iAfter devoting long hours and years of hard work in building their companies, majority owners of private businesses may reach a point where they consider whether it is time for them to sell. This large question – Is now the time for you to sell your business? – will depend on the answers to some important, underlying questions, which are reviewed in this post. The answers to these questions may confirm that the owner is ready to move forward with a sale, but even if that is the case, the answers to these preliminary questions may reveal that there is still quite a bit of work that still remains to be done before the sale process should begin.
Why do you want to sell?
The first question majority owners need to answer is this: Why are you selling the business? All potential buyers will want to know the owner’s answer to this question, but even more importantly, owners need to understand their own motivations about why the time is now right for the sale to take place. In addition, and just as importantly, owners also need to be able to answer this question: What comes next? Is there a clear plan for the owner — both mentally and emotionally — as to what the years are going to look like after the closing? Without a next stage plan in place, owners may find themselves lacking in purpose, which is not healthy or productive for them, or for their family members.
Owners may have many different motivations for the sale and simply need to be able to sincerely express the key driver for their sale to the potential buyer. Most buyers will want the owner to continue to help for some period of time with the transition process after the sale takes place. The owner will therefore need to be on board with the fact that the new buyer will likely want to make changes over time in operations, personnel and/or direction of the business. While the buyer is unlikely to suddenly embark on wholesale changes, the buyer will tend to see new opportunities and have new approaches in the way that the business is conducted.
This new path is the buyer’s prerogative to take, and a former owner who is resistant to any and all changes will not fare well or be very helpful to the buyer in the transition process. This may be a major problem if there is any further compensation owed to the former owner based on the company’s performance after the sale. In fact, a majority owner may diminish the total return received from the sale of the business if the owner will not support the changes the buyer wants to make to the business after the sale. This adverse result may be due to a shortened consulting agreement if the owner is let go sooner than expected or receives a smaller share of future returns from the company if the owner has any type of carried interest. This does not mean the owner should decline to provide constructive input to the buyer, but the owner needs to accept the fact that this changing of the guard at the company will likely involve some meaningful changes to the way that things have been done in the past.
What is your company worth?
Before considering a sale, the majority owner should have some idea of the potential sale price the company would realize in the marketplace. Fortunately, determining the likely range of the potential purchase price does not require the business to be listed for sale. Instead, the owner can obtain a reliable estimate of the purchase price by retaining a business valuation expert. This expert will be able to provide the owner with a range of value for the business upon sale based on its financial performance, recent transactions that have taken place in the market, and in view of the owner’s anticipated growth expectations for the next few years.
This valuation report may be heartening if it squares with the owner’s understanding of the current value of the business, or it may be a reality check if the owner has an inflated view regarding the anticipated price for the sale of the company. But if the value of the company as determined by the valuation report falls below the owner’s view regarding the value of the business, the report will still be helpful. In this case, the report will provide the owner with specific revenue and earnings targets (and growth rates) the business will need to achieve for the owner to obtain the desired purchase price when the company is sold.
This question focuses on the value of the business, but it also raises the issue of whether the company has maintained its financial books in good order. If the current financial condition of the business cannot be readily determined by a potential buyer from the company’s financial reports because they are confusing, unreliable and/or incomplete, this raises a significant concern that must be addressed before the business can be brought to market. Potential buyers confronted with financial records that are in poor condition are unlikely to pay top dollar for the business. Buyers may even choose to walk away from the purchase entirely if the financial records are in such bad shape that they cast doubt over the company’s operations and the performance of the business as a whole.
Is your house in order?
Answering this question may be the one that is most eye opening for the majority owner. The question here is what will the potential buyer find when the due diligence process starts?
One good way for an owner to know if the sale process will go well is to take a look at the business from the perspective of the potential buyer. The company’s business counsel can provide the owner with a sample of a due diligence checklist that will be part of the sale process. The majority owner should consider these questions: What will a potential buyer think about the company after it has the chance to review the information produced in response to this checklist? What will it show? If there are skeletons lurking in the company’s closet, the response to this due diligence checklist is likely to reveal them. Any troubling issues will need to be resolved before they are disclosed to potential buyers.
In addition, all stakeholders in the business need to be ready for a sale to take place. Most businesses have significant stakeholders who are involved in the company and helped to make it successful. These can include other minority owners, key employees, lenders and large customers. If one or more of these stakeholder groups are not aligned with a sale of the business taking place, that resistance can create major impediments to a sale. For example, does the majority owner have the right to make the unilateral decision to sell the business, or does a sale of the business require a unanimous vote? If unanimous consent is required, does the owner have the other owners on board with the sale taking place at any price, or are they open to a sale only if a certain price target is achieved? The owner in this situation needs to consider whether the other minority owners will support or be an impediment to a potential sale.
Similarly, while employees who have no ownership interest in the company may not have the right to block a sale of the business, if they oppose a sale of the company to a third party, their sudden departure before a sale could derail an attempted transaction. The owner will therefore need to make sure that key employees will support a sale under the right conditions to ensure there will be a smooth transition to a new ownership group.
Conclusion
The sale of a private business is an achievement that can be an exhilarating experience, but getting there takes a lot of careful planning and will be the result of a team effort. Before the sale process even starts, the majority owner will want to consider several key questions to decide whether both the owner and the business are truly ready for a sale of the business to take place. The owner needs to consider whether the explanation that is provided for the sale will resonate with potential buyers and also whether the owner is ready to move on after the sale to pursue other interests. In addition, the owner will want to check on the value proposition to make sure the potential sale price for the business fully aligns with the owner’s expectations. Finally, the owner will need to evaluate the business from the perspective of a potential buyer to ensure there are no glaring surprises that will emerge during the due diligence phase, which will create hurdles in completing the sale.
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