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Posted: November 08, 2012

Ready, set—sell!

Proper prep for selling your business pays off

Julie Herzog

Despite ongoing economic challenges, many small and mid-sized businesses have continued to grow and thrive, giving their owners an opportunity to walk away and reap the benefits of years of hard work.  If you are an owner contemplating a sale, it is imperative to prepare yourself and your business beforehand.  A small investment now can prevent significant bills and headaches later on.

Key considerations when looking to sell your business include:

Understand strategic versus financial buyers.
Strategic buyers acquire a business to meet a specific business goal.  This may be because the business fills a market niche currently unmet by the buyer or the business may provide access to products or technologies important to the buyer’s own business.  Such buyers generally think long-term in making acquisitions and, because they can often realize more value from an acquisition than the intrinsic value of the business acquired, they often offer more for a business than other suitors.

While strategic buyers use acquisitions to meet business goals, financial buyers, such as private equity funds, seek financial gain and healthy profit margins and have a shorter target timeframe to realize gains.  While a financial buyer may not pay as much as a strategic buyer, it can offer other benefits such as allowing the existing owner to retain 10 to 15 percent of the equity in the business and obtain even greater returns on the next sale.

Depending on the particular buyer, it may want you to continue working with your company post-sale, it may offer a consulting agreement or it may want no further business relationship with you.  Factors such as your importance to the company’s operations, management of the buyer already in place and others can be key.

Identify gaps in buyers’ portfolios.
Buyers often have specific niches they want to address in their portfolios and a savvy seller who identifies buyers with a need for her business’s offerings will have an advantage in pursuing any sale.  These portfolio gaps can be identified in many ways, including by simply staying attuned to acquisition trends in your industry.

Know the corporate culture.
Familiarize yourself with the culture of potential buyers.  Since you may continue to work together post-sale, it is critical that you be comfortable with the buyer’s culture or you could risk becoming involved with a company that does not share your business philosophy or goals.

Prepare your business’s financial records.
Buyers will thoroughly review your business and you must be prepared.  A review of your business’s financial records will be among any buyer’s highest priorities and it is imperative that these records be organized and thorough.  Disorganized or incomplete records may not only prolong the sale process, they can kill a deal or result in a lower valuation for your business.  Before engaging potential buyers work with a qualified accountant and legal counsel to ensure that the materials that buyers will request are accounted for and presented professionally.  Consider hiring an auditor to audit your business’s financial records as an audit can preemptively identify potential areas of concern for buyers and permit their remediation before a potential buyer discovers them.

Protect yourself legally.
Before beginning the sale process ensure that you have consulted experienced legal counsel to help you consider the numerous legal aspects of a complex business transaction that can have significant implications both at the time of sale and for years afterwards.  Good counsel will begin any discussion by inquiring about your goals in selling your business, and your answer to this question can significantly affect how a sale proceeds.  Regardless of your goals, a few of the many aspects of a sale through which skilled counsel can guide you include:

1. Transaction structure and form of consideration (e.g., cash or stock).
2. Tax implications of the sale to you.
3. Requirement to sign an employment or a non-competition agreement, retention of employees while a deal is in the works and intellectual property protection, especially if a sale falls through.

Consider your financial options.
Both before and during the sale process, consult with financial and legal advisors regarding your financial goals and the financial options available to you post-sale to ensure that the sale of your business is consistent with your goals. Whether to sell, the type of consideration sought and retention of an interest in the business are all key issues.

Consider life after the sale.
Always be cognizant of how you envision life post-sale; it may change dramatically and it is important to be ready.  Share your vision for life after work with your family, friends and advisors and discuss your ideal future and how you can get there.

Selling a business requires tremendous preparation, introspection and work. Ensuring that you understand the sale process and that you have taken the necessary steps to make both the sale and your transition to life afterwards as smooth as possible will help to make not only the professional transaction, but also your personal transition, easier and more rewarding.
 

Julie Herzog is a partner with the Denver-based law firm of Schuchat, Herzog & Brenman, and is a corporate, securities and merger and acquisition specialist.  She can be reached at (303) 295-9707 or jherzog@shblegal.com.

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