Selling your business ‘someday’? Five things to consider now
1. First and most important — start putting your house in order.
Depending on the issues you face in your business, this will likely be one of the most time-consuming parts of the selling process. Identify any problem areas in your financial documentation, revenue line, profitability, real estate, staffing, inventory, receivables, etc., and work to fix or minimize what you can. It is critical that you evaluate your operation from a buyer's perspective: Ask yourself if the business is in good enough shape to sell, and seek a qualified third-party valuation.
2. Don't forget important agreements — are they documented? Up to date?
Make sure agreements with vendors, customers, employees and distributors are current, memorialized in writing and transferrable.
3. Consider your personal financial situation and goals.
For many owners, the sale of the business is a major part of their retirement plan, yet they put off taking an objective look at how the sale will impact their personal financial situation. Can you realize a number that works for your lifestyle? If not, you will have to consider adjusting that lifestyle or postpone selling until you make improvements in the performance of the business.
It is a good idea to get an estate planner and a financial professional involved early on to help plan for the significant liquidity event. If you have partners or shareholders, a professional can assist you in sorting through who owns what and who gets what after the sale. Advance planning will help you achieve a smooth transition from running the business to enjoying retirement or working on your next entrepreneurial venture.
4. Decide whether a legacy is important.
Some sellers are happy to close the deal and walk away. Others are concerned with what happens to the business, its reputation and its employees after the sale. Do you hope that the business continues to contribute to the community and employ locals?
While you typically can't bind the buyer to run the business in a certain way, you can research and ask questions to determine the buyer's business culture and give preference to those whose cultures more closely resemble your own.
5. Limit your liabilities.
Perhaps your current legal counsel has relevant experience in mergers and acquisitions. If not, consider interviewing law firms with strong specialization in this practice area. Selling a business is a high-stakes event, and while the buyer assumes the greater risk, you as the seller will also take on certain risks. If there are surprises, or the business does not function as represented, the legal exposure for the seller can be quite high.
Consult with an experienced mergers and acquisitions attorney early in the process to help you identify the risks associated with various representations and warranties, and to help you limit these risks through the negotiation process.
Understandably, the buyer wants protection from the existence of any liabilities undisclosed during negotiation, up to closing and sometimes even after the sale. As the seller, you want to avoid circumstances that force you to give back money earned from the sale after the close. For example, if an employee brings a claim for a preclosing event after a business is sold, the representations and warranties and indemnity provisions of the purchase agreement will determine the extent to which the seller must pay for this claim. An experienced mergers and acquisitions attorney can help limit this exposure.
Pete Roth, an experienced mergers and acquisitions attorney, is a partner with Varnum LLP. When working on the selling side, he enjoys helping owners get their money as quickly as possible and then keep it after close.