After many hard years of work and building, you decide it is time to sell your business. Before you uncork that champagne bottle and buy your yacht, you will need to think about issues and plan in advance of selling your business. You should carefully consider the following three things when you think about selling your business.
I can address all the issues of the business during the sales process, and they won’t affect the price or terms (also called “putting head in the sand” syndrome).
Business owners wishing to sell their business often neglect or ignore issues that the business has in the accounting, financial controls and legal areas that can significantly impact the ability to smoothly sell the business. Business owners who do not have an outside accounting firm review the financial statements prior to marketing the business can find a rude awakening when a prospective buyer does its due diligence on those financial statements and finds irregular accounting practices. Similarly, Sellers who wish to sell the real estate along with the business should not leave remediation of environmental issues or resolution of liens until the negotiation of the sale of the business. Dave Chambless, at Abraxis Business Services, smartly sums up the likely result of this problem: “It is very important that all significant business, accounting and legal issues get addressed before the sale of a business – not during the sale of a business. Many of the risks with which the seller has lived and is comfortable often become significant issues during the deal (as a buyer may not want to live with such issues or, if they must, they want a lower purchase price).”
I can time the sale of my business to maximize its price.
Business owners can no better time the market for a sale than you or I can time when the stock market will hit bottom. I have watched time and again as business owners wait to sell the business at a time they think the revenue of the business is at its maximum. This is typically a mistake as there is much more involved in the process. Dave furthers this sentiment as follows: “A common mistake that owners make is to try to sell their business based on their personal timing, and they do not take into account market activity (e.g. their business segment is experiencing heavy M&A activity), industry shifts, their commitment level to the business, or many of the other factors that can affect a business value. A good rule of thumb is to sell the business as it is increasing its revenues and cash flow. This is when it is the most attractive to others! When it has reached its peak, it is too late.”
A Bird in the Hand is better than an Earnout.
An earnout means that all or a portion of the purchase price will be paid to the seller at a point in the future provided that the business being sold meets certain post closing financial performance criteria. Many seller’s agree to an earnout in the hope of receiving additional money after closing assuming the business will perform well financially after the closing. What they fail to consider is that the buyer may wish to run the business differently post closing or may account for sales differently and that either may cause the business to miss the financial targets. Either situation results in an unhappy seller who did not receive the additional earnout revenue. A seller may be better off most times accepting the bird in hand in the form of a lump sum cash payment at closing as opposed to the earnout in the bush that may never come to pass.
Those who prepare for the sale of their businesses will be rewarded with higher prices for their businesses and smoother pathways to the closing tables, while those who do not address these three issues will find the process difficult, frustrating and expensive.
