Are You Prepared (For The Sale Of Your Business)?

You have been working for many years building and growing your business and the goal is to sell it one day. Are you doing what is truly needed to make that a reality?

A proper sale of a business takes a significant amount of time and preparation on the part of the business owner. It is highly unlikely that a buyer will just appear one day with an offer you cannot refuse and close a transaction in a couple of months. Rather, thoughtful planning and a proactive approach will result in an efficient sale on your terms – a transaction that quickly maximizes financial return with the correct buyer in a professional and confidential manner.

As Achim Neumann, President of A Neumann & Associates, LLC. and one of the foremost respected M&A advisors on the East coast, says in his 2017 book entitled The Road Beyond – What Nobody Tells You About Selling a Midsized Business, “Whatever the ultimate motivation or timing is for the sale, what is most important is setting the planning into motion with as much lead time as possible – ideally, at least three to five years ahead of the planned transaction time.  Within this context, a business owner will have many questions regarding preparation for the sale. These questions are essential to the owner’s, ‘peace of mind’, thus determining, if he or she is ready to sell and motivated to commit to the process.”

So what do you need to know to properly prepare for a successful sale of the business? Here are 5 key basic questions that should be answered for every business owner before proceeding:

1. What is my business really worth? – A proper accredited fair-market business valuation should be performed and delivered to the business owner. This cannot be a “back of the envelope, one size fits all” type of appraisal based upon typical rules of thumbs ratios or revenue and profitability. Your business is unique, and it deserves a company specific evaluation based upon factors unique to it. The valuation should accurately identify sellers discretionary cash flow (or the true benefit of ownership on an annual basis) as well as the assets included in a sale. Based upon current market factors and the financial performance of the firm over the past 4 years, an accurate value can be determined.
2. How attractive is my business to a potential buyer? – As part of the valuation, it is critical to have a formal company marketability assessment provided with it. This review will outline both the positive and negative operational factors that drive value and impact the relative attractiveness in the market from a buyer’s perspective. Items such as owner dependency, client concentration, managerial depth, financial record-keeping, recurring revenue, and potential growth opportunities all impact the marketability of a firm in the buyer’s eye. A useful valuation and marketability assessment will also provide a call to action for the owner to improve and address any deficiencies before a sale is initiated. Bottom line is this – the stronger your firm is going into the market, the more cash you will receive at closing (as opposed to deferred dollars) and the stronger overall transaction can be attained. A sample marketability assessment can be found at https://neumannassociates.com/company-marketability-assessment-registration
3. What will a deal look like? – The combination of a proper valuation and marketability review will directly influence what a final deal will look like – you need to know exactly how much cash will be delivered at closing and how much will be deferred in either seller note or performance-based scenario. The physical assets and working capital levels included in a sale must be defined and deliverable. Moreover, you need to know how a deal will be structured (stock or asset sale) and the relative tax implications of a sale. Without this detailed definition, a “simple valuation” is simply meaningless.
4. Will that deal meet my goals? – Now that you know the details of what a deal will look like, you will need to see if that transaction will meet your goals – both financially and from a lifestyle perspective. The financial proceeds of a sale can be inserted into a financial plan and reviewed to see if cash flow will be sufficient for retirement or change of career. Many times, a transition period or post-closing consultancy is required to execute a sale – this needs to be defined and deliver the lifestyle elements important to you. Your goals will be met if there is clarity with valuation, deal structure and owner motivation.
5. What is the process to discretely sell my business and meet my goals? – There is certainly a correct way and an incorrect way to sell a business – the assumption is that you would want to do it properly. Once the preparations outlined above are in place, it is essential to collaborate with the proper advisors to implement the sale. Professional marketing documents, access to the correct buyers, stringent buyer prequalification to preserve confidentiality, expert negotiation skills, accurate financial reporting, and a thoroughly managed approach are all pillars of a successful transaction process. If you understand the process and are an active participant from the beginning, it enhances the experience and chances of success.

As Mr. Neumann adds, “Some business owners assume that selling a business is similar to selling real estate, but nothing is further from the truth. A successful and confidential business sale requires a great deal of preplanning, valuation, cash flow recasting, document preparation, buyer evaluation and prequalification. In fact, selling a business is not a one-person job; it is a team project requiring and M&A advisor, an experienced business attorney and a qualified CPA – all in place and working with the owner well in advance of a transaction.”

Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful and proactive approach.  The execution of an efficient sale as described above is a complicated process that calls for experience, discretion, and professionalism. This is only going to be done once – it needs to be done correctly and with full control of the business owner. The sooner you can have a meaningful fair-market valuation and marketability assessment put in place with a qualified M&A advisor, the sooner you can get the information you need to build the foundation for a successful exit strategy.