Crafting Your Business Succession Plan and Strategies: My Top 18 Tips to Your Successful Business Sale
November 19, 2008
Getting out, and getting paid, when you sell your business are two different objectives. Crafting successful strategies that get results and implementing them takes time, effort and a variety of talents. Shifting ownership from you, your family, or your partners to a new owner is a delicate process. Just remember, no sale is final until you have survived the negotiations, weathered the closing, cashed your final check and run the statute of limitations for all contingencies. If you don’t get your best deal, or you don’t get paid every last cent, shame on you.
Tips On Taking Precautions:
1. Get Your House In Order – Make sure all your company information/documents (minutes, contracts, forms, statements, etc, including any Shareholder Agreements) are in order. Selling your business can take some time, so once everything is current, keep it that way.
2. Decide What You Want To Accomplish (with the sale and with the rest of your life) - Make 2 lists of goals – one personal and one professional, detailing what you want your life to be like and look like once the business is sold and you no longer have to come into the office. Resolve any conflicts between the lists. Share the lists with your top managers. They will, in most cases, be staying on [and locking them into their jobs may be key to achieving your objectives]. Ask them for their opinions — in writing — of both the goals and the potential impact of reaching the goals in their areas of responsibility. You want them on board with the sale, not working against it.
3. Ferret Out And Resolve Personal Obligations and Contingent Liabilities – Review ALL loan, lease and other financial obligations that may exist to determine if there are any personal guarantees in place. If possible, negotiate personal guarantees away. (Some lenders, including leasing companies, often roll existing guarantees forward as part of a renegotiated lending package. Assuming there are no guarantees in place, without checking, can be costly.) If you can’t negotiate new terms without personal guarantees, consider paying off the obligation at settlement. Buyer Indemnifications are not worth much if the buyer can’t pay.
4. Shift To A Profit Strategy – The US Tax Code makes the smaller company the best tax shelter around. Once you decide to sell, the purpose of your financial reporting is not to minimize taxes, but to enhance value. You may pay some taxes during the transition, but it will both enhance company value and make the company more attractive.
5. Recruit A Strong Team – Getting your best deal often depends on recruiting and using the right team of advisors. These advisors include your attorney, accountant, financial planner and consultant and/or investment banker. These professionals comprise the team you will need to achieve the most dollars and the best terms. Each has his/her own specific skills and you will need them all. The few dollars you spend for professional assistance (usually 10%, or less, of what you receive from the sale [as you receive it]) will more than pay for itself in getting you a better outcome.
6. Get Your Team On Board With Your Goals And Set Criteria For The Sale - Working with your team, use your goals’ lists to generate a criteria checklist. Items for this checklist include:
a. minimum selling price (see #3 below) required to close any gaps in your financial (estate) plan and ensure either a secure retirement or the seed funds you need for your next endeavor;
b. timelines for when sale proceeds are needed (retirement funds, if part of the plan, may not be accessible without penalty before a certain age).
c. type of buyer most suitable to run the business;
d. timetable for sale;
e. objectives to achieve prior to any sale (including employment contracts, shadow equity or equity for key executives);
f. transition period and employment contract for you;
g. desired terms and conditions; and,
h. other financial issues.
Divide your completed checklist into MUST items, those things a buyer and/or sales transaction must include before you accept a deal, and LIKE items, those which while nice to have are not essential to the sale. A good, solid checklist takes time to develop, but it will keep you on target.
7. Qualify and Vette Everyone You Share Confidential Data With – Set criteria for vetting prospective buyers and insist that any prospective buyer sign a Confidentiality and Non-Disclosure Agreement. Having the process and documents in hand helps if deep pockets suddenly arrive on the scene – and you will be seen as more professional for having these agreements in place.
