Like selling a house, selling a privately held business can be a complex, lengthy process. “When to sell?” and “For how much money?” are just two questions a potential seller asks when trying to decide if and when to sell a business.
“If you’re thinking you may want to sell your business, the time to start planning is now,” says Greg Yadley, a partner with Shumaker, Loop & Kendrick LLP in Tampa.
Smart Business asked Yadley what potential sellers can do to help make this hard decision.
When is the right time to sell my business?
There is no perfect time. It’s like trying to decide exactly when to buy a particular stock you’ve been following. If you’re interested in buying a stock as a long-term investment, then the right time to buy is now.
It’s never too soon to begin thinking about when and why you might decide to sell. Are you approaching retirement age? Is your partner facing a serious illness and needs cash? Is the next generation uninterested in carrying on the family business? Is there a consolidation within your industry making it difficult to compete with larger companies?
How important is the next generation in the decision to sell?
It can be the controlling consideration. Quite often, siblings complement one another and very effectively run a company. Responsibilities have been allocated through trial-and-error over time, and each co-owner intuitively knows what the other thinks. The next generation, however, may have diverse views about the future direction of the company and likely has no experience working together.
Not only decision-making, but compensation and distributions to owners versus investment for future growth present thorny issues. This is particularly true where some family members are actively engaged in the business and some are not involved at all.
What do I need to do to get the best possible price for my business?
Make sure to clearly define your goals at the outset. Price certainly is a major consideration, but there are many others. Even with price, some sellers want cash up front. Others may wish to negotiate a certain amount of cash at closing with an earn-out based on future performance of the business. Deferred payment, with interest, presents another alternative. Taking an equity stake in the ongoing business also could provide a much larger return. Continuing to work or consult after the sale could provide additional income. Even if the buyer doesn’t need you to continue to run the business, you may be able to negotiate additional consideration by agreeing not to engage in a similar business or compete with the company for a few years after the sale.
The key to getting the best price is having experienced advisers guide you through the process. Remember also that the highest offer may not come from the most credible buyer. You don’t get paid until you close, so the quality of the buyer is a crucial consideration.
You need a savvy accountant to make sure your books are in tip-top shape and an experienced ‘deal lawyer.’ The sale of your business is too important not to engage a lawyer who specializes in this type of transaction. A strong financial adviser, who may be an investment banker or a business broker, can identify what kind of buyers are most suitable for your business, what they are looking for and how much they are willing to pay.
Can a seller stay involved after the sale?
Some buyers insist that the seller agree to work for a certain period of time. They know they are not just buying hard assets, but the goodwill and relationships nurtured by the previous owner and his key employees.
Are there different types of buyers?
There are generally two kinds. A ‘financial buyer’ is someone who understands a particular product or industry and — through his or her management skills, access to capital and business relationships — can take the seller’s business to the next level of growth and profitability. These buyers almost always want the seller, or at least the key personnel, to stay involved.
A ‘strategic buyer’ is someone in the same business as the seller. Here, market shares, access to customers or technology or similar considerations are critical. Quite often, a strategic buyer has sufficient management and industry knowledge that he or she doesn’t need the seller to stick around for more than a short transition period.
How can sellers make sure their longtime employees are taken care of after the sale?
That must be bargained for during the early stages of negotiations when financial and nonfinancial requirements are made clear. You need to protect your work force — not only to be able to deliver an operating business to the buyer, but to protect yourself if the deal ultimately doesn’t close.
GREG YADLEY is a partner with Shumaker, Loop & Kendrick LLP in Tampa. Reach him at (813) 227-2238 or [email protected].
