Exit Strategy: What Are Considerations For Preparing To Sell My Business?

Selling your business is one of the most important decisions you will ever make.  The reasons for selling your business can vary.  It can be a well planned event culminating decades of hard work, it can occur quickly due to an offer that can’t be refused, or it can be sold out of necessity because your business isn’t performing as you would like.  No business sale is the same and no single article can provide you with the perspective and information necessary to effectively complete a sale.  Start by asking yourself: “why do I want to sell my business?” Then before you get too far down the road in planning the sale, determine which professionals are appropriate and seek their advice in achieving your ideal exit strategy.

The Team

Determining which professionals to involve in the process of selling your business is one of the first things that should be done when you have decided to sell your business.  There are many different types of businesses and business sales vary from sale to sale, so there is no cookie cutter solution as to how many or even what types of professionals should be involved.  There are also some industry specific professionals that would have no application to certain types of businesses.  As such, the professionals addressed in this article are merely generic professionals that are common in many sales.

Almost every sale will have an accountant involved to provide tax advice and help exchange basic financial information from buyer to seller.  Many sales will also have an auditor, especially if the business conducts annual audits of its financial statements.  If the sale involves land or equipment there may be an appraiser involved.  A business broker may be involved to help market the property for sale.  A business advisor or consultant may be involved to help maximize the value of your business at the time of sale.  A lender of some sort will also likely be involved.  Lastly, a lawyer will probably be involved for the purpose of providing general advice, analyzing and commenting on risk and preparing the documents necessary to effectuate the sale.

Which Professional Do I Contact First To Help Sell My Business?

There really isn’t a right answer as to who to contact first when you are thinking about your exit stategy.  The best approach is to contact the individual with which you have the strongest connection.  This professional will help you identify other professionals necessary to help you through the process and those other professionals will help you identify the remaining professionals on your team.  However, to the extent possible, contact your professional as soon as possible.  Preferably, before you have any conversations about the sale of your business.  Making contact early is especially important if you are going to have a business consultant involved in the sale.  For instance, a business consultant may suggest a multi-year strategy to maximize the sale  price of your business.

Exit Strategy Discussion Points With Your Attorney

The remainder of this article will focus on issues likely to be important to your legal counsel.  Although every business sale is unique, there are some generic issues that are important in every business sale.  Two of the most important issues in almost every sale are 1) will the sale be a sale of the entity or a sale of assets; and 2) is the seller receiving 100% (or near 100%) of the cash at closing or is seller financing contemplated.

If your business is a well known business in the community and the business name has value the buyer may want to buy the entity.  However, if the business consists primarily of a list of business contacts or transferable contracts the more practical solution may be an asset sale.  When the entity is sold the purchaser buys all of the assets, the debt and any potential claims against the seller.  If the buyer is purchasing debt and potential claims the buyer will likely request seller make representations and warranties about the nature of the debt and potential claims and will also likely request seller indemnify for any future claims.  Of course, there are many other issues to consider when determining whether the sale should be an asset sale or the sale of the entity.

Determining exactly how the seller is going to get paid is probably the single most important issue in the sale of the business.  When negotiating the sale of your business, especially if the sale will result in a large sum of money being paid, you may have feelings of euphoria and may be overly focused on how the deal is “supposed to happen”.  However, you should always look at the deal with a critical eye and ask yourself what happens if the buyer breaches the contract.  Looking at the transaction with a critical eye provides you with a completely different perspective than if you were paid in full at closing.  For instance, if the buyer runs into problems post sale and can’t pay the lender back that will primarily be the buyer’s and lender’s problem.  There may be some money reserved or withheld as an earnout that may be effected but if you negotiated the majority of the sale price up front then you are protected as much as possible. There is also potential for the threat of litigation.  However, if you received the sale proceeds up front you are much better prepared for litigation as you likely have a war chest to contest any claims that may be brought.  Conversely, if you hold the debt that financed the sale then you are potentially exposed if the business fails after the sale.  If you do “hold paper” on the sale you should secure that note.  However, when you lend money on the sale of your business you take on additional risk that a traditional lender doesn’t have.  Namely, you run the risk that the buyer may allege defenses, such as fraudulent or negligent misrepresentations, to your attempts to foreclose the security.  Defenses arising from the sale of the business may result in a situation where the buyer holds on to the business for years while the foreclosure of the security is litigated.  Determining whether to receive the sale price up front or to self finance the sale is a very important decision that should be given very careful consideration.

The last issue to be discussed in this article is whether you will continue as a key employee of the business post sale.  Often times the buyer will request that you continue on as a key employee post business sale so that you can operate as a point of reference and help increase the likelihood of success through consistency of operations.  It is not uncommon for the buyer to also request a non-compete after the terms of the employment agreement expires.  The terms of these types of agreements vary widely and are often the product of significant negotiation.

Final Thoughts

All business sales, regardless of the amount, are complicated.  Do not strike your deal prior to consulting with professionals.  Once the deal is made it is hard to move backwards or make change to terms for which you didn’t understand the risk or consequences.  Furthermore, preparing for the sale with proper consultation may significantly increase the purchase price.  Speaking with professionals will almost certainly raise questions and provide you with ideas that you never contemplated.  Whether selling your business as part of the culmination of your career or out of necessity, it is important to take a thoughtful and deliberate approach to accomplish your goals.

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