8. Let Prospective Buyers Start Talking Price - Pricing is important (but I don’t recommend sharing it with prospective buyers in advance). While you must get your minimum-selling price, you will almost certainly want more. And you may, or may not want to establish an asking price (once set, it’s hard to ask for more and almost always negotiated downward). You should have your consultant or one of the other team members prepare (or commission) an independent valuation of the company. The valuation will give you a good starting point in establishing a realistic pricing strategy, keeping in mind that your business may well be worth more to one buyer than another. Ideally, a valuation should allow you to compare several valuation approaches to the company’s worth. These computations can be based on: multiples of earnings approaches; asset value plus goodwill; or some of the many sophisticated cash flow models. Be assured, the professionals representing the buyer will be doing similar calculations. Knowing how much to settle on with each prospective buyer, and under what terms, are central to your success.
9. Establish and Maintain A Paper Trail – Establish a file where you can keep a paper trail of all deal related documents.
10. Answer Your Most Important Question: Are You Ready To Move On? - Take a look at all the preparations completed BEFORE even looking for a buyer or dangling a tantalizing “carrot” in front of an eager prospect. Be brutally honest with yourself. Have you considered all the contingencies? Have you reviewed and considered all your financial plans? Would strengthening the business over a short period result in a greater selling price or better terms? ARE YOU READY AND WILLING TO LET GO AND WALK AWAY? Unless your answer is, YES, put everything on hold and get back to work.
Tips On The Selling Process
- Find The “Right” Buyers – Lots of people talk a good game but when it comes time to sign on the dotted line, there may only be a few, or even one IDEAL buyer for your business. Finding him/her can be difficult.
- Places to look for prospective buyers include: Investment bankers, venture capitalists, local banks, accountants and attorneys, in addition to many business brokers, are all potential referral sources for transactions. Your management team may be ready and willing to make you an offer. A family member, or friend, might want to continue the business. Customers and/or vendors and/or competitors might have interest. A number of new resources have appeared online in the form of message boards and social networking sites – even a casual conversation can lead to a meaningful opportunity, so be prepared.
- You can also do a little market research into those companies and individuals whose business interests fit your criteria, but don’t make any announcements until you are truly ready to go public and tell the world. Bear in mind, also, that developing a strategy of who to tell, how and when will make for a much more stable transition for customers, employees, lenders and other stakeholders.
- (Once you announce the company is for sale, there will normally be more “tire kickers” than you want to deal with. (In addition, without a transition strategy as noted above, some competitors will almost certainly use such information as a way to attempt to “raid” your key accounts.) Match every prospect against your MUST’s. If you discover a “must” missing, move on the next prospective buyer.
- Develop A Short List – A short list of prospects should be composed of those who inquire (or are identified and contacted) who you feel might make a good match and where a good transaction is likely. Rate them on their potential attractiveness, on their potential ability to complete the deal, on their ability to grow the company and also on their anticipated ability to make all payments to you in a timely manner. Once you have a working list to go with your criteria, you, or preferably a member of your team, can begin making contacts. A significant show of interest will require a prospect to sign a Confidentiality Agreement noted above. Only after this document is received will you begin to disclose (in stages) financial and other data to a prospective buyer. (A copy of the form Advent uses is available; use the contact form here or send me an email, put “Get Results Agreement” in the subject line and we will send you a copy of ours.
- Do Your Homework About Prospective Buyers - While you are having “get acquainted discussions” and disclosing prelimiinary data, have your team conduct a thorough due diligence review to qualify prospective buyers – both at the company and individual level. This happens BEFORE releasing your own sensitive information. Due diligence is a responsibility that both the buyer and seller have. Serious buyers should insist on reviewing records, tax returns, financial statements, public disclosures and other documents. They should speak with your accountants, attorneys and advisors. They should want to speak (and this needs to be handled very sensitively), with your vendors, customers and employees. They should also be prepared to prove they have the financial resources to complete the transaction. You need to be asking similar questions about them. Due diligence is essential to both sides in crafting a win-win deal.
