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selling your business

6 Steps To Selling Your Business

Don’t ignore one of the most vital elements of your business plan, the exit strategy. Here are key business practices for selling your business.

If you’re a typical small business owner, you spend more of your time working on today’s issues than tomorrow’s potential. That may keep the doors open for now, but what about when you’re ready to retire, or no longer have the will or energy to run your business?

As mid to large businesses grow, owners typically realize they’ll need to find a way out, but most small business owners do not have an exit strategy. Rather than simply selling inventory and closing the doors, the suggestion is that small business owners can increase their wealth by capitalizing on the goodwill or customer base they’ve built up.

Here are some basic business practices that many entrepreneurs overlook, but can help keep the company buffed up and ready for the marketplace.

Key business practices for selling your business:

1. Write down the business processes

You can’t sell a business that is in your head. So, you need to write it down. Entrepreneurs don’t typically like dealing with details and the fine points, but you must document how everything works in your organization.

For example, spell out the roles of management and employees, not titles, but their actual responsibilities. Or, describe a typical customer visit. Franchise companies list these types of details; a small business owner can use the same tactics to show the value of their company to a potential buyer.

2. Set financial goals

You cannot sell a business that is not making money. And, how do you know if you’re growing if you don’t know where you started and where you’re going? Once you’ve set some target goals, measure them on a regular basis. Look at the internal processes of your business and make sure they are still working for your customers and your company alike. You may be pleasing customers, but are you making money? Know what your return on investment is, so you can explain it to those interested in buying your company.

3. Have a marketing budget and plan

Many small business owners don’t allocate money for marketing. A marketing plan, with a corresponding budget, is key to attracting and keeping customers. One rule of thumb is to spend the equivalent of one staff salary on your marketing and advertising. Think of it as your “silent” employee working 24/7. Market awareness of your brand and demonstrated customer loyalty can dramatically increase the value to potential purchasers. Marketing is the last thing you cut even if times are bad.

4. Keep track of customer information

Often, the most valuable aspect of a business to a potential buyer is your customer list, especially if your potential buyer is a competitor. Keeping track of customer contact information, including name, address, phone number and email (along with permission to contact them electronically), is a must. Being able to deliver customer profiles and buying habits to a new owner demonstrates how well your business is run and makes your customer list invaluable. If business owners don’t have customer data, they’ll be in trouble.

5. Keep employees in the loop

Your staff represents your company to customers and buyers alike. Make sure they know your goals. Communicate with your employees and ask for ideas. They can help you dress the business up for sale. If you’ve decided to sell because the business is in trouble, let them know. It is unlikely to be a surprise and few things demoralize a staff more than having to rely on water cooler rumors. Try to avoid staff salary cuts if possible. Your people are the face of your business and a salary cut may backfire. Try looking at your business processes and finding ways to save money instead.

6. Get professional advice

Identify the areas of your operation that need improvement and look for specialized help to simplify your processes. Make sure to test them before the potential buyer does. There are consulting professionals on a part-time basis who have knowledge implementing transition strategies for businesses and can help you, for a reduced fee.

So, don’t ignore one of the most vital elements of your business plan, the exit strategy. With careful planning and monitoring from day one, your last days of business can bring rich rewards.

For more information about selling your business and/or B2B CFO, visit b2bcfo.com.

Tips To Help You Get The Best Price In A Down Economy - AZ Business Magazine Jul/Aug 2010

If You’re Selling Your Business, Here Are Some Tips To Help You Get The Best Price In A Down Economy

The past 18 months have been extremely difficult for participants in the mergers and acquisitions community. Purchase and sale transactions in 2009 were at their lowest levels since shortly after the dot-com bubble burst at the beginning of this decade. The main culprit? Most observers agree that the lack of debt financing to fund (or leverage) buy-out transactions stymied deal-making in 2009. Further, valuations (or more accurately, the multipliers that drive valuations) took a nosedive as well. Finally, a general lack of uncertainty caused both potential buyers and sellers to approach any proposed transaction with a great deal of trepidation.

The result, of course, was a down market as both buyers and sellers sat on the sidelines waiting for conditions to improve. Many of the deals that did occur were fire sales (often in connection with liquidation proceedings), rather than the culmination of a well-planned and profitable exit strategy.

Although the economy is showing signs of recovery in 2010, many industries remain depressed (real estate, construction, and manufacturing, to name a few) and unemployment remains high. Many economists and dealmakers are cautiously optimistic about the future, but down in the trenches things are still very tough. As a result, a business owner who might otherwise desire to develop an exit strategy for his or her business is likely working 24/7 just to keep the business afloat. From the “glass half full” perspective, however, the depressed economy presents the foresighted owner with an opportunity to get her house in order, so that when market conditions improve she will be in the best position possible to seal a deal quickly.

You should begin preparations to sell your business at least 12 months prior to the date on which you anticipate completing a sale. If you are lucky enough to receive indications of interest in your company, you will discover quickly that selling your business is a full-time job in and of itself. However, the time demands will be much more manageable if you have properly prepared your business for sale long before you receive the first inquiry from a potential buyer.

