It might not be something they like to talk about, but all business owners should at least think about what their exit strategy is. Even massive companies like Campbell Soup Co. sell off business units at one point or another, so it’s best to be prepared.
Plus, there’s never been a better time to sell. Citizens Bank’s 2019 mergers and acquisitions survey of 600 companies found that 62 percent of potential sellers are either already engaged in a transaction or looking to sell a business this year.
As the Baby Boomer generation inches closer to retirement, valuations are steadily increasing. The economy is in good shape, and banks are still hungry for loans and, therefore, offering attractive deals.
If you want to be in that looking-to-sell majority, it’s time to put a fresh coat of paint on your product before it hits the open market.
Preparing for the Sale
I’ve bought and sold a lot of businesses over the years. My fastest acquisition so far occurred in just three days. It was a fire sale that actually turned out to be a great deal for both the seller and me in the end.
I found out on a Wednesday that the business was closing its doors that Friday and the company was telling customers to go elsewhere. We made a deal for the company to get a percentage of the gross profits from the customers we retained — a win-win for everyone involved.
Of course, that was a stroke of luck. With a strong management team in place and good financials, a typical business sale transition typically takes at least six months to reasonably plan. Selling a company with poor earnings and outdated records could take up to a year — if the company is even sellable at all. No matter how much cash flow you have, if you don’t track it, nobody will want to buy your business.
That’s why it’s important to have a qualified financial advisor in your corner, especially if you’re looking for seven figures or more.
The Benefits of Solid Financial Advice
The first question I ask any potential client is “Who is your financial advisor?” It’s important to gauge the client’s level of experience and preparation from the get-go.
Not every financial advisor has expertise in business sales. You need to do your due diligence to find one who has experience with mergers and acquisitions and who is preferably a registered investment advisor (RIA). RIAs have a fiduciary responsibility to act in their clients’ best interest — in other words, they’re not going to sell you something you don’t need. I can’t stress enough how important this is.
Also, don’t be as focused on the amount you’re selling your company for as much as what you’ll get for your company net of taxes. The taxman will get his cut, but there are a number of ways to reduce your tax liability, such as using deferred compensation plans or a deferred sales trust.
A qualified RIA understands the tools that are necessary to minimize the tax burden of your company sale, and this person can help you set up a family trust to protect the funds from lawsuits and long-term illnesses after the sale of your company. These are important considerations as you’re preparing to sell.
3 Steps for Selling Your Company
You don’t know what you don’t know, so talk to your financial advisor about the best options for selling your business, whether it’s immediately or over a period of time. Then get to work on these three key steps:
1. Determine the true cash flow of your company.
Your certified public accountant (CPA) has probably been minimizing profits to minimize tax liability, so that’s not the best measure of your company’s value. Cash flow is a stronger indicator, so your company needs to show three years of solid cash flow prior to the sale.
The first things potential buyers will request are up-to-date financial statements and tax records. If you have a reputable CPA preparing these for you, you’ll be set. Few things frustrate buyers more than waiting for companies to get their paperwork together and up-to-date.
And whatever money you’re funneling away from the business or hiding, you need to stop. I always tell people that you can’t sell the wink. Buyers are wary of investing in companies even when the financials are transparent. Acquisitions can be tricky, so don’t give buyers a reason to second-guess.
2. Notify stakeholders appropriately.
If you’re the majority owner and you’re doing due diligence to see what the company is worth, there’s no reason to get stakeholders involved. But once you’re certain that it’s time to sell, everyone with a stake in the business has to be told, including shareholders. In many cases, shareholders have voting rights and must approve the sale before it can be finalized.
In fact, everyone involved in the company, both internally and externally, will eventually need to be told. Buyers want to know that there’s a solid management team in place and that the business will continue running even if they’re out of town. And customers want to be assured that the brand’s quality will be consistent after the sale. Naturally, you also need to notify employees.
3. Tell your employees at the right time.
You need to tell your employees about the sale, but the “when” depends on their role. Do you have key employees whom you are susceptible to losing in an acquisition? Do you have non-compete policies in place? Your financial advisor and a lawyer can help you understand how an acquisition will affect your employees.
Also, find out how likely it is that the acquiring company will keep existing staff. Layoffs are common in transitions, so employees might jump ship at the first sign of a sale. Confidentiality is vital until the sale is finalized, as these types of major changes can shake the rumor mill to full tilt. For example, for some companies I’ve bought, we talked to key employees a month before the transaction, but we didn’t tell the rest of the employees until the day of the sale. The timing will vary depending on the situation.
A proposed title for my next book is “101 Ways to Screw Up the Sale of a Company.” Selling a company is a lot like baring your soul, and all the skeletons come out of the closet. It can be embarrassing and create distrust if you’re not upfront about everything. Liens, court judgments, and other hidden debt can quickly put the brakes on an acquisition.
It’s important to build a strong team that includes a financial advisor, a business attorney (not an estate, litigation, or other personal attorney), a CPA, a broker, and whatever temp workers are needed to fill in the gaps during the transition. Once you have this key team in place and follow the advice above, your business sale should be a breeze.
Terry Lammers, CVA, is managing member of Innovative Business Advisors. He and partner Steve Denny launched the business in 2014 to perform business valuations, help people buy and sell companies, and provide exit planning and consulting. Terry is the author of “You Don’t Know What You Don’t Know: Everything You Need to Know to Buy or Sell a Business,” and he was president and owner of Tri-County Petroleum for over 20 years.