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Article Author:

It's Never too Early to Think About Selling Your Business

Stella Y. Su, MBA, CPA, ABV
Senior Manager, Corporate Finance Consulting
ssu@BlackmanKallick.com, 312-980-2912

If you own a business, chances are you have been approached by companies or individuals interested in acquiring your company. Getting an offer out of the blue can cause emotional and business stress if you're not prepared.

If the offer price is higher than you expected, you may think you need to grab the offer, although you could actually do better. When the offer price is much lower than your expectations, you may feel disappointed or even angry and immediately dismiss the buyer.

You may end up turning away several offers over the next few years. Then, when you are finally ready to sell the business, no prospective buyers seem as excited about your company as before—leaving you feeling defeated, anxious and wishing you had taken the original offer years ago.

What if you did accept an offer and sold your business? After a few months of traveling the world, visiting the kids and building another house, you may suddenly feel empty. No one calls you for business decisions. There's no more getting up early to go to the office or working on weekends. If you haven't thought ahead about what you will do with your time after you sell the business, you will probably find that early retirement is not all that fun.

What's the common thread running through these
scenarios? The business owner was unprepared; he or she hadn't thought ahead about various aspects involved in selling the business.

Now is the time to start thinking about selling your business
By taking the time now to be prepared for potential buyers, you'll be able to exit your business in a timely fashion when the right time comes—and maximize your selling price. It's never too soon to start preparing to sell your business.

Don't miss the selling window
If you don't have a realistic idea of what your business is worth, you could pass up a perfectly good opportunity to sell.

Case in point: Niche manufacturer. Two brothers owned a small equipment manufacturer with approximately $2 million in sales. Several years ago, a buyer offered to buy the business for $2 million—a favorable price. The brothers had unrealistic expectations of what they could get for the company based on the dot-com boom; looking at sales-price references from different industries at different time periods can be very misleading. The brothers later turned down an offer to buy the business for $3 million, thinking they could sell the company for three times revenue. Because they didn't get good financial advice, they missed two good opportunities to sell the business.

Do you have a succession plan for your business?
Is your business prepared for the unexpected? What would happen if you were not in the picture? Recently, the sole owner of a construction business died suddenly, with no
succession plan in place. His wife was left having to sell the business after realizing that the new management was not capable of taking over the company and the business is
bleeding cash.

 If you have a family business, you may find yourself with no succession team if your kids are not interested in or capable of running the business. Every business needs a succession plan; if you don't already have one, your BK representative can help you develop a plan to ensure the continuity of your company.

Is your industry heading for a decline? Sell now
If you realize your industry is heading for a downturn and you've been thinking about selling, acting now—while your sales are still good and you can attract potential buyers—could be an option.

Understand the types of potential buyers
Who may be interested in buying your company—and at what price? A strategic buyer who can realize synergies by acquiring your business is generally willing to pay more for your company than a financial buyer. You will undoubtedly have criteria for the type of buyer you are looking for to line up your needs with the buyer's offer—one who will maintain the integrity of the business you've built, or take the business to a certain level with adequate capital.

Involve your financial advisors early
An experienced financial advisor who specializes in mergers and acquisitions can help you avoid the potential pitfalls of selling your business. Your BK corporate finance consultants can help throughout the process, from determining the value of your business and identifying potential buyers, to evaluating competing offers and acting as your advocate in the sales negotiations. Without expert representation, you may be pushed around by the buyer, rushed into a hasty decision—and not get the price your business is truly worth.

Be sure the sales transaction structure is tax-beneficial
The way your business is structured—as a C corporation or an S corporation—can make an enormous difference when you sell your company. If you have a C corporation and are considering selling your business or transferring it to your heirs in the next 10 to 15 years, you should strongly consider converting to an S corporation now. (See "C corp or S corp? The difference could cost millions when selling your business")

How can you prepare for the day you sell your business?

1. Clearly state your business and personal goals. Determine what's really important to you—how you define business and personal success.
2. Draft an action plan. Document the steps you need to take to reach your stated goals. Include a time line and business exit strategy.
3. Do your business research. This important step will help determine the selling price you can expect to get for your business. Study trends in your industry. Benchmark your company's performance against that of your competitors. (See "Improving performance through benchmarking") Gather feedback from your customers and suppliers. Understand the value drivers of your business—the strengths of your products and services.
4. Adjust your action plan according to your research and current understanding of your business. Identify your core and non-core business areas. Where are your best growth opportunities—through acquisition or organic growth? Are there any unprofitable areas of the business?
5. Support your business growth. Use cash cow business lines to promote new growth areas. Divest any unprofitable or non-core lines to free up capital. Consider selling any mature business lines that are at their business cycle peak. Use the cash from the sale to support your core business.
6. Develop a working relationship with advisors and bankers. There are many resources in the financing community, from banks to subdebt to private equity firms. Debt can be cheap when it is appropriately leveraged. Banks are short-term oriented; equity partners can be more patient than banks, realizing that they will cash out when the business is sold. These investors are willing to take on a higher risk for a higher return than banks. Consult your advisors, who can view your business more objectively and involve them early to avoid any surprises.  
7. Prepare the company for sale. Identify your company's needs in anticipation of a future sale. Bear in mind that you will need at least a year's good track record to make the business attractive to a buyer. Most buyers want a company that can run with existing management—minus the current owner. Train your successor and allow at least a year for a smooth management transition before selling the company. Get your accounting records in order; the condition of your financial statements is very important in accurately representing your business to potential buyers to avoid potential deal killers and price reductions. (See "How can accurate financial statements improve your firm's sale price?")

For more information, contact Stella Su at 312-980-2912.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.