As the owner of your company, the first thing you should do is step back for a moment and consider how indispensable you are to the business. If you take a week’s vacation, does it take you a month to get the company back on track once you return? Likewise, are you the primary contact for your company’s most significant accounts? If the answer to either of these questions is “yes” (or even a strong “maybe”), then you are in a difficult position. Buyers, especially financial buyers, generally prefer acquisition targets without significant “key man” risks. Start now to wean the company from you by developing a plan to delegate authority to other individuals and automate company operations. If you don’t, you will likely find yourself saddled with a burdensome employment or consulting agreement after the sale is complete in order to mitigate the buyer’s perception that your departure would lead to the company’s imminent demise. On the other hand, if you want to continue to work for the company after the sale, your “key man” status is a sure-fire way to ensure your continued employment.

In a similar vein, does your bottom line reflect your company’s true profitability? Put another way, once your potential buyer begins its due diligence, will it be required to restate your financial statements in order to get a true picture of the company’s cash flow, balance sheet and net income? Many entrepreneurs find it difficult to separate their personal financial situation from their company’s. Although it may be tempting to run personal expenses through the company’s books in order to obtain expense deductions, this practice often clouds the true performance of the company and can limit your return on the back end once you are ready to sell. If you have not done so already, adopt tax strategies for your company that are transparent and, above all, legal and that won’t require your buyer to do back flips in order to get a true understanding of the business’ financial position and results of operations.

Think carefully about your existing arrangements with key employees. Are they properly incentivized to stay around once the company is sold? Would it help to lock some of them into long-term employment arrangements if they are key contributors to the value of the business? On the other hand, do any employees have change of control or “golden parachute” agreements that will burden the business, or that the buyer will insist be bought out at or prior to closing? It is often best to deal with these types of issues before the rumors of a sale start circulating among the employees.

Does your company own the real estate on which its facilities are located? If so, you may want to consider spinning off the real estate to a separate company owned by you (as opposed to being owned by the operating company). Buyers often do not want the real estate associated with an operating business unless the property has some strategic value. As such, much time and effort often is spent detaching the real estate from the operating business as part of the acquisition transaction. This process can be tedious and time consuming, as it requires new title insurance commitments, appraisals, or assignment or renegotiation of financing arrangements. Also, if your business is a corporation, there are very good tax reasons to transfer ownership to a non-corporate entity. Finally, the real estate component of the transaction can also be another source of income for the owners through the negotiation of a valuable long-term lease of the facility to the buyer.

As you begin to consider a sale, be sure your company is properly positioned from a tax standpoint. Sit down with your tax adviser and discuss the tax ramifications resulting from either an asset sale by the company or a sale of the equity by the owners. Generally (for tax and other reasons), buyers prefer asset sales and sellers prefer equity sales. Further, the legal treatment of a transaction often does not coincide with how the transaction is treated for tax purposes. For example, to meet both buyer and seller preferences, an equity sale for state law purposes can be treated as an asset sale for income tax purposes. While a full discussion of income tax treatment is beyond the scope of this article, it is imperative to involve your tax adviser as early in the sales process as possible, and it may be well worth the time and upfront costs to restructure your business now in a manner that best positions the business from a tax standpoint for a potential future sale.

Make sure there are no skeletons in your closet before you commence negotiations with your buyer. Do you have audited financial statements for your business? If not, consider engaging a certified public accountant to conduct an audit of your company as of your most recent fiscal year, or at the very least take steps to put the company’s financial affairs in order so that an audit can be conducted quickly later. Most buyers (or the lender providing the financing to the buyer for the acquisition) will require at least one full year of audited financial statements. An audit requires a thorough review and cross-check of the company’s books and records, and will likely result in certain additional management controls being put in place for your business. These controls may be outside the norm of the company’s historic business operations, but will likely result in increased efficiencies once implemented.

In addition to getting your financial records up to speed, you should also prepare for the legal due diligence review that the buyer (and its lender) will conduct of your business. Make sure your contractual relationships are all documented and well organized. Do you operate with “handshake” agreements? If so, take the time to enter into written, legally-binding agreements with your vendors and customers, even if these agreements are fairly simple. Also, make sure none of your important agreements is set to expire shortly before or after the time you expect the transaction to close. By renegotiating expiring contracts now you may be able to take the buyer out of the negotiation process later on. Documenting or renegotiating contracts will take the concerted effort of your management group, including all employees who have authority to enter into contracts, as well as the assistance of legal counsel. Remember that the only thing worse than an unwritten agreement is a written agreement that does not actually reflect the agreement or course of dealing between the parties.

Finally, if you have not already done so, consider preparing a procedures manual for your business and engaging an attorney to prepare an employee handbook and significant company policies. The existence of well-drafted manuals, handbooks and policies will give your business credibility and make the transition to new ownership less difficult. You should do this well in advance of closing to give your management team and employees adequate time to adjust to any new procedures or protocols that may need to be implemented.

Like the financial markets in general, potential business buyers crave certainty and stability in an acquisition target. Engaging in the preparation and organizational exercises described above will go a long way toward injecting stability in your company, which in turn will instill confidence in your buyer and enable you to negotiate the best price possible for your business.

Arizona Business Magazine Jul/Aug 2010