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7 Steps to Selling your Business

David Walsh, JD, CFP®

Director of Financial Education

Last Updated
November 12, 2020

Tips for Business Succession Planning

Selling a business can be a long, complicated and trying process. Records need updating, buyers need vetting, due diligence requests need responses, accountants and attorneys need meetings, terms need negotiating, personnel need reassuring… Oh, and don’t forget that you’re still running a business!

The following steps can help make your life easier by providing clarity around the process of selling your business.

Step #1 – Choose your exit strategy

A selling owner will quickly discover that there are many options for how, and to whom, to sell a business. Sales can be structured to reduce taxes, reduce liability or both. Buyers typically fall into one of three categories – employee buyers (directly or through an ESOP), competitor/strategic buyers or financial/tactical buyers.

Determining your exit strategy is an important first step because it sets the stage for the entire sale process. It shapes the legacy you wish to leave for your business and family, and it guides you toward the best sale structure to complement your personal financial plan. A good business succession advisory team that is experienced with legal pitfalls, applicable taxes, financial planning and valuation practices plays an indispensable role in helping you craft your exit strategy.

Step #2 – Enlist the help of tax and legal professionals

When you’re not selling your business, crack all the jokes you want about accountants and attorneys, but before and during a sale they will be your best friends. Involve them early and often. In fact, you should meet with your accountant and attorney well before the sale in order to gain an understanding of the full impact of any tax laws that impact you. These laws can vary greatly depending on whether the transaction is an asset sale or stock sale and whether it’s structured as a lump sum or installment payout.

In addition to helping you minimize your tax liability, your attorney will continually protect your business interests throughout the sale process. Selling a business requires the disclosure of most, if not all, of your confidential and proprietary business information, including clients/customers, suppliers, processes, methods, intellectual property, etc. If the deal doesn’t close, you will need to legally protect this information with a non-disclosure agreement (NDA). If the deal does close, you will need to protect your post-closing business interests.

Step #3 – Present the best version of your company

Books and records are maintained for functional purposes – taxes, compliance and operations. They are not prepared with a view toward selling, but now they need to be. Throughout the sale, all eyes will be on your financials and other business records, including the eyes of lawyers, accountants, the buyer and, possibly, business valuation specialists. This is why it’s important to make sure your bookkeeping is organized and in good order.

Start with the following documents:

  • Financial statements
  • Incorporating and governing documents
  • Permits
  • Leases
  • Licensing agreements
  • Customer agreements
  • Other third-party contracts

There’s a reason people spiff up their cars before they sell them. Making your asset, in this case your business, look as good as possible before a sale can help increase your asking price. You may even want your advisory team to recast your financial statements to give prospective byers a more accurate view of your company’s earning capabilities.

Step #4 – Target and qualify prospective buyers

You and your advisors must have the necessary tools and resources to research and access the largest and most qualified buyers. Your merger and acquisitions (M&A) advisor should be able to conduct a thorough review of your competitors, customers, strategic buyers, private equity firms with relevant expertise, and other sources of highly suitable capital and partnership. This is one of the most time-consuming parts of the process, but it is absolutely vital for a successful deal. After all, if you don’t approach the best buyers, how can you know you’re receiving the best price and terms for your business?

Anytime you field an offer to buy your business, know who you’re dealing with and how serious they are about making a purchase. Some potential buyers who express interest in a business may not be qualified to purchase the company. A good advisory team will pre-screen buyers, allowing you and your management team to continue focusing on growing the business rather than wasting your time with unqualified buyers.

Step #5 – Negotiate your terms

Start with a realistic price. If your price is too high, you risk scaring off buyers and not selling. If your price is too low, you leave money on the table. The value of your business can be reasonably determined and justified in a number of different ways. If you need help, ask your advisory team’s valuation expert.

Your negotiations should also include what is not for sale (for example, the company car you wish to keep) as well as how the purchase price will be paid, either up front or over time. Payment in all cash with no earnout is the most low-risk option. On the other hand, payment in seller-financed, long-term installments adjusted for post-closing performance is laden with risk. The way in which a deal is structured can be just as important as the agreed-upon price.

Step #6 – Keep emotions at bay during the sale; after closing, let go

After all the years of work you put into building your business, selling it can be an incredibly emotional process. Following the sale, it can be difficult to walk away. While it’s natural to struggle with the decision to sell, you must try to keep emotions out of the practical decisions you need to make once you commit to selling.

It can be equally as difficult to know how to carry on after you’ve closed on the sale and are in the process of transitioning the business. You will need to retain key employees, introduce clients to the new owner, turn over financial and accounting functions, and disclose any trade secrets and proprietary information necessary to operate the business. It can be a natural inclination to perform these transition tasks as if you still own the business, but the new owner will expect you to consult from a distance. Be mindful of these expectations and learn to start letting go of the reigns.

Step #7 – Mix business with pleasure

Last, but not least, don’t separate your personal financial plan from the sale of your business. For many business owners, their business is their baby, not just another asset. However, once you commit to selling, your business becomes an investment in your personal portfolio. It’s important to work with your financial advisor to make sure this investment is in line with your overall financial plan and long-term goals.

Many business owners are surprised to discover that selling their business can be as difficult as starting it. There are books to settle, finances to track and pressure to do everything in a way that provides the best possible outcome for yourself and your employees. With the right advisory team following these seven steps, you can walk away from your business with a full pocket and a full heart.

At Creative Planning, our teams have helped countless business owners execute successful business sales. Our staff includes accountants, attorneys and business valuation professionals who work with your advisor to help optimize your sale with a particular focus on how the sale will impact your long-term financial goals. For additional information, please contact us.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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