How to Sell a Company:
There are a number of reasons you might want to sell a company. It has grown and become a success and you have profited. You are ready to retire. You have dreams of doing something new. Perhaps the effort it takes to run your company is more than you want to give now that you are older. It is time to start enjoying things like time with friends and family, or travelling. It might be the case you simply aren’t making enough money to justify the continuing costs, or you have extinguished all of your available resources. You’ve maxed out debt or capital opportunities, or both.
Perhaps you can thrive and survive if you find a partner/buyer. You know that given changes in the market or technology you need to merge with, or be acquired by, another company. Doing so will symbiotically provide both of you with the resources you need to remain competitive. In any event, whatever your reasons may be, you need to sell your company, or a part of it. Whether you are a corporation, LLC, sole proprietor, business unit, a company division, or simply have company assets to sell, here are 5 things you need to consider before actively seeking a buyer. Caveat, this list is far from exhaustive.
5 Things to do Before Seeking Buyers
1) Be Discrete About Selling Your Company
Company/asset/unit sales needs to be carefully, discreetly, and professionally marketed as to not disrupt current business operations. You don’t want to damage current cash flow generation and revenues or to alarm customers, vendors or employees. Do not tell anyone about your plans to sell your company until you have spoken to experts and have come up with a plan to make sure all communications, written and oral, are treated with uttermost discretion. One rule of thumb is to only discuss your intentions of selling your company with individuals, agents, or entities that have signed a non-disclosure agreement.
2) Figure Out Which Parts of Your Company You Are Going to Sell and How
Are you going to sell your company outright? Are you going to sell all or part of its stock, or just all or part of its assets? There are many, many questions which must be answered before knowing everything from tax consequences to future legal liability. To go into all these considerations herein is impossible because every company sale is complicated and unique. In any event, a Purchase Agreement is the master document for the sale of your company. It will contain many legal provisions that protect you, the seller. In addition to detailing the sale, e.g. is it a stock sale, an asset sale, or otherwise, many other considerations will be covered. For instance, how will you, the seller be paid? Will you be paid in cash, debt, or stock? How will you ensure receipt of future payments should the sale price be in any way connected to future performance (e.g. earnout payments)? How will disputes be handled should they arise? Will they be settled via lawsuits, or by mediation or by binding arbitration? Many questions need to be thoroughly considered based on the type of deal you wish to strike in selling your company.
3) Do Your Due Diligence before Selling a Company
How do you know what your company is really worth? You don’t want to sign on the dotted line and then subsequently discover you sold your company at a serious discount somewhere down the road. It can only help to spend a little hiring a trusted advisor to estimate your company’s value before having any discussion with any potential buyer or partner. Additionally, your company will have different values to different buyers. This is why a lot of detailed and thoughtful market research is required to assure who you want to solicit. In other words, the marketing of your company sale needs to be targeted to an appropriate group of potential buyers that are most likely to be interested in acquiring its stock or assets at the best possible price for the seller. To you this will be fair market value (FMV). Additionally, when you find potential buyers for your company, they need to be carefully vetted for financial fitness as well as for operational acumen. You don’t want a buyer who may become insolvent and jeopardize your future earn out. You don’t want to deal with a buyer with a history of litigious action. As a seller, you do not want to end up with a broken asset/business back in your hands after your company sale has been made, all because you did not do your homework and sold to a buyer who truly did not know how to operate the business.
4) Prepare for Detailed Buyer Due Diligence
As a seller even if you know your company’s value and you have a ready and willing buyer, a big surprise often comes right after a letter of understanding is in place. The buyer’s demands for due diligence are incredible and vast and likely to delay putting final ink on your asset purchase agreement. The buyer wants five years of tax returns, audited financials, bank statements, customer, supplier and vendor contracts, litigation lists, employee resumes, operations manuals for assets, desktop procedures, training manuals, inventory lists, asset lists, intellectual property lists/details, permits, business licenses, leases… The list goes on and on. In short, before embarking on selling your business/assets a seller must have his house in order. This possibly includes the aforementioned list of items for a larger enterprise. However, for smaller concerns having impeccably prepared financial statements (depending on business size/sophistication requiring audit or review) along with back up documentation/substantiation on the ready via a financial system login may be sufficient.
5) Draft a Transition Plan
Finally, a well-documented and planned transition plan can be one of the most important aspects of selling a business. The buyer will want to know exactly what kind of training needs to be done, for how long, and which employees need to be involved. If the business you are selling is complex, a TSA (Transition Services Agreement) will likely need to be drafted in order to handle, and serve as guidance for, the critical activities during the transition.