Preparing Your Business for Sale

A Practical Guide to Preparing Your Business for an Exit Event

Aug 31, 2023

For family businesses, the journey of entrepreneurship is often deeply rooted in personal dedication, passion, and a shared commitment to growth. However, as the torch passes from one owner to the next, the pivotal aspect of preparing for a business sale tends to be overshadowed by the strong emotional bonds that tie family members to the enterprise. While the heart and soul poured into the business are undeniable, the importance of meticulous preparation for a potential sale should not be underestimated. This essential process is often overlooked, leading many family businesses to navigate the complexities of a sale without adequate foresight. In this context, the significance of comprehensive preparation takes center stage, playing a pivotal role in safeguarding the legacy, maximizing value, and ensuring a smooth transition for both the business and its closely connected family stakeholders. Here are some practical steps we have identified to help you maximize the outcome of a potential business sale.

Be Prepared
1. Start early. For best results, we advise business owners to begin planning a sale 2-3 years in advance of selling.
Be Objectives Driven
1. We believe that the entire transaction process should be driven by the ownership objectives that are more than just selling at a certain value. That process is rooted in the Financial Planning process. Your Financial Advisor should (even needs) to have a seat at the table throughout the process.
2. Ensure that the anticipated proceeds from a Transaction will support your retirement and life objectives. What are your “must have” items that you need to plan for? Retirement? Care for special needs family members? Rewarding Key Employees for their hard work and dedication? Charitable contributions and gifts or endowment? Your Financial Advisor will incorporate these objectives and tax planning strategies into your financial plan which should be used as a guide throughout the exit planning process.
Housekeeping
1. Examine third parties’ agreements: Formalize contracts, especially with major customers and suppliers. Long-term customer/supplier contracts can add considerable value. Ensure that contracts allow assignment.
2. Records: Are the business' stock records and minutes in order? Are all contracts in one place? Is there a system for renewing contracts, leases, licenses and permits? Is there a record of all claims, whether or not they result in formal litigation? Is there a system for terminating UCC filings when debts have been paid or leased equipment returned (similarly, liens on real estate)? These might seem like insignificant details, but they routinely hold up transactions.
3. Be Organized: Business owners can make it easy for a purchaser to do its "due diligence." This is particularly important if the business owners have been successful in gathering the interest of more than one potential purchaser. In addition, poor organization can cause a potential purchaser and advisors to label the business as poorly managed and prompt them to start looking for problems.
4. Employees: Many business owners will say that their most valuable asset is their people. Are Key Employees under employment contracts? Non-Competes? Do they have an incentive to stay, a golden parachute, supplemental executive retirement plan, etc.? If they walk out the door what happens to the value of the company? Are you investing in their growth and leadership skills?
5. Advisor Team: A cohesive advisor team is critical to the successful business transaction; a seasoned deal attorney, CPA, investment banker and personal financial advisor are key to maximizing your sales price, before and after the impact of taxes. We like to say, “put a team of smart people around the table and you usually end up with a positive outcome.” No one advisor has all the answers, and they need to work in concert.
Skeletons
1. In the process of addressing housekeeping, management may find a skeleton here and there that may have an adverse impact. It is better that you should find the problem ahead of time than a potential purchaser, especially before the “fee meters” start running with your advisors. The adverse impact of a skeleton can often be mitigated if it is fully disclosed early in the process.
Intellectual Property
1. Of the factors that affect the value and marketability of a business, one of the most important is the existence of proprietary products or services. Protect them by filing copyrights, trademarks, or patents; a corporate name alone is insufficient to protect a brand.
2. If the business involves technological innovations or trade secrets, make sure that each employee is party to an agreement covering confidential and proprietary information and inventions.
Tax and Estate Planning
1. What you realize from the sale of a business is far more important than what you sold the business for; Federal, state, and local taxes are the biggest expense you will incur upon the sale of the business and are extremely important in the planning process. Whether you are a C Corp, S Corp, an LLC, or a partnership, Uncle Sam and the state have specific tax issues for you to assess prior to executing a Letter-of-Intent. Should you sell assets or stock? Is there a recapture issue? Do you have estate and philanthropic issues you would like to address? Would you take stock of the acquiring company? A sale over time? These are questions for your advisor team to address to maximize the after-tax value of the transaction.
2. Sometimes there are delicate family issues to consider regarding estate planning. There may be multiple children of the marriage who will all become heirs of the sellers’ estate, but what if only 1 or 2 of those children work for the business? The “Fair vs Equal” discussion should be considered and planned for; we find that most sellers want to put in place a structure to allow active children to “earn equity” in the business as earned over time.
