Selling your business can be stressful. There’s no silver bullet or single piece of advice that will alleviate all of the stress, but there are steps you can take to make sure the process runs as smoothly as possible, reported The Washington Post.
Similar to the way a pilot walks through a checklist before a flight takes off, the point at which you need to start planning for the eventual sale of your business comes long before you actually depart. As your business grows, it naturally increases in value – but in no way does that mean you’ll automatically secure the maximum sale price. There is always more you can do to get a more favorable deal from potential business buyers.
By planning ahead for the eventual sale, many of the issues that a buyer might have could be resolved well in advance. Here’s a checklist to get you started.
1. Identify the right potential buyers
Planning for the eventual sale of your business begins by identifying your ideal prospective buyer and any potential back-up buyers. Knowing who your firm’s potential successor should be will provide insight into what key issues or challenges you could face at the time of sale. Buyers may include:
Business partners
Key employees
Family members
A third party, such as venture capitalists and other strategic investors
Once you’ve identified the ideal set of potential purchasers, you then need to consider how those buyers would typically pay for the business. Planning ahead will leave you with many more options for the sale of the business, as these strategies cannot be effectively implemented at the finish line.
2. Get your house in order
Placing a valuation on the business seems like the next important step, but determining that value can be a very tricky calculation. Don’t be too concerned about the actual number; just make sure you are taking the necessary steps to prepare the business for sale and garner the highest possible price:
Evaluate control and audit procedures, as well as accounting practices
Structure employee compensation plans to retain key employees
Reexamine your retirement plan structure and deferred compensation agreements
Having a clean set of books is extremely important in supporting a business valuation. You should evaluate your financial monitoring and audit procedures, as the accounting practices that you currently have in place might be working at the moment, but bringing on an outside auditing firm for the last couple of years will help you sort out any looming financial issues before buyers come in.
Additionally, it’s not uncommon for a business to have one or two all-star employees who drive a large percentage of revenue. Providing key employees with strong financial incentives to stay could minimize potential concerns the purchaser may have about those employees leaving.
3. Scale back your role
The success of a small business is commonly tied to the drive and determination of its founder. Said another way, if you are the main driver of value, and you head for the door, the value is diminished.
It’s important to quantify how the company’s performance is affected by the owner’s participation. Any potential buyer is going to consider the impact of the loss of key employees, and this includes you as an owner. Consider these steps to limit the impact of your departure:
Cultivate and develop new key employees within the organization
Systematize critical operations to eliminate customer service issues
Develop operation manuals and employee handbooks
Create teams within organization to limit the need for your input
The more easily replaceable you are as an owner, the more valuable your business will become. Take the time to identify all aspects of the business where your presence is critical. Find ways to extract yourself from those situations and instead utilize your key employees.
4. Consider your long-term needs
It’s important that you understand your personal retirement objectives and projected retirement income. Many business owners have some sort of buy-sell scenario in mind, but rarely do they understand the full impact of the sale on their retirement. For example, selling your business and walking away with a $5 million check may sound great for some, but will it be enough money to generate the income necessary to support your current lifestyle?
When developing your personal plan, make sure to incorporate assets with different risks, growth assumptions and tax consequences. Also, be sure that your expense assumptions are realistic and incorporate critical items that your business used to provide — for example, health insurance. If you’re unsure, talk to a retirement professional.
Bottom line: A business owner should prepare for the sale of his or her company many years in advance. Don’t leave it to chance by waiting until you are ready to sell, because once you get to that stage, you’re already behind.
