Selling a business is a significant life event, filled with emotions, stress, and excitement. It’s also a lot of work. Most business owners will only go through this process once, which is both a blessing and a curse. On the plus side, you only have to do it once. However, many aren’t prepared for the process and might end up losing money. Since many sellers rely on the sale to fund their retirement and lifelong financial goals, it’s crucial to get it right from the start. Here are some tips from sell-side business advisors on what to do (and not do) when selling a business.
One common mistake is not starting the process early enough. Many business owners assume they’ll never retire, but life can change unexpectedly. Health issues or a loss of passion can make running the business difficult. If you need to sell quickly, you might have fewer options. Some buyers may want the owner or management team to stay on for a while to help with the transition. If there’s an earn-out, it usually requires the seller to stay with the company for certain milestones to earn the full purchase price. Earn-outs aren’t ideal for sellers, but if you can’t consider deals with any continuation component, it could affect the sale price and timeline.
Business brokers often recommend getting a valuation done years before you plan to sell. Sarah Grossman, Principal of BayState Business Brokers, says this helps sellers shape their timeline and financial planning. Understanding the fair market value of the company is crucial for setting expectations, and knowing the drivers of the valuation can help increase the sale price over time. A broker can advise on things to do in the business over the next few years to make it more saleable.
Aaron Naisbitt, Managing Director at Dunn Rush & Co, emphasizes the importance of knowing your business’s worth and running a competitive process. Many business owners make the mistake of not educating themselves and preparing adequately for the process. Not every business can run a competitive process, but those that can and don’t will leave money and terms on the table.
Getting professional help is key. Negotiating a sale directly with a buyer might be short-sighted. Grossman warns that sellers approached directly by competitors could leave significant money on the table without understanding their company’s valuation. Sellers need to work with a broker and advisors to understand a typical deal structure to maximize their cash at closing.
Understanding the terms of the deal is crucial. This is where money is made or lost. Naisbitt cautions that sometimes terms can sound good but aren’t always common sense. Without an advisor, sellers don’t know where to argue. During negotiations, consider what’s important to you and what you’re willing to give up.
Gathering your team of advisors early on is key to a successful outcome. Your business advisory team may include a business broker or M&A advisor, accounting and tax advisors, and a transaction/M&A attorney. On the personal side, involve your financial advisor, estate planning attorney, and CPA/tax advisor throughout the process.
Business brokers and M&A advisors help with valuation, finding potential buyers, and advising on deal structure and terms. They typically receive compensation as a percentage of the sale price when the deal closes, aligning their goals with the seller’s.
One visible way sell-side advisors add value is by advising on deal structure, including ways to maximize cash at closing and avoid traps. For example, most earn-outs end in litigation. If an earn-out is necessary, try to go as high up on the income statement as possible, as you won’t control things like margins after the transaction.
Work with your tax and accounting team in advance to clean up financial records, prepare financial statements, projections, and key metrics. Even organized business owners won’t have sale-ready financial records without deliberate effort.
Engage an attorney experienced in M&A deals to assist with the sale. An M&A attorney will know what legal terms should be in the contract and how to protect your interests and prioritize your goals.
Your personal wealth advisor will play a key role in the sale. Business owners usually have most of their net worth tied up in the company, so the sale marks a major financial turning point. Consider working with a sudden wealth advisor who focuses on helping individuals experiencing a transformative liquidity event.
Involve your wealth advisor in discussions around deal terms to ensure alignment with your financial needs. Your advisor can help determine how much cash you need at closing and whether to consider arrangements like an installment sale.
At closing, a financial advisor can help decide what to do with the money from the sale. Wealth advisors typically coordinate with your tax and legal professionals on the personal side of selling a business.
A CPA can analyze the tax implications of different deal structures and your possible tax liability. Consulting a personal tax advisor is critical before completing the transaction to focus on your after-tax proceeds.
The sale of a business is often a major financial change. Instead of having most of your net worth in an illiquid asset, you now have cash to invest, spend, protect in trust, or give away. Your estate planning attorney can help ensure your post-sale financial situation and goals are reflected in your estate plan and trust structure. It may also be a good time to discuss charitable goals, legacy objectives for heirs, or estate tax planning strategies.
Selling a business is a lot of work. In addition to running the company, sellers need to comply with due diligence requests from the buyer and the lender financing the transaction. This process is often the biggest hurdle for unprepared business owners.
Grossman finds many sellers unprepared for the level of due diligence required. Buyers will need financial statements, bank statements, employee information, insurance information, corporate documents, and possibly a Quality of Earnings process. They will also look at revenue consistency, margins, staff tenure, customer concentration, and competition to determine the business’s health.
Aside from due diligence, sellers should prepare for the emotional impact of letting go of the business, hidden liabilities, tax implications, and employee reactions. The process can be more complicated and time-consuming than anticipated, benefiting greatly from professional guidance.