- Come To Terms With Your “Adopt Or Sell” Mentality – Realize, particularly in the initial discussions and early negotiations that you may be perceived as an entrepreneur more interested in having the business “adopted” than in it being sold; or (if you the owner is incapacitated) as an inflexible, corporate type intent only on selling a product line, division, or company, before a certain date or at a certain price; or as shareholder representative who doesn’t know the business or its potential or future and just wants out. Knowing where you are coming from helps everyone get past possible initial misperceptions and is key to enhancing deal value. Whatever your mentality, it will require a studied approach and great sensitivity.
- Negotiate Cautiously – Only after all this preparatory work has been completed can the challenging task of negotiating the sale get underway. The good news is that homework has given both you and the prospective buyer insight into the other. If there are cultural issues, they have usually surfaced and can either be resolved or both sides move on to other opportunities.
- In moving forward, my advice to clients (buyers and sellers, alike) is to strive to control the terms rather than the price. Several years ago, I negotiated a deal in which the seller and buyer were far apart in their estimates on what the company was worth. We structured the agreement of sale so that the net present value, the cash value today, equaled what the buyer wanted to pay, but the total dollars for the transaction over time were more than the seller originally asked. Both sides felt they had won (and they had).
Tips on Closing The Deal And Getting Paid
- Stick To Your Plan – Identify and align your options in relation to being paid at closing and after the sale. Pricing, who gets what, escrows and other issues are all important, but when you are selling you can never forget the that the only meaningful goal is Getting Paid. So, knowing what you want is critical to getting it. A brief list of options includes; a strictly cash sale due at closing; a tax free exchange of stock (with a public company); cash plus a promissory note plus an employment contract; cash, a promissory note and a non-compete agreement; venture capital. The list goes on. Be sure at closing that you have dealt with any contingent liabilities remaining. (Just a reminder that such transactions may include: unpaid taxes; unexpired leases; lender UCC’s (Unified Commercial Code filings) that have not been satisfied. Failure to clear these items could result in costly comebacks at a later date.) Allow an average of from 2-6 months for the process to be completed during which time serious buyers identify and line up any additional funding sources, or funding terms and conditions.
- It’s Not Over ‘Til It’s Over - Make sure the agreement provides for regular financial reporting while you are still owed more than $1.00 from the sale, that default terms can be invoked prior to any future bankruptcy by a new owner and that there are sufficient teeth in any default provision to give you a fighting chance to restore the company to health if you have to re-possess.
- At Closing, The Devil Is In The Details – Closing can be tricky and unfortunately the closing process has unraveled many deals. Again, go gently. A deal isn’t done until all parties have signed off on the transaction. One deal I witnessed fell apart at the closing table when one of the advisors, claiming he was “emotionally moved” by the integrity exhibited by both sides, read a poem he had written for the occasion.
One aspect that requires precise attention is the Representations and Warranties provisions that are a part of every deal. Neither the buyer or the seller should sign off on these provisions until they are fully understood and agreed to – looking at both what’s going on at the time of closing and what might happen down the road. Representations and Warranties are sleeping giants that can unravel deals down the road and need to be handled as such.
After the closing, your new life begins. You are either out the door or an employee who will (probably) be out the door once the new ownership gets a handle on running the business. (Employment contracts notwithstanding, most former owners are often asked to leave long before their consulting/employment agreements expire).
More importantly, the “buck” now stops somewhere else. Remember that and stand aside – it’s the other person’s turn.
Whatever your choice, good fortune and good luck to you as you explore your options.
© 2008 John J. Reddish, MS, CMC
John, and his Associates at Advent, help entrepreneurs and other leaders who want to master growth, transition and succession to get results faster, less painfully and in ways that work for them. This happens through consulting, coaching/mentoring, training and/or speaking. Understanding that there is no ONE path to get results, client services are tailored to the way s/he can best use our services. John is a member of the National Speakers Assn. For more information: www.getresults.com. For succession information, go to: www.thesuccessionplanner.com. Or call 610.506.6311 in the US, 01.610.506.6311internationally, or at johnr [at] getresults [dot]com.
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