Exit Strategies: A Brief Overview of Steps to Take Before Selling Your Business

Business owners work so hard to establish and grow their business, but at some point in their lives, for various reasons, a business owner will often decide to move to another business or sell his/her business.  Many people think that if the business is slow, it may mean that they have bad business acumen or that the business simply is not a good investment anymore.  For many others, the lawn always looks greener on the other side. Regardless of the reason, whenever a decision is made to sell, a business owner should first take few necessary steps to prepare for the sale of the business. 

The following list that we will discuss is not by any means a conclusive list; preparations may vary among many factors from one business to another, and are relative based upon the size of the business; the complexity of ownership; the financial standing of the business, etc.

Some of the main issues that should be discussed generally and prepared for prior to offering the business for sale are:

1.       Ownership

If the business is owned by a proprietor, then the decision to sell is easy to make and does not require many formalities.  However, if the business is organized under an LLC or INC, then the members and or shareholders must agree on the sale. This agreement may be in the form of a corporate resolution.  The validity of said resolution is normally dictated by the operating agreement or the bylaws of the company.  Depending on the corporate structure, corporate formalities must be observed in order for the sale to be valid. 

2.       Tax Consequences

Regardless of how the business transaction is structured there are, inevitably, tax consequences in any sale transaction.  Due to the specialized expertise of the tax law, it is highly recommended that a consultation with a tax advisor or CPA is secured before the business is offered for sale.  Tax consequences are beyond the scope of this article, but are definitely important to factor into the sale of any business.

3.       Due Diligence

Although it is thought that due diligence is for buyers, it is as important as it is for the seller.  The more prepared the seller is, the better value s/he can demand for the business and the transaction is faster to be concluded.  Normally, potential buyers will like to see, among other documents, the financial records of the business. Obviously, if the business is not profitable, Seller will have a hard time selling the business. Before disclosing any private information about the business, Seller should ask potential buyers to sign a confidentiality agreement so the business information is protected and safe guarded. 

4.       Value

It is hard to put a value on a business that you, and maybe your family, worked so hard to build over the years.  However, once a decision to sell is made, emotions should be set aside and a realistic number should be presented.  There are many formulas or ways that are helpful in determining the value of the business.  Consultation with a CPA is one way; hiring a business evaluator is another; and being conscious of market value is always a must.

5.       Structure of the Sale

Now the decision to sell is made; due diligence is done and we are ready to offer the business for sale.  Depending on the consultation with the CPA, partners and lawyer, do we want to sell the business as asset sale? There are many factors to consider in assessing this option. Does the seller wants the selling price cash, all in one payment; is the seller willing to owner finance, take a note for partial payment? Is the seller willing to hold a partial membership interest or shares in the company? Does inheritance come into play? The structure of the sale varies from one transaction to another, from one owner(s) to another, from one business structure to another. In short there are many factors to consider before a decision is made on how to structure the sale of a business.

6.       Financials

In many instances, buyers do not have enough cash to pay the entire agreed upon purchase price. Typically, it is the Buyer’s responsibility to secure the purchase price.  Outside financials sources are customary in sales transactions depending on the business, the collateral, owners, and many other factors.  Depending on the seller’s financial and tax situation, it may be beneficial for the seller to offer some help in financing the sale transaction.

7.       Employees

Another sensitive issue should be dearly thought of during the seller’s due diligence period is the status of employees. Employees are inseparable part of the success of any business and thus at the time a decision is made to sell, their status should be carefully attended to and addressed fairly and appropriately in a sense that in any sale transaction, the seller should determine beforehand whether the presence of the employees is vital to the continuity of the business. This matter should be discussed with the employees themselves before hand and then with the potential buyer.   

8.       What is next

“It is always greener on the other side.” Despite of the benefits of owning your own business, business owners think that they are in the wrong business and if they change their business, they will have better chance to make more money.  This philosophy is so ironic especially when I see it on my end.  For some reason, business owners think that other businesses are much better than theirs!  It is not always true; the true fact is that always follow what you enjoy and the money will come.

Business owners sell their businesses for many reasons like retirement, moving, tired of this business, I can make more money somewhere else, etc… No matter what your reason is, always ask yourself what will I do when I sell my business? Whether it is another business opportunity, traveling, or just spending more time with family/retirement, as a business owner, you should always have a plan in place before you sell your business.

Disclaimer.  Nothing in relation to the enclosed information should be construed and or considered as legal advice for any individual, case, or situation.  The following information is prepared for advertisement use only.  The information is intended ONLY to be general and should not be relied upon for any specific situation. For legal advice on your specific situation, we encourage you to consult an attorney experienced in the area of Business Law.