As a small- or medium-sized business owner, you’re probably used to being the person others turn to for answers. Now, as you approach the idea of selling your business, it can be uncomfortable not knowing where to begin. To set you on the right path and help you think strategically about the process, we’ve compiled 10 critical steps for selling a business – so you can move forward with confidence.
1. Start Assembling Your Team of Advisors
There are a lot of variables when it comes to selling your business and no two transactions are exactly the same, but here’s one certainty: you are going to need a trusted team of advisors. In these early stages, you’ll need your core team – you and any co-owners, your board of directors (if applicable), your business attorney, and your accountant. Later, you may find that you want to expand your advisory team to include an M&A advisor, business broker, and/or commercial real estate agent.
2. Get an Accurate Valuation
Before you get too far along in the process, it’s important to have an understanding of your company’s value – for three primary reasons. First, knowing the value range for your company as it exists today helps to establish realistic expectations for the sale. Second, as you prepare to approach prospective buyers, this valuation acts as a baseline from which you’ll judge offers. Third, if the valuation is much lower than expected, you can shift your timeline and, instead of going to market right now, spend 6-12 months “enhancing your value” (see step 5).
3. Consider Your Exit Strategy
An exit strategy isn’t about what you will (or will not) do after the business sells. It’s about creating a plan for stepping away from the company in a way that supports your vision for its future. Start by talking with your advisors about what prompted the decision to sell the business, so you can identify goals for the sale and plan for a seamless transition.
Ultimately, the way you structure your sale will depend on your exit strategy. Is it best to structure the sale so you’re selling your shares (aka stock sale) or is it better to sell the assets (aka asset sale)? Are you interested in considering employee buy-out possibilities or are you more interested in financial buyers or strategic buyers? There are pros and cons to each of these options, so talk with your business lawyer or corporate counsel about what’s right for you.
4. Clean Up Your Financials
For most business owners, your financials have been tailored for tax purposes – not for the purpose of selling the business. Now that you’re on a new path, you have new goals to achieve. Your financials should tell the story of your company’s earning capabilities, including how past performance supports future forecasts. Working to ensure your financials are organized and creating a presentation strategy can have a major impact on how buyers view your company’s potential.
5. Enhance Your Value
If you’ve discovered that your company has a lower valuation than you’d hoped, you may want to consider ways to enhance its value. This doesn’t mean artificially inflating its worth or ‘cooking the books.’ This means implementing strategies that lower operational costs, increase sales, and maximize profits. Perhaps you’ll consider dropping your lowest-performing, narrowest margin products or services. Maybe you’ll focus on lowering your customer concentration. There are countless tactics to explore.
6. Do Your Due Diligence
It’s true that the potential buyer is responsible for conducting their due diligence (aka comprehensive research into your assets, liabilities, and operations). However, it’s good for you, as a seller, to prepare ahead of time – ensuring records are in order for various aspects of the business, such as financials, customer information, leases and real estate, intellectual property, loans and liabilities, contracts, etc. Work with your M&A attorney and accounting team to review your records and correct anything that’s been missed or overlooked over the years.
7. Connect with Potential Buyers
Perhaps the most time-intensive aspect of selling your business, targeting potential buyers means connecting with those who not only have an interest in buying the business but also the means. As you navigate this stage, you may decide it would be a better use of your resources to hire a business broker or M&A advisor.
8. Present the Proper Contracts
As with any business deal, it’s essential to present the proper legal contracts as the sale process moves forward. When selling your business, there are several key contracts that your legal counsel should draft for you, including the Indications of Interest (IOI), Letter of Intent (LOI), and Purchase Agreement. Each of these documents provide protections to both parties during different stages of the sale. Additionally, there are other documents your business transaction attorney can provide, including non-disclosure agreements (NDAs) and non-compete agreements.
9. Negotiate the Deal
Unlike traditional real estate transactions, there are more considerations for a business sale than its purchase price. An experienced business lawyer can help you navigate the various terms during negotiations, such as stock sale vs asset sale, liabilities the buyer will assume, assets you’ll retain, employment contracts, equity ownership, etc.
10. Navigate the Transition
If the intention is to have the business remain in tact after the sale, then it’s unlikely you’ll simply hand over the keys and walk away. There will be an agreed upon transition period where you’ll make introductions to employees, key customers, and vendors; provide some degree of training on the operational aspects; answer questions on copyrights, trademarks, and other proprietary information; and so on.
Ready to Take the First Step Towards Selling Your Business? Let’s Talk About How to Get Started.
Kohler Legal is a business law firm that provides legal services for individuals and businesses throughout San Diego. Its primary focus is to provide personal, one-on-one legal services, build ongoing relationships with its clients, and help them grow and succeed.
Have a legal question about your business or want an honest assessment of your case? Contact us today for a free consultation with one of San Diego’s most trusted small business attorneys.