Selling your business: Maximizing value and ensuring a smooth transition

Selling a business is a significant milestone, marking the culmination of years of hard work, investment, and growth. Whether you’re looking to retire, pursue new ventures, or simply capitalize on your investment, a well-executed sale is crucial. However, a smooth transaction is easier said than done. Here’s a comprehensive guide to help you maximize the value of your business while minimizing the stress of selling.

ASSESS THE VALUE OF YOUR BUSINESS

Ideally, business owners should begin tracking the value of their business 3-5 years before the time they want to sell. This gives the seller time to make the meaningful changes needed to position the business for the highest value.
Business valuation involves assessing various factors such as financial performance, assets, and potential for future growth. A business valuation expert can provide an accurate and objective evaluation as well as give you some perspective on how to improve the value of your business. Key valuation methods include:

Income Approach: Evaluates the business based on its expected future earnings.

• The income approach is generally used by investors for larger businesses where the future cashflow/profitability are reliable or for businesses where recent investment is expected to generate predictable profitability.

Market Approach: Compares the business to similar businesses that have been sold recently.

• Most frequently used in the main street and lower middle markets where market comparables are available.

Asset Approach: Looks at the value of the business’s tangible and intangible assets.

• Most frequently used in businesses that are extremely asset heavy or those that have negative cashflow.

DO YOUR HOMEWORK

• What are your personal plans after you sell?

• What’s your number? (What do you need financially from your business in order to make a sale worthwhile?

• Is your business in a position to give you that number?

• What are the tax implications of selling your business and how can you minimize the tax burden?

ASSEMBLE YOUR TEAM

Selling a business is a team sport and the sooner you get the team together the more smoothly your transaction will go.

• Business Intermediary: A good business intermediary can help you find buyers, negotiate terms, prepare and manage diligence, provide resources, give recommendations, and provide a buffer between the buyer and the seller to increase your chances of getting to the closing table.

• Attorney: An attorney that specializes in mergers and acquisitions (M&A) makes all the difference.

• Accountant CPA: An accountant can help you provide the necessary documents and tax filings.

• Tax Strategist: If your CPA does not have experience in structuring M&A deals for tax efficiency, you will want to engage with a tax strategist (especially if your deal is over $1 million).

PREPARE YOUR BUSINESS FOR SALE

Preparation is key to making your business attractive to potential buyers. Here are some steps to enhance your business’s appeal:

• Financial Records: Ensure your accounting is accurate and up-to-date as buyers will scrutinize your financials and tax returns to assess the business’s financial health.

• Operational Efficiency: Streamline operations and improve processes. A business that runs efficiently and has well-documented procedures is more appealing.

• Legal and Compliance: Address any legal issues and ensure compliance with industry regulations. Resolve outstanding disputes and make sure all licenses and permits are in order.

• Growth Potential: Even if you are selling, you should establish a business plan that highlights areas for growth and expansion. Buyers are interested in the future potential of the business, not just its current state.

FIND A BUYER

It isn’t just about finding a buyer, it is about finding a qualified buyer and that takes time and a lot of effort. This is where a business intermediary can help. They can find verified buyers while your time is better spent running a business worthy of buyer interest.

NEGOTIATE THE SALE

Negotiation is a key phase in the sale process. Key aspects to negotiate include:

• Sale Price: Be prepared for back-and-forth discussions and be open to negotiating terms.

• Deal Structure: Decide whether the payment will be a lump sum or structured over time. Structured payments may include earn-outs based on future performance.

• Transition Period: Define the terms for transitioning the business to the new owner. This may involve training, consulting, or staying on for a period to ensure a smooth handover.

PREPARE FOR DUE DILIGENCE

Due diligence is a thorough review process conducted by the buyer to validate the information provided and assess any potential risks. Be prepared to provide detailed documentation and answer questions about your business. This process can take several weeks to months, depending on the complexity of the business.

FINALIZE THE SALE

Once due diligence is complete, you’ll need to finalize the sale through a formal agreement. This typically involves working with legal professionals to draft a comprehensive sales agreement that documents the terms and conditions of the sale.

TRANSITION AND POST-SALE CONSIDERATIONS

After the sale, focus on a smooth transition. Sellers should expect to assist the buyer in formulating and executing a transition plan that includes:

• Clear communication to employees,

• Introductions to customers and vendors.

• Hand-off of responsibilities if the Seller is leaving the business.

 Selling a business is a complex process that requires careful planning and execution. By thoroughly preparing your business, finding the right buyer, negotiating effectively, and addressing legal and financial considerations, you can maximize the value of your sale and ensure a smooth transition. Consulting with experts in valuation, legal, and financial matters can further enhance your chances of a successful outcome.

Kathryn Guthrie is an owner and broker of the Liberty Group of Nevada and a seasoned entrepreneur with over 16 years of business. Her passion lies in supporting small business owners to successfully transition their businesses to the next generation of ownership. Guthrie is a Certified Exit Planning Advisor (CEPA) through the Exit Planning Institute and a value builder adviser, which makes her well-equipped to provide comprehensive guidance and support throughout the transaction process.