So much has happened in the past twenty months that some business owners wonder if they should stay in their businesses or sell that arguably largest asset. We asked LSL long-time friend Dora Lanza, a veteran mergers and acquisitions expert, for her thoughts. She is the co-founder and COO at 22-year-old Plethora Businesses.
Here’s what she told us:
There are many moving parts to selling a business. Some of the concerns are personal to the owner; others will involve fellow executives and employees. Also, business owners may need answers from their financial advisors, attorney, and CPA before feeling comfortable.
- Understand that selling one’s business can be a very emotional process.
- Decide to stay on or make a clean break.
- Understand what may happen with your employees.
- Have your business in the correct legal structure.
- Plan for your retirement needs.
- Be objective about the business’s true value.
- Identify key management players before planning for a sale. It can often help you garner a higher multiple.
- Be sure the company’s financial statements are in order.
- Investigate the tax implications of the sale.
- Stay close with your advisory team.
Here is some information about each of the points.
Understand that selling one’s business can be a very emotional process.
A comment about one’s emotional state might seem odd for a post about selling a business. Still, whether the company is small or large, the founder (usually the CEO of a larger organization) has traditionally spent much of their life in the business. It is their largest asset and holds emotional ties like one’s home but in different ways. We often see people who sell “too soon,” meaning they didn’t think through the impact of leaving their business behind them and how their life would change, not just from a quotidian day, but how it would impact their emotional being. It relates to the next point.
Decide to stay on or make a clean break.
Depending on the strength of the management team, a buyer may need the assurance of a smooth transition and request that you stay on in some capacity. Working in sales or on the manufacturing floor might be satisfying. Another option is staying on as an investor or a combination of both. This can sometimes be an excellent way to keep one’s foot in the door without the responsibility of running the day-to-day business or feeling the financial pressures. So, the idea of investing in the company is what we call an opportunity for “a second bite of the apple,” and it often yields high dividends down the road. On the other hand, sometimes it’s time to move on. Each situation is different.
Understand what may happen with your employees.
This is another very personal and difficult area—especially where large mergers or acquisitions will almost certainly result in some positions being “consolidated” and employees let go. The idea here is to be as straightforward as possible with the buyer’s or acquirer’s intentions and be prepared to accept the emotional result of your decisions.
Have your business in the correct legal structure ahead of time.
Corporation? LLC? S-Corp? Partnership? Which one is best for selling? Which is best for the buyer? Which one may create an impediment to a sale? The tax ramifications of one or the other may impact a buyer’s tax base and affect the net after-tax proceeds of the sale, undermining your retirement plans.
Plan ahead for your retirement needs.
With the sale, you may very carefully have set yourself up for a comfortable retirement, which is wonderful. However, sometimes, the threat of inflation, the uncertainty of future medical costs, or the failure to accurately value your savings will be enough to cause you to put off selling for another year or two and depending on the activity cycle of M&A impacting the price a buyer is willing to pay for your business. You have heard the old saying, “strike while the iron is hot,” and don’t miss the market frenzy. As in any major financial decision, it is essential that you check with the family financial advisor and company CPA to see how the sale will affect your retirement.
Be objective about the business’s true value.
This is another area where sellers make mistakes. They tend to overestimate the value of their companies or be unclear on what exactly will drive up the value from a buyer’s viewpoint. Have your business appraised by an experienced M&A appraiser. The “Think of the potential” statement will always incite the follow-up question— “Why have you not exercised it?” On the other hand, there are ways to enhance the value of the business legally and strategically, including from a financial perspective, such as catching non-business write-offs or structuring your debt in a more attractive way.
Another critical value issue is deciding how much the “secret sauce” (maybe a patented product, soon-to-be-released service, or intellectual property) is worth and when to share sensitive information about your business with the would-be buyer. This is where working with your trusted advisors to keep all critical proprietary information, processes, and customer and vendor lists confidential is essential. Then, knowing when it can be shared with the buyer, with a Non-Disclosure Agreement in place, is of the utmost importance. Too soon, and the purchaser could walk away with the company’s secrets without buying the company.
After that, they will look at the company’s culture, reputation in the marketplace, and other “soft” but critical assets.
Having well-matched buyers competing to purchase your business can also dramatically increase the ultimate price a buyer pays for it. This is where working with an experienced M&A advisor pays off.
Identify key management players before planning for a sale. It can often help you garner a higher multiple.
Caveat Emptor: Let the buyer beware. And it helps the seller too! Covenants not to compete in the final buy/sell/acquisition/merger contract keep the entire old executive staff from starting up a competing business down the street—literally or figuratively in the virtual marketplace. As the seller who has walked away, this may not seem to make much difference. However, in the greater karmic world of business, the buyer will be devastated (maybe decimated) if the entire management team departs and starts up a rival firm taking with them the secret sauce. It’s best to have your key employees on board with the sale. You might consider gifting them shares with vesting restrictions in exchange for some kind of non-compete to assure the successful continuity of the business post-sale.
Be sure your company’s financial statements are in order.
When selling your business, your confidence in the accuracy of your financial statements will be felt by the buyer. Everyone involved wants to be sure the value is there. Buyers want to buy “no surprises.” They must be confident the revenue has been stated correctly, costs are captured, assets and liabilities are correctly accounted for, and cash flow is accurate. Preparing in advance for the sale by having your CPA prepare reviewed or audited financial statements gives potential buyers a level of confidence where they are willing to pay more for the business and/or make due diligence and the quality of earnings a smooth process. Your CPA is your best friend here.
Investigate tax implications of the sale.
Related to the legal business structure and the company’s value, the sale proceeds will be taxed. How much of your business will be allowed to be allocated to goodwill? What is the intellectual property worth? The equipment–cars, trucks, machinery? How much will you net after the sale of the business and its assets? What will the tax rate be? How much of the sale will be taxed at the capital gains rate? Go back to your financial guidance firm. How much do you need to net after-tax to retire comfortably? These two may not always align, and that is ok. You just need to have the knowledge to make the best decisions for you and your family.
Stay close with your advisory team.
Selling your business is a daunting decision. Your CPA will make sure your books are in order. Your management team will hopefully be a voice for reason. Your M&A advisor can be instrumental in obtaining the highest price for your business. Your tax attorney, lawyer, and financial advisor will all be instrumental in making sure you maximize the net proceeds, and you are ready for the next phase…maybe retirement or maybe opening up your dream business in the post-sale portion of your life.
Here are a couple of concluding thoughts:
The decision to sell your business might not be perfect, and there’s no doubt that selling a business is hard. But at some point, things must come to a close. After twenty-two years in this business, we have seen that the most successful sales are those where both parties have a good feeling after the deal is done. That occurs when the seller takes the time to check in with themselves, ask their CPA, attorney, and financial advisor for their input, think through their future goals, and sense after the fact that they sold their business at the right time to a happy buyer. It is so much better than an emergency sale with hurried closings, regrets, and no future plans in place.
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About Dora Lanza
Dora Lanza is co-founder and COO at Plethora Businesses. Plethora Businesses is a leading M&A firm specializing in business sales, mergers, acquisitions, and valuations for privately-owned businesses. Offering senior-level attention from start to finish, Plethora Businesses focuses on developing creative solutions to achieve their clients’ objectives.