Most business owners miss out on good sale opportunities because they have neither prepared themselves nor their companies for the sale. Usually, a once-in-a-lifetime event, selling your business impacts your and your family’s lifestyle, taxes, cash flow, and wealth-transfer plans.
You need to prepare yourself and your company to maximize your sales proceeds and preserve your wealth. So, develop a strategic plan to sell the company, set a tentative exit date, and prepare a succession plan well in advance of your exit.
4 Essential Things to Do to Prepare Your Business for a Sale
- Develop a plan
- Clean up financials
- Complete due diligence
- Prepare yourself and your employees
Develop an Exit Plan/Strategy
Seek assistance from an advisory team to align your business and personal goals to develop a plan or strategy for your departure from the company. The exit planning process begins with a preliminary business valuation that reveals the current state of your business and what you could get if you sold your business today.
The initial valuation usually falls short of your exit goals. The gap between the two must be filled before your exit date. A detailed exit strategy or plan identifies where the company is underperforming and recommends remedial actions.
The advisory team should include a mix of professionals, such as tax consultants, accountants, value creation experts, etc. They will help you throughout the exit process, from strategizing to interviewing prospective buyers to executing the sales transaction.
The sale of your company will impact your personal and corporate taxes, so remember to include a tax plan in your exit strategy. Understanding your options and tax planning will help you avoid penalties, maximize deductions, and minimize taxes.
You may also consider selling your business overtime on an installment basis to eliminate or minimize tax consequences. Accepting partial payments over several years allows you to recognize gains over those years and avoid higher tax brackets. Opt for this method only if you are confident of the buyer’s ability to meet future payment obligations.
Clean Up Financials
Clean up anything in the financial area that a buyer would not pay for and get rid of them! These include items and expenses unrelated to business operation: e.g., salaries to non-working family members or insurance policies.
Remove infrequent expenses from your records, such as costs incurred in moving to a larger facility or one-time legal charges. Have supporting documents for all the non-operating expenses you claim from the business.
Have a certified public accountant prepare your financial statements. That will help in evaluating your internal goals. Get an in-depth analysis of the financial statements to identify discrepancies, errors, or anything serious before an investor does during the due diligence process. It also helps recognize any potential issues that you can resolve.
Hire a CPA to audit the financial statements. This provides the highest level of assurance that your financials are in order and clean.
Check, organize, and update all your legal paperwork, including licensing agreements, permits, incorporation papers, contracts with vendors and customers, etc.
Complete Due Diligence
Completing your due diligence helps prepare you and your company for the sale. The buyer’s due diligence is thorough to ensure that they are making a good investment.
Get the due diligence list from the buyer before the due diligence process begins to understand how difficult it could be and how you should proceed with it.
You need to maintain your company’s performance during the period of due diligence. To not let that slip, rely on your advisory team to help you perform the seller’s due diligence while you run your business as usual.
The buyer’s due diligence team will likely ask for information difficult to collect, so prepare in advance. This may include projections for the next three years, growth strategies, management team abilities, etc.
Prepare for the quality of earnings audit, which the buyer’s team will conduct to understand your company’s sustainability and anticipate its future performance.
Have essential documents ready, like taxation details from the last three years, financial statements for the previous five years, asset list, legal documents, documented procedures, marketing manuals, employee handbook, insurance policies, loan documentation, etc.
Due diligence is a painstaking process that most business owners find complicated. Prepare for it in advance with the help of your advisory team.
Prepare Yourself and Your Employees
Communicate honestly with your employees about what is going on and their status in the business transition. Failure to do so causes worry and loss of their trust in you. They will try to find out facts on their own, which could work against you and eventually affect the sale of your business.
Let them know what they can expect. Motivate your employees to relax and stay confident about the company’s future and their roles in it. Tell them how their contributions have helped the company reach this stage. Train them as to what questions they may and may not answer publicly.
Involve your key employees in the business transition process as much as possible. Prepare them for the transition and empower them to add value for the smooth completion of the due diligence process and the ultimate business transition.
You may also consider giving them incentives to stay with the company, adding value to your business and keeping it steady.
You might take a step further and ensure the well-being of your employees by carefully selecting the buyer. See if the buyer appreciates your company’s culture and will commit to keeping it intact. You do not want a big corporation taking over your company and minimizing its expenses by sacking your employees.
Perhaps, you could fix the sale agreement terms to ensure that your key people maintain their positions in the company after the business transition.
Informed, involved, motivated employees confident in their continued employment help immeasurably affect a smooth business transition.
Prepare yourself by identifying what is next for you. Are you going to retire or start a new venture? Think about your post-exit financial needs and incorporate them into your exit goals.
Preparing your business before selling it is the key to maximizing sales proceeds and achieving your desired exit. A successful effort needs expert advice, exit planning, time, and effort. Completing these four essential tasks prepares your business for the ownership transition.
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