American business owners are breathing a collective sigh of relief as the post-recession rebound officially sets in, and for many who weathered the economic downturn, earnings have increased, profits are up and potential purchasers are again lining up to enter the market with finances in hand. And for others, fair market value for the business has reached a point where it may make financial sense to sell, particularly for those who held on to see a better day.
But before you make plans to sell the business, whether now or in the next few years, there are a few simple questions to ask yourself to prepare and avoid unwanted surprises. After all, preparation enhances the value of your business; surprises cost money and time.
Does My Ownership and Business Structure Still Work?
It may be more efficient to save a dollar than to earn an additional dollar on the sale of your business. Consider whether your current business structure (C corporation, S corporation, LLC, or Partnership) is still the “best” structure for your business.
Do you have lines of business that you can “spin-off” to subsidiaries or brother/sister entities, which could help maximize the sale price and minimize taxes? Consider whether there are valid business and tax planning reasons for your business to re-organize in a state that does not have a state income tax. If your business has owner-occupied real estate, consider whether the real estate should be placed in a separately-owned LLC (and then rented to the purchaser of your operating business). Your business has grown, and perhaps you have outgrown your current business structure.
Is My Estate in Order?
If you haven’t put an estate plan in place, do so before you sell your business, or even before signing a letter of intent to sell. If you undertake ownership recapitalization (e.g., voting and non-voting stock) or transfer all or part of your ownership in your business to the appropriate estate planning vehicle (like a trust), you may be able to make the sale proceeds available to your descendants more tax efficiently and remove the proceeds from your estate for estate tax purposes.
By planning ahead of a potential sale, you may be able to take advantage of certain estate planning strategies, such as discounts for lack of marketability and lack of control.
Are My Financials in Order? Meet with your accountant (or hire a qualified accountant) to review your financial records. A sophisticated buyer will engage its team of experts to undertake a quality of earnings analysis of your revenue and expenses. Don’t be surprised. Perform your own investigation to identify hidden gems or potential warts that would impact your valuation.
Also, have your accountant confirm that your financial records are in a format that can easily be understood by the buyer’s financial team. Speaking the same financial language as the buyer avoids the uncomfortable and costly conversation about “your financial records are a mess.”
Finally, consider whether it is worth obtaining audited financial statements before you take your business to market.
Is My Path to Closing Clear?
Make sure your business records clearly identify the owners of your business. This may seem like a mundane chore, but it will become a priority at the time of closing the sale.
If yours is a family-owned business, have there been any transfers to relatives, or to trusts, or have family members died? Have you awarded ownership to an employee who left the business years ago, but do not have records showing that you bought back the ownership? Have you bought the interest of any prior owners and didn’t have them clearly sign-off on ownership?
Loose ends like this can delay or torpedo a sale. Even if you get to closing, they can create additional expenses or reduce lead to a reduction in your sale price. Take steps to put your ownership records in order before cleanup becomes urgent.
Are My Relationships Secure?
A buyer wants to ensure that your key customers will remain as customers even if you are no longer running the business (or after the end of your post-sale consulting period), and that any market advantage you’ve obtain from relationships with vendors will not shift to a competitor.
You may have forged solid relationships that have served you and your business well, but undertake an inventory of your key relationships from the buyer’s perspective. Are the terms of your relationships committed to writing? If not, should they be? If your relationships are in writing, how clear are the terms and have you been operating in a manner different than the actual terms of the agreement?
For your employees, it is critical that they won’t run for the exits immediately prior to or after the sale closes. Obtain confidentiality and non-compete agreements, if possible (the enforceability of these types of agreements varies widely depending on your state, so check with local legal counsel).
What Are My Business’ Vulnerabilities?
Initiate your own internal housekeeping audit to identify and then remedy any potential problems with taxes, pending or threatened lawsuits, employment related claims, independent vs. W-2 classification issues, unissued or expired permits or licenses, the physical condition of your building and tangible assets, and any disputes with customers and vendors, and any third-party consents required to sell your business. Uncover and address these matters before the buyer uncovers them for you, and lowers the purchase price.