that describe how to write a business and marketing plan.
SBA Writing Your Business Plan
Creating an Effective Business Marketing Plan
For the new owner to understand the aspects of the business, it may be beneficial for you to stay on the transition team as a part-time paid consultant to advise the new owners on the best practices for success. This will make sure the new owners keep the business on the right path even if they do not know the ins and outs of the industry and business. Your name is still attached to the business for a period after the sale, so you want it to continue to remain successful to support your former employees.
To continue operating at the pre-sale level, you may want to create a consultancy contract with the seller. By doing this, they can help advise you on the business and industry processes to minimize the learning curve. You can set the length of the contract to what you deem appropriate to learn your new business.
At the time of sale, it is important to have the business show a profit. To make it as high as possible there are some strategies you can implement which in turn will enhance the value of your business. This can be done by maximizing the future benefit or minimizing the risk of purchase. One of these strategies is changing your tax strategy. Instead of taking every possible way to lower your taxes, focus on growing the revenue and paying in that higher tax bracket to grow your profit.
Another one of these is to minimize the number of business expensed items that are for mostly personal use. Since these provide a direct benefit to you more than the business, it is evident that they do not provide as much value to the business. Therefore, removing these items from the liabilities of the business will show less debt for the buyer. This will give the buyer a more realistic picture of the expenses associated with running the business and present it in a more professional light. It is important to make sure all the business expenses are included and documented. The buyer does not want to use personal funds to operate the business.
PREPARE FOR THE BUSINESS TO RUN WITHOUT YOU
A business that cannot run without you is ill-prepared for future business. Having a plan in place that outlines the roles of staff and the goals of the organization is vital to training the next generation of your workers to learn your responsibilities. Not only is this good practice in the case of succession planning and understanding your current situation, but it allows for guidance after you leave. If you are interested in learning more about succession planning, visit our website www.kbvinc.com, and give us a call at 570-322-7700.
In a family business, only 40% make it to the second generation and only 13% reach it to the third generation (Cornell University, 2022). One of the reasons for this is the failure to plan. Sometimes the owner leaves suddenly due to death or illness, but failure to plan in any situation does not leave the business with the highest chance of success.
To have the best chance at a fair and successful deal, it is important to have knowledgeable advisors to reach out for advice. These are the broker, attorney, accountant, and financial planner. All of them will specialize in different areas of business and are well-educated in their field. This allows them to offer the best advice in a narrow field. Having several advisors will allow for feedback and support in many areas along the selling process.
The broker is your primary advisor because they will perform your valuation and meet with you to determine your goals. The rest of the advisors will help the broker complete the transaction. Your broker will start by helping you find a qualified buyer. These are buyers with good intentions and the ability and means to afford the purchase. If you also are fortunate to own the land in which your business operates. The broker may be able to assist you with the sale of the real estate. They can use your financial statements and history to formulate a value and create your benchmark. Although not all brokers will assist with the real estate, they can refer you elsewhere.
Your attorney and accountant will help advise your legal obligations throughout the transaction. They will help you understand everything from which forms need to be filled out, to how to best avoid paying unnecessary taxes. One of these taxes that can be avoided is the 40% estate tax (Investopedia, 2022) If you plan on passing the business to your family upon your death, it will be subject to this tax. One common way to avoid this is to put the business in a trust. This way the trust has ownership, and the business is not part of your estate. Your broker is not your attorney. When deciding if the trust route is worth exploring, you should schedule an appointment with an estate planning attorney.
To decide if that is a route for you, they can work together to understand your assets. They also understand the concepts of cost basis and capital gains. We have attached a useful article from Investopedia that describes the differences between those two concepts with examples of each. Your accountant will prepare your taxes, so they will understand your business history. A tax attorney will help you with planning and tax disputes. Unlike your accountant, they do not prepare the taxes. Despite having different roles in advising you of the sale of your business, they both will help you prepare a well-reasoned and legally sound plan to execute and build value.
They also will complete your tax returns each year. As the business sells and buys assets, pays short- and long-term debt, and issues stock, the accountant will oversee keeping track of these transactions to be compliant with IRS standards.
Your financial planner will help you plan for your retirement. Whether your goal is to retire or start another venture, you will want to spend the cash you receive from the sale wisely. Depending on your age, family, and location, you will need to determine how much you need to retire. Your final valuation will need to be near this figure for you to be successful after the sale.
Lastly, your family and friends also can be a resource. They may not have the technical expertise that the advisors have, but they know you and can help you decide whether it’s a good deal, or help you formulate your future. Usually, they have your best interest at heart so they will provide honest advice.
There is a lot of preparation that goes into preparing to sell your business. From creating value to maximizing your profit and selecting your preferred advisors, it is understandable if this process becomes complicated quickly. If you are in the market to sell your business and need help with these initial steps, reach out to us at Keystone Business Ventures by calling us at 570-322-7700 or sending an email to email@example.com. We will happily schedule an appointment to discuss the selling and purchasing process, our succession and transition planning services, or our other broad range of services not mentioned in this article.