If you own a business, there’s only three ways you can leave it: A) liquidate (go out of business), B) Die or C) sell. Obviously, the best option in most situations is to sell your business – to convert the value of your business to cash.
When buyers come knocking on your door, they are going to be looking for any number of things, including (but not limited to): A) how much cash is your business generating (usually measured by EBITDA), B) are there key employees who can come with the business, C), Is there unique intellectual property (IP) and/or processes and D) a number of artifacts which will help confirm the validity of what they are purchasing.
Some buyers may want to buy the stock in your company – others may want to buy some or all of the assets of your business, such as customer list(s), manufacturing equipment, IP, receivables (monies owed to your business for products purchased and/or services rendered) and/or in-force customer contracts.
How Long Does it Take?
Usually, you can count on 3 – 12 months to sell your business. The emotions of selling a business will take you through the highest of highs and the lowest of lows. Generally, it’s best to have a consultant who specializes in sell-side representation quarterback your sale, represent you coordinate the efforts of your trusted advisors and do the negotiations. Having done this in the past, I can attest that it’s usually best to not have the seller in the room during the negotiations – the “back and forth” can be emotionally draining on a seller and the outcomes can be uncertain. Sellers who are “in the room” will usually ruminate on each detail, every comment and inferred motive of the buyer. They might play out the end-points ad Infinium until they work themselves into such a worried frenzie that they lose perspective on the here and now. A consultant will usually negotiate a better deal, both in terms of price and terms what a business owner will for him or herself.
What if I Mix Personal and Business Finances?
In many small businesses, the owner mixes his/her personal finances with the business finances. For example, an owner may purchase an SUV that is used primarily for personal use, but the purchase is run through the business for tax purposes. Or an owner may use company funds to finance the down payment on a family cabin. Another very common mixing is getting cell phones for the family and running the monthly bill through the business. The number of ways an owner can mix personal and business finances is only limited by the imagination of business owners. Such mixing is rarely nefarious or illegal (if properly reported to the IRS), but it does pose a real problem when it comes to selling the business: personal and business finances must be separated before going to market so that potential buyers can view a clean balance sheet, income statement and cash flow statement. Separating mixed finances can take between six and twelve months and may require the services of a banker (to refinance both personal and business debt) and a lawyer (who may be needed to review contracts, business agreements, loan documents and so forth).
What Do Buyers Need Before They Will Sign a Purchase Agreement?
As part of the buying process, buyers may want to see any number of artifacts. The more they are spending to buy your business, the more likely it is that they will want to see a wide range of artifacts. The more readily available these documents are for the buyer to review, the more credibility you’ll have as a buyer. In more complex deals, a secure data room is built for purposes of passing information to potential buyers for their consideration.
- Formation Documents: such as Articles of Incorporation, bylaws, legal details on partnerships, joint ventures and/or key vendor/partner agreements
- Financial Information: such as 3-5 years of annually reviewed or audited income statements, balance sheets, cash flow statements and footnotes. They will also want to see internal financial reports, sales by product with gross margin, by customer, by region, by channel and so forth. They will want to see an anonymous customer list, accounts receivable, accounts payable and other financial reports. If there is inventory in your business, they’ll do a deep dive on your inventory as well and will look closely at your inventory turns. Supply chain information will be needed, such as who the key vendors are, what kind of vendor locks have been entered into and fluid the vendor supply chain is. Finally, they will want to see several years of tax returns as well.
- Capital Structure: for stock purchases, they will want to see how many shares are issued and authorized in your corporate documents along with a cap table that shows who the owners are.
- Sales & Marketing: customer lists, customer demographics, brand IP, domain names owned, trademarks, copyrights and so forth
- Market information: market demographics for each product, such as market size, product penetration, growth rate, growth potential, current competitors, future threats to product viability, impact of substitution products and so forth. They will likely want to see sales force productivity numbers, compensation model(s), quotas, sales cycle information and so forth.
- Information Systems: be ready to supply information on licensed platforms, hardware deployed, home-grown software, owed IP, access to installation bits and product key codes, subscription information, disaster recovery capabilities and so forth
- Management and Personnel: they may want to see an organization chart, bios and resumes of key employees who come with the purchase, copies of employment agreements, job descriptions, bonus and profit sharing plans, benefit matrix, information on any unfunded liabilities, employee demographic information, evidence of compliance with state and federal laws and regulations (such as EEOC or FMLA), union contracts, locations of I-9’s, evidence that no illegals are hired and so forth
- Legal and Other Matters: be sure to have a list of any pending or past lawsuits, outstanding judgments, list of patents, copyrights and trademarks, copies of insurance policies, leases, list of all bank accounts, list of all plant and facilities assets and so forth.
This list is not exhaustive by any stretch of the imagination. But the more buyers will be paying for your business and the more sophisticated they are, the longer the list will become of artifacts which you’ll be expected to produce. Therefore, before selling your business, you should take some time to gather key information which will likely be requested by your buyers. In many cases, this isn’t a day or two project – it often can take 3-6 months to gather needed information.
How do They Pay Me for My Business?
Usually, you’ll want to procure one or more LOIs (Letter of Intent or Letter of Interest) from potential buyers. These letters, usually not more than 1-2 pages, outline what the buyer would like to buy and a price range which the buyer is willing to pay. It’s best to sign one LOI and then allow that buyer to do his/her due diligence on your business. After this, they may adjust their price, walk away or move forward with purchasing your business. If the latter, you’ll need a lawyer to draw up the closing documents that will express the agreement of both parties. On an agreed-upon date, both parties will sign the closing documents and monies will be wired into your checking account and the transaction is complete.
Much negotiation goes on during the due diligence phase and a myriad of questions are asked and answered. Again, the larger the business, the more complex this part of the transaction will be.
This section is way over-simplified, but it’s nearly impossible to discuss all the eventualities which could happen during a buyer’s due diligence process.
The Process Will Be Stressful
Don’t try to sell your business when you’re experiencing other major life events, such as marriage, divorce, moving and so forth (unless a court is ordering you to sell your business as part of a larger divorce decree). Selling a business – separating personal and business finances – is stressful. You’ll still need to run your business as if you’re not selling it because you don’t really know when or if it will sell until the money is wired into your account. You might find that selling your business may be one of the most stressful times in life, which is another reason to have a consultant who does sell-side representation for a living. Let them shoulder the stress with you.
Summary
Selling your business is usually a one-in-a-lifetime event, so don’t gee-whiz your way into this. Your business likely represents your most valuable material asset, so getting it right on the sale side is important. If you want to discuss the sale of your business with me, Bill English, just give me a call at 763-458-3722.
Bill English
