This is the first installment in a series of articles, Business Transition and Exit Planning, to help you become an educated consumer of the professional services you may want to retain to help you. See a list of the installments at the end of this article.
As a business owner, you worked hard, possibly for decades, building your business. You were smart, and the business has been successful, but it is time to move on. Maybe you want to retire or try your hand at something new. Regardless of the reasons, you want to sell your business, but you have questions.
Selling a business is not rocket science, and neither is selling a house, yet nearly all smart homeowners use real estate agents. So how do you select a good professional to help you sell your business?
While the internet can be a great resource, you will find that what you often find in a search are promotional articles written by companies or people who want you to hire them.
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This article is the first in a series to help you become an educated consumer of the professional services you may want to retain to help you. It is intended to be a starting point, a table of contents, so to speak, for the rest of the series (which you can read as one-off articles but which you will get more out of if you read them in the order presented below).
These articles are no substitute for a professional advisor — lawyer, accountant, business broker, investment advisor, or valuation professional — but they will provide insight to help you find the right advisor(s), ask the right questions, and understand their advice.
In this series, most of the articles assume that you will sell all of the assets of your business rather than just your equity in the business. That is the most common way to structure the sale of a business. But a merger, for example, is not a sale at all. Read A Visual Guide to the 5 Legal M&A Deal Structures and Asset Sale vs. Share Sale: Which Seller Approach Should You Choose? as warm-ups before heading down the road of educating yourself about how to sell your business.
1. Is It the Right Time to Sell?
You cannot always control the timing, of course, but always ask yourself, “Is it the right time to sell?” Many factors determine the answer. Some may be intrinsic (i.e., there may be some improvement you should make before you put the business on the market) or extrinsic (i.e., raw supply costs, customer demand).
2. The Planning and Staging Process
Most business owners are not prepared to sell their businesses. That is why the planning and staging process is key. Planning and Staging a Company for Transition explains that an assessment phase should come first in every good sale. Read Housekeeping Tips To Maximize Business Value.
3. Finding a Buyer
In How to Find the Right Business Buyer for Your Company, learn the difference between buyer types, which one is right for your company, and where to find them.
One way to think about types of buyers is to divide them into two categories: strategic and financial. Read Strategic vs. Financial Buyers: Distinctive Ways of Acquiring Businesses to learn more. One particular type of buyer is a private equity (PE) fund. Read How to Attract Buyers in Private Equity Transactions before you begin any discussion with a PE fund.
Assembling the Right Transaction Team: Tips for Selling Your Company Successfully covers more than just the question of whether or not to retain an intermediary (i.e., business broker or investment banker) for the transaction. I list it here because intermediaries are indeed discussed in that article, and intermediaries are the most common way seller are connected to buyers.
4. Maybe Your Kids Want Your Business
Maybe a sale to an outsider is not your plan, and you want to transition ownership and control to the next generation. As The Good, the Bad, and the Ugly of Family Business Transitions and Exit Planning explains, transitioning to the next generation comes with unique dynamics and issues.
5. Maybe Your Buyers Already Work for You
Selling your company to an employee stock ownership plan (ESOP) may provide unique advantages. ESOPs were created by Congress in 1974 to help employees accumulate wealth by providing tax benefits to business owners who sell their businesses to their employees. There are about 10,000 ESOPS in the United States today. You should consider this option if you own a profitable business with stable cash flow and have great employees who care about the business. To learn more, read What Is An ESOP and Do You Want One? Pros and Cons of the Employee Stock Option Plan and ESOPs: Tax Advantages of an Employee Stock Ownership Plan.
6. Valuing Your Business
Some of the articles mentioned above touch on valuation, but it’s time to take a step back and hit the topic head-on. Start with these:
If you want to get a little deeper into the weeds on the value of soft assets (a/k/a intangibles) then you will want to read Valuing Your Company’s Online Assets Before Sale.
1. The Letter of Intent (LOI) or “Term Sheet” in Selling a Business
A letter of intent (LOI), sometimes referred to as a “term sheet,” expresses interest. It is an informal, non-binding offer made by one party to another. In our context, it is specifically made by a potential buyer to a seller. An LOI ensures the buyer and seller are on the same page before drafting a purchase agreement.
An LOI contains most of the key terms, including price. A common scenario is a buyer submits an LOI to the seller. Then they negotiate, sometimes without an attorney, but it is better to involve attorneys at this stage if they are going to be involved at all.
Most LOIs state key “closing conditions.” That is, things that have to happen or be true, or not happen or not be true, before each party has to consummate (a/k/a close) a transaction. One common closing condition is a financing contingency. The buyer can back out if they cannot get the financing they need. Another is the “due diligence out,” which permits a party to back out if their due diligence review results are unsatisfactory.
If the parties do not come to an agreement over the terms of an LOI, then they will part ways. If, on the other hand, they come to an agreement, they can spend more significant time and money on due diligence and on negotiating a definitive purchase agreement, comfortable that getting a transaction closed is reasonably likely.
Read more about LOIs in
2. Due Diligence
Before offering to buy your business, the prospective purchaser (assuming they are not an idiot) will perform due diligence. The definition of due diligence is “a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.” –OxfordLanaguages/Google
Read how a buyer would do this in our article How to Conduct Due Diligence Before Buying a Business.
3. Confidentially Speaking
Protecting the confidentiality of any discourse regarding the sale of your business is essential. In conducting due diligence and negotiations with a potential buyer, you must disclose information that, falling into the wrong hands, could cause serious damage. Just the fact that you are thinking about selling your business could hurt your relationship with your employees, customers, suppliers, shareholders, and others. Before entering into any discussion to sell your business, one of the first requirements is that the buyer signs a non-disclosure agreement.
Read Protecting Potential Business Sale Confidentiality to help ensure that you don’t make a mistake.
4. The Purchase Agreement
Congratulations, only five more articles to go, so don’t give up now. Not reading these is like dropping out of college with one class left. Or maybe like eating the first six courses of a seven-course dinner. Here they are
These articles are essential for two reasons. First, they pull together, reinforce, and expand upon what you’ve learned to this point. Second, there is no deal without a definitive purchase agreement. Everything you have learned to this point has, in a sense, been a warm-up to get to these articles.
You have just read the first installment in a series of articles on selling your business, even if you have never sold a business before. If you’d like to skip around, here is a complete list of the articles in the series.
[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on January 14, 2019.]
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Jonathan Friedland is a principal at Much Shelist. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts Magazine; Smart Business Magazine; The M&A…