If you’re considering selling your business, there are several things you should consider before taking that life-changing step. Your business sale will be more fruitful with the right preparation. So, what steps should you take before closing the deal?
1. Evaluate the Timing
If you’re not under any particular compulsion to sell now, you will want to evaluate whether the timing is right. You can determine timing favorability by looking at market conditions, competition in your area or industry, consumer demand levels, and more. Ask yourself whether you’re in a buyer’s or seller’s market to better understand your positioning.
2. Prepare Your Business for Sale or Acquisition
Like selling a house, before putting your business on the market, you must prepare it for sale. To do so, it helps to gather the following due diligence materials:
- Governing documents (bylaws, shareholder agreement, operating agreements, annual meeting minutes, etc.
- Financial statements (previous three years and current year to date)
- Tax returns
- Employment contracts and benefits information
- Leases (equipment and real property)
- Loan agreement
- Business licensing, permits, and certifications
- Any other contracts and other relevant documents that will impact the transaction and/or your buyer after closing
Be prepared to disclose any legal matters, such as pending or threatened lawsuits, tax audits, etc. The potential buyer will look into your business’s financial records, tax filings, governance and legal matters, and more to understand purchase risks and profitability. After entering into confidentiality agreement (whether before or as part of the Letter of Intent (LOI), you should offer transparency early to prevent wasted time and effort, or soured relationships with your buyer.
Advance work with a transactional/mergers & acquisitions attorney will help you present your due diligence materials in an organized and effective manner, and will help you spot potential issues and address them before your buyer raises them.
3. Discuss Business Goals and Transition/Post-Closing Integration Plans Early On
In transaction negotiations, an early understanding of the “business case” for the deal will help all parties determine whether the investment of time and resources in moving forward with legal contracts (referred to as “definitive agreements”) is worthwhile.
What will your involvement be after closing? Do you and the buyer agree on transition plans and integration strategy, including branding changes, maybe a new company name, and long-term business goals? Will you need to hire or fire any employees, or can you keep your current staff? Are you planning to enter any new markets or develop any new products or services?
You should discuss these types of questions with the potential buyer early in the process to streamline transaction and minimize surprises later on.
4. Seek Objective Valuation
Sellers often have strong opinions about what their business is worth. And, to be fair, what a seller is willing to accept is a significant factor in determining the value of a business, but it is not the only one. It is important for any seller to understand the fair market value of the business for sale, which is an objective, professional estimation of what a fair price for the business would be.
Business valuation professionals consider factors like, among others, cash flow, profitability (you’ve heard of EBITDA-earnings before interest, taxes, depreciation and amortization-and SDE-seller’s discretionary earnings), total assets, current market conditions, and forecasted growth to estimate a business’s fair market value (FMV). Being armed with this knowledge will help you in meaningful negotiations of a purchase price with your buyer.
5. Involve Your Landlord, Lender, and Other Necessary Parties early
Whether selling or merging your business, you should discuss the anticipated transaction early on to get their participation and any necessary consents and agreements to allow the transaction to proceed under the terms of your agreements with them. Your attorney can provide valuable insight by reviewing the applicable documents first so that communications with these third parties can be targeted and efficient, tailored to the terms of your specific agreements.
6. Study the Tax Implications
Business sales, and other mergers and acquisitions involve numerous tax implications that can impact you significantly. These are outside the scope of this post, but suffice it to say you should consult a competent CPA and get good tax advice before you sign a LOI. Seller’s and buyer’s have different tax motivations, and these are a significant factor in negotiating the purchase price and structure of your transaction.
7. Be Thorough in the Letter of Intent
Include as many primary points of negotiation in your Letter of Intent as possible. This makes it critical to seek competent legal advice before entering into your LOI. Besides purchase price and structure, involving legal counsel at this stage will help you structure the transaction consistent with your expectations not only financially, but also from a tax perspective, legally, and expectations for post-closing issues related to earn-outs, indemnification, and others. In addition, depending on the structure of the deal (with very few being strictly cash at closing, you will want to conduct due diligence on your buyer to achieve some comfort level with their financial history and capabilities, credit, existing debts, legal documents, management team, and more to ensure they can fulfill their obligations under the purchase agreements and that you will be able to work with them after closing, if that is part of the deal.
8. Keep the Merger or Sale Confidential
Many transactions these days are “simultaneous sign and close”. This means, in the words of Yogi Berra, “it ain’t over ‘til it’s over.” Announcing any preliminary news before finalizing the sale can cause any number of problems, which can not only endanger the transaction, but also haunt you going forward if the transaction does not close. By keeping the sale confidential, you can protect your team while ensuring the sales process continues progressing smoothly. Do not post on social media, announce the sale in your newsletter, or anything else.
Work With a Transactional/Mergers & Acquisitions (“M&A”) Law Attorney for Support from Start to Finish
Do you need help selling or merging your business? Wilson Ratledge, PLLC, can guide you through the process to protect your financial interests. Call Wilson Ratledge, PLLC, today at 919-787-7711 to speak with a business law attorney.