Selling Smart: Tips and Insights for Selling Your Business Part 1: Preparing for the Transaction

_{Three generations of the Carr family, The Mills at Natick.} 

_{By Dave Bennett, Senior Vice President, Regional Community Business Banking Manager, and Kathleen Maroney, Senior Vice President, Manager of Government Assisted Lending, Middlesex Savings Bank}

In this series of posts, Middlesex Savings Bank will share tips to consider when planning and executing the sale of your business. This first post will cover preparing for the transaction, the second will look into executing the plan, and the third will discuss financial considerations for the proceeds from the sale or turning the sale proceeds into a lifetime income. While these posts are not intended to supplant guidance from your fiduciary advisors, we hope they will offer some direction as you plan for this important financial event.

 

What moves a business owner to put their business up for sale, especially if it has been their passion for many years – or even the majority of their life? 

There are three common reasons business owners sell. Often, you want to move on to the next chapter in your life. This can be retirement, or in some cases, pursuing a new career. Another reason is succession planning. You may be ready to pass the baton to the next generation of your family, an employee, or to a new, third-party owner you have yet to identify. A third is health. Unfortunately, health issues create a sense of urgency in selling a business. But they often reveal the importance of planning, too.  

So what should you be thinking about as you prepare for the sale of your business? Here are four themes that come up in conversations with our customers. 

1. Assemble the right transition team. As in professional sports, you’re far more likely to win with a great team behind you. This is true no matter what type of sale you’re planning on. The full team for a business sale will vary based on size, but it typically includes:

• An accountant. When it comes to selling a business, you may want to consider shifting to a certified public accountant (CPA) who is experienced in the sale of a business, as well as other traditional CPA roles. An experienced CPA will bring a solid idea of what a business might be worth. They’ll also make suggestions for building up equity on a balance sheet and developing an income statement. When it comes to selling a business, it is possible for an owner to outgrow your accountant, especially if you’ve only ever used your current one to prepare taxes. 
• An attorney. An attorney is crucial to negotiating the terms of sale and to closing the deal. Finding an attorney with business sale and acquisition skill sets is important, especially if the buyer brings one to the table.
• A financial advisor. Although a financial advisor typically focuses on post-sale lifestyle planning and investments, they should be aware of your plans and goals from the beginning of the process. They can offer guidance on issues such as buying the building in which your business operates. This strategy gives you more flexibility after the sale. You could sell the hard assets, such as buildings, and realize a larger total gain. Or you might keep the real estate and become a landlord to your former business and any others that might be housed in the same building. This latter strategy would set up an ongoing stream of income.

And as a possibility to consider:

• A broker. A broker may work with you on issues like valuation, marketing the business, ensuring confidentiality, screening potential buyers, conducting due diligence, negotiating terms of the sale, and finalizing the transaction. (Note that these are areas where your CPA or attorney can be effective as well.) Brokers are typically used in third-party sales but can be called upon in sales of the business to employees. Conscientious brokers will start the conversation with you early on, and can guide you on what you need to do to prepare for a successful sale. Just as an experienced real estate agent might point out home improvements to make before their client’s house goes on the market, an experienced broker might advise you to correct imbalances in your books for a higher valuation.

2. Understand valuation fundamentals. In real estate the number one rule is location, location, location. In business sales, you could say the number one rule is cash flow, cash flow, cash flow. No matter how much sweat equity you have poured into your business over the years, the company valuation will largely be based on how much money is coming into the business and how much is going out. There are other assets, of course, like customer lists, manufacturing equipment, goodwill, brand equity, and relationships with vendors and suppliers. But they pale in comparison to the importance of a business’s cash flow. 

Certain decisions you make have an impact on cash flow and net income. These include tax write-offs and expenses such as the your compensation and expensing your vehicle. Other decisions will affect equity and the net worth of the business. These include distributions your business may make to you or others. The larger these distributions are, the more they affect the equity of the business. If your business shows little to no profit at the time of the appraisal, its valuation is likely to be considerably lower.   

All these decisions will shape the timeline you set for a sale. A good estimate is 36 to 60 months ahead of the event, though 36 months is more typical.

3. Prepare for contingencies. Your team of advisors can prepare you for potential contingencies. For example, it’s especially important to discuss a sale or transfer to a close party such as a relative or long-time employee and the potential tensions this may present for the buyer. You also may need to consider providing a portion of the buyer’s financing in the form of seller-debt in the event that the buyer cannot raise the full amount of funds needed to complete the business purchase. 

4. Take advantage of resources, many of which are free. In addition to the business transition team, programs like SCORE, Small Business Development Centers (SBDC), or Center for Women & Enterprise (CWE), all of which are SBA resource partners, can offer guidance through mentorship, webinars, live events, and online courses. They’re communities of experienced entrepreneurs, corporate managers, and executives who are available to help owners with business issues. Of course, owners can mine their own business networks for suggestions as well.

Your bank is an important resource in the purchase of a business. Yet our position in lending to buyers means that we can’t legally offer formal advice for selling one. That’s the role of a transition team, so choose carefully.

In the next installment of this series, we’ll take you through a few things to expect during the sale process itself.