Selling a business is a fairly common exit strategy employed by small business owners. However, like anything else, it’s a process that can become bogged down or even fall apart if not done properly. Andrew J. Sherman, Author of “Mergers and Acquisitions from A to Z: Strategic and Practical Guidance for Buyers and Sellers” offers the following advice:
Start planning 18-24 months in advance of finding a buyer. Sherman advises starting with what’s called mock due diligence. “You look at your small business with the eyes of the buyer and say, ‘what would I find attractive about this business?’ What would I find unattractive about this business?” This gives you a window to fix those unattractive things. Such things could include customer dependence – where most company revenues are derived from one client. “Those weaknesses could be legal in nature. They could be financial in nature. They could be operational in nature. It could be you’ve got a couple of pending lawsuits – whatever it may be.”
Determine where you want the money to go: Getting ready for the process also means it’s time to start thinking about estate and tax planning. “If you have a very simple will where all of the money from the sale of the business goes to your wife, are you happy with that? Are there other changes you may want to make? Do you want to set up trusts?” Sherman says there is a lot of personal planning because it’s a small company. “To the small business owner, this is probably their most valuable asset. They need to do some tax and estate planning around it.”
Have your team in place: If you’re looking to sell, you would typically have at least two key advisors – an attorney and an accountant for starters. And both of them must have M&A experience. “It’s not necessarily the case that your long standing lawyer or accountant, who helps you with contracts or employment issues, understands mergers and acquisitions,” says Sherman. Smaller businesses are often either sold by the owners or through a business broker, while larger entities might use an investment banker.
Present the business in the best light. “If I’m buying your house and I come over and there’s stuff all over the place, holes in the wall, the faucet is leaking, I’m not really motivated to pay a lot of money for this,” poses Sherman. “If, on the other hand, I come in and there’s this very professional PowerPoint and vision for the future, and a good solid business plan… You’re going to pay a premium for a business that’s really firing on all pistons. Not one that’s falling apart.”
Consider the terms of the deal, not just the price. In the late 90s, Silicon Valley was the hotspot for acquisitions, many of which were completed by way of stock swaps. When the dotcom bubble burst, many of those stock options became worthless – a problem you don’t have in a cash transaction. “It’s important – not just in terms of price, but in terms of terms. How will the purchase price be payable?” says Sherman. “Because not all lawyers and accountants are experienced in M&A, the clients get fixated on the price, the next thing you know, they’ve accepted the highest price, but have accepted the weakest set of terms. This is where a good M&A lawyer can more than earn their fees by guiding the client, not just on whether the price is fair, but how the terms are going to be executed.”