Important Steps to Take When Selling a Business
Selling a business, no matter how large or small, is always a complex venture. It involves several legal considerations as well as scrutiny and evaluation from professionals, such as lawyers, brokers, and accountants. You should get a business attorney on your team as soon as possible to ensure the sale is done right.
The profit you earn from selling your business will depend on the timing of the sale, strength of operation, structure of the business, and the reason for sale. Most importantly, your interests will be best protected when you have a knowledgeable business lawyer on your side.
Here are a few important steps that can help you maximize the revenue you get from selling the business:
- Define Goals and Exit Strategies
Business owners should have a broad range of transaction options to sell their businesses. These options affect the final price paid by buyers. Your goals will drive the type of buyer your company desires. In general, business buyers are of three types:
- Employee buyers
- Financial buyers
- Strategic buyers
Each of these options has its individual pros and cons.
- Determine Reasonable Valuation
A critical step in the sale process is to determine a reasonable valuation. You need to have realistic expectations so that you don’t turn off potential buyers. Deals can quickly crash when sellers and buyers are unable to agree on a purchase price.
The most experienced advisor will not be able to bridge a large gap. You should engage valuation experts before listing the company for sale. This will provide a basis for you to understand the value of your business. The final price is determined by the quality of the business presentation, potential buyers, and negotiation with buyers.
- Enhancing Value
A company’s strategic plan, financial status, and growth opportunities can be used for increasing the overall value of the business over a period of 6 – 12 months. Regardless of the size and scalability of your particular company, you should carry out the necessary steps for increasing its market worth. You can employ strategies like streamlining processes, focusing on core competencies, reducing customer concentration, and reducing expenses.
- Gather Existing Financial Information
An essential task in the sales process is to spend enough time for evaluating and presenting the company’s business and financial history. Typically, business owners prepare their financial statements for taxation and not for selling it. Investing the time to present your earning power can have a major impact on how your business is viewed by buyers.
- Organize Due Diligence Information
Potential acquirers expect the facts and records to be properly documented and organized while evaluating a company. You should review the corporate governance documents, incorporation papers, permits, employee agreements, licensing agreements, and leases. These records are usually shared in a data room, which can be cloud-based, in the form of a banker’s box, or an actual room.
The seller’s mergers and acquisitions advisor needs to organize the data room so that buyers can easily and quickly find the information they are looking for. A poorly organized data room may delay the due diligence process which can in turn hurt the seller. It is recommended to choose an experienced business attorney to be the advisor.
Your attorney can create a high-quality business summary that includes due diligence and financial information. This business summary will demonstrate financial information, growth opportunities, and market niche. This report is also known as CIM or confidential information.
- Qualify Potential Buyers
There are usually a large number of buyers for lower and middle market companies. Buyers need to use tools and resources for researching and accessing qualified buyers.
You would need to review competitors, strategic buyers, customers, private equity firms, and other entities with suitable capital. This is the most time-intensive step in the entire process. You need to do this right to approach the best buyers and close the deal.
There are many potential buyers that may express an interest but are not qualified for various reasons. Your attorney will do the groundwork for you by screening potential buyers. This will help you and the management to focus your efforts on growing the business instead of wasting it on unqualified buyers.
- Negotiate a Price
There are several professional and financial considerations in the sale of a business. The purchase price is only one element. Other components to negotiate include:
- Stock sale versus asset sale
- Seller financing
- Terms of sale
- Security for financing
- Liabilities assumed by the buyer
- Employment contracts
- Current assets retained by the seller
- Non-compete agreements
- Equity ownership
There are three stages of interest in a company – IOI (Indication of Interest), LOI (Letter of Intent), and Purchase Agreement. Things start getting serious from the LOI stage. This gives the potential buyer an exclusivity period to assess and evaluate the company.
The purchase agreement, employment agreement, non-compete agreements, and other documentation need to be drafted during this exclusivity period. The purchase document is the definitive document that outlines all the terms of the sale.
Consult With a Qualified Business Attorney in Alabama Today
Selling a business is a complex process in which any error can cost you thousands of dollars. The experienced legal team at the BHM Law Group can guide you every step of the way and make sure that your rights and financial interests are fully protected. To set up your free initial consultation, call us at 205-994-0902 or reach us online.