If you had to boil “selling a business” down to one word, we might pick complicated. Selling a business requires owners to think through tax, legal, and financial considerations for themselves and the business. Beyond that, many owners have an emotional connection to what they’ve built, meaning there’s a certain X factor involved when it comes to finding the right buyer. In this article, we’ll walk through some of the high-level ways you can start to prepare your business for a sale. 

Five + years to sale

Ideally, you want to start preparing your business for a sale at least five to 10 years in advance. This gives you time to optimize your business based on your goals. Ask yourself:

  • Do you want to stay involved in the business? If you’re hoping to stay involved, the process may look different than if you want to cash out and move on. If you’re hoping for the latter, think through whether you’d be willing to stay on in a transition role and for how long.
  • What’s most important to you in a sale? Some owners want to sell to family and prioritize customer experience. Others want to maximize profit. Identify your objectives and prioritize them.

 

Then, research your options. There are multiple types of business ales and multiple ways to value a business. Which you choose will likely depend on:

  •  Business structure. C corps will have different rules and regulations than pass-through entities.
  •  Type of business. Do you have tangible assets or a relationship-driven business? Are you focused on growth and profitability or revenue generation?
  •  Size. How many employees do you have? Additionally, are they likely to stay on after a sale? How hard is it to find qualified employees in your industry?

 

We put together a cheat sheet for selling a business that details the different types of valuations, the various players that may be involved in selling your business, and some of the terms and acronyms to know. It may come in handy as you begin to research your options.

If you aren’t sure where to start, this could be a good time to engage a business consultant or business coach to help you learn about the process, understand the market for your business, and start preparing.

Two to three years to sale

Start getting your firm’s financials in order. Make sure your accountant knows that you may be selling in a few years and understands how you plan to value your business. A good accountant will be able to highlight trends for you—for instance, they might spot an area of growth that might otherwise get buried in financial statements.

They may also be able to spot any potential negatives early on—for instance if your costs are increasing in an area—so that you can make operational improvements.

Your accountant can also help you clean up your statements by removing extraneous information.  

These actions help you craft an authentic story for buyers that makes your business seem as attractive as possible, while still being honest and accurate in your portrayal.

Finally, focusing on the accountant early on will help you develop a strong working relationship with your accountant. This will be important as the accountant may need to work with your business broker on marketing the business and assist the buyer with due diligence work 

In addition to working with an accountant, we suggest talking to a financial advisor about your plans. In the same way that your accountant can help you get your business finances in order, a financial advisor can help give you an idea of what to expect on the personal side. They might recommend certain tax minimization strategies or suggest you talk to additional experts that you may not have considered.

Read more:

One year to sale

Hire a business broker to help you begin preparations. Depending on the size of your business, you may need to find a more specialized partner, such as an M&A advisor, or in some cases, an investment banker.

As a general rule, mid-size businesses (valuations above roughly $5 million) might need more than a business broker. If your business might be valued at more than $100 million, you may need an investment banker. While you may not have an exact handle on what your business is worth before speaking to one of these professionals, it’s likely you have an idea of range and where to start. If you don’t (or worry the valuation could be highly variable) consider talking to a consultant or a financial advisor to help orient you.

During this phase, you’ll likely focus on the story you’ll tell potential buyers as well as marketing materials. In the meantime, the professionals you work with can generate valuations, set an asking price, and prepare documents like a confidential information memorandum (CIM).

Expect your team to expand during this process. You’ll bring on a business attorney (or M&A attorney) to craft preliminary documents, such as nondisclosure agreements (NDAs) crafted to reflect your business and the circumstances around a potential sale.

Your financial advisor can help you assess your team and may suggest adding additional professionals based on your unique situation. For instance, if you want to transfer your wealth to your children or grandchildren, your advisor might suggest meeting with an estate attorney familiar with grantor-retained annuity trusts (GRATs) in addition to your business attorney.

During and after the sale

Sales can include many logistical moving pieces depending on the structure. For instance, the payout could be structured over time or have performance criteria built in. An M&A advisor, business broker, and/or financial advisor can help handle the logistics and keep you on track.

They can coordinate with attorneys, CPAs, and bankers to help ensure payments are addressed to the proper accounts and handled properly to mitigate risk. They can also help you incorporate any assets generated by the sale into a well-rounded financial plan.

At this stage of the process, the details will be almost entirely dictated by the terms of the sale and what your specific needs are.

 

If you own a business and are starting to think about a sale, our team may be able to help you facilitate that process. Reach out to discuss.