3. There comes a point in every sale where, as a tax attorney we work with frequently likes to say, “the deal is pregnant.” At this point, charitable contributions and utilization of certain trust is no longer possible under IRS tax Code. These trigger points are important to know and be aware of if your objectives include philanthropy or gifts to family members.
Financial Statements
1. Most closely held businesses manage their finances to minimize taxes as opposed to increase earnings. Speak to your advisors about ways to reflect the true value of the business in its financial statements (e.g., consider "expensing" less aggressively – perhaps by capitalizing equipment purchases and repairs to buildings or equipment, consider capitalizing loans from shareholders, and, if the business is a "C" corporation and the owners can afford to, consider reducing salaries to FMV to owners).
2. Examine the true value of each asset that has been depreciated – the business owners may have to substantiate it during the negotiations for a sale. Similarly, try to identify and value the business' intangible assets (e.g., proprietary products, distribution network, name recognition and uniqueness of market niche).
3. Remember, audited statements are best, reviewed statements are the next best alternative and compiled statements are the least effective reporting. Consider increasing the level of review by your CPA. The cleaner the statements, the more efficient the process.
Core Business Metrics
1. Crucial for a company and prospective buyer as they provide valuable insights into its performance, growth, and overall health. Here are some key reasons why core business metrics are important:
  1. Performance Evaluation: Metrics allow a company to objectively assess how well it's performing against its goals and benchmarks.
  2. Data-Driven Decisions: Metrics provide actionable data that supports informed decision-making and strategic planning.
  3. Goal Alignment: Metrics help align employees' efforts with company goals, fostering a unified focus on objectives.
  4. Accountability: Metrics hold teams accountable by setting clear expectations and measuring progress.
  5. Identifying Trends: Metrics reveal trends over time, enabling early detection of positive or negative changes.
  6. Resource Allocation: Metrics guide allocation of resources to areas that drive the most value and growth.
  7. Continuous Improvement: Regular monitoring of metrics helps identify areas for improvement and optimization.
  8. Benchmarking: Metrics allow companies to compare their performance against industry standards and competitors.
  9. Investor/Buyer Confidence: Metrics provide transparency to investors, enhancing trust and confidence in the company.
  10. Performance Recognition: Metrics highlight achievements, boosting employee morale and motivation.
  11. Risk Management: Metrics identify potential risks, allowing proactive measures to mitigate or address issues.
Identify Potential Purchasers and Sale Price
1. Take time to identify potential purchasers. Help potential purchasers identify the business by raising its profile. A network of contacts established while participating in business associations and community organizations may help identify potential purchasers but try to think more broadly than the business' immediate competitors, customers and suppliers. Consider using a public relations consultant to raise the profile of the business and to compile high quality brochures and other marketing materials.
2. The ideal situation is to attract several potential purchasers (eg. Competitors, management buy-out, private equity, ESOP) and initiate an auction.
3. Think realistically about what the business is worth. A variety of equations and formulas for valuing a business exist, and valuations may vary. Your advisor team can help with valuations. Try to identify the valuation range acceptable to the ownership. With the understanding that an all-cash deal yields the lowest sales price, are the business owners prepared to seller finance or take stock in a purchaser to increase the sales price?
Timing Is Everything – Be Patient
1. Business owners can almost always increase the price paid for their business with careful preparation and by choosing the right time to sell.
2. A purchaser is paying for the future of a target business. Consequently, if the business is expanding at the time of the sale, the owners are likely to get a better price than if it has reached a plateau or is declining.
3. Business owners who resist the temptation to become emotionally invested in a particular sale before it is negotiated and closed will obtain a better deal, not only relative to price but also with respect to matters such as indemnification and escrow of purchase price.

The transaction - be it to Private Equity, Family Office, management team, synergistic buyer, or ESOP – will undoubtedly benefit from:

Assembling the right team
Defining Objectives and Goals
Preparing the Business utilizing best business practices

Selling or exiting a business should not be looked at as an event, but rather as a process that is well planned for to drive the optimum outcome for the Owner and their family. It is never to early to adopt best practices: integrate financial and business metrics into your operations and analysis, ensure proper corporate governance, address Key Employee goals, and invest in leadership development. By presenting a sophisticated and professional corporate structure the buyers will have more faith and perceive less governance and leadership risk in the prospective transaction – lower risk almost always leads to a higher value.

Contact Tim Sperling, Director of Business Development, at tsperling@rbgcap.com or (480) 386-0309 today to learn more about business disposition tools and strategies.