What you need to know before selling business

By: Giorgio Andonian

Making the decision to sell your business is usually a very difficult one. You’ve spent years, if not decades, building your firm and working in the trenches to maximize revenue and profits, and now you’re at an inflection point. Do you have the energy to keep going, or is it time to hang up your hat and cash out?

Actually, arriving at the decision to sell may be the easy part. Most small business owners are nimble, and when they make a decision, they move quickly because that’s how they’ve survived so many economic cycles. But engaging in the divestiture process itself requires a lot of time, thought and deliberation. This involves deciding on the terms of the sale, including the purchase price, payment structure, and any contingencies that may apply. Developing a well-defined exit strategy beforehand can help avoid complications, minimize risks, and lead to a greater chance of success.

Below are some key things that business owners should consider when divesting their business:

Valuation: Try to have a realistic idea of the value of your business. Accurately valuing a business can be challenging, so it's important to seek professional advice. Simply throwing out a desired figure doesn’t work in this game; private equity and strategic buyers will look under the hood and valuation will be driven by the company's historical financial performance, brand equity, investment required in the business, future growth expectations, and market conditions. Understanding how a buyer would value your business helps level-set expectations. An M&A professional will always try to maximize value by creating an auction process, but having a baseline understanding of how valuation works and is calculated is critical.

Company Structure: Many businesses are structured by a CPA or accountant, generally as a C-Corp, to help protect the business owner from any potential liabilities. Understanding the type of company structure you have (C-Corp, S-Corp, partnership, etc.) before divesting is very important and making any changes should be done prior to engaging in the sales process. Speaking to an experienced M&A CPA ahead of time can save headaches during the negotiation process and potentially millions in taxes owed.

Tax Implications: There are tax implications to divesting a business, so owners should have an understanding of what their net proceeds will be, meaning after tax. This includes capital gains tax, which may apply to the sale of assets or shares. An asset sale of a C-Corp versus the stock sale of a C-Corp can mean a significant difference in after-tax proceeds. Indeed, depending on how the deal is structured, a lower total valuation may still leave more net cash in your pocket.

Timing: With the help of an advisor, business owners must carefully assess market conditions, the overall economic climate, and their own financial situation to determine the best time to sell. Selling at the right time can result in a higher sale price and a smoother transition. Conversely, missing out on an up cycle may mean having to hold onto the business for another five to seven years until activity and interest pick back up.

Due Diligence: This may be the most burdensome part of selling your business. In due diligence, potential buyers will review your company's financial and legal documents, operations, and other aspects of the business. They will want to ensure that they are making a sound investment, and that requires careful analysis of every aspect of your business. You should be ready to provide accurate, detailed and up-to-date financial statements, key performance metrics, tax returns, contracts, employee records, and many other important documents. You will be asked to continue to update this information as the due diligence process continues through closing; your advisor should be there every step of the way. Expect this process to take about 60 to 90 days.

Transition Plan: Owners should have a transition plan in place to ensure a smooth handover of the business to the new owner. This involves communicating with employees, customers and suppliers about the divestiture and any changes that may occur. It's important to make sure that key personnel are retained and that the new owner has the resources and support needed to take over the business. Working with the buyer to coordinate the announcements and transition will be critical; leaking information about a deal prior to closing can create significant issues and delays for both buyers and sellers.

Legal Considerations: Interviewing different attorneys that specialize in M&A is an important but often missed step in the sale process. Often times, a family attorney is hired because he or she is a trusted advisor, but is often not an expert in M&A, which could create unnecessary friction in a transaction. A qualified M&A attorney can help ensure that all legal aspects of the sale are properly addressed. They will know what key items to focus on to protect the client, while moving the deal towards closing.

Business owners must be prepared to invest a lot of time and resources to ensure a smooth process to maximize the value of their business. Having the right professionals by your side providing a range of services from tax strategy, deal structure, negotiations, and closing can help you make informed decisions and achieve a successful divestiture.

Giorgio Andonian is a Managing Director in FOCUS Investment Banking’s Automotive Aftermarket Group. With a lifetime spent in is family’s automotive business, he now advises and assists privately held middle market auto aftermarket companies with mergers and acquisitions. Contact Giorgio at [email protected].