As an entrepreneur, you’ve built your business for years and have come to the point when you’re finally ready to sell. Congratulations on reaching this milestone! After putting in countless hours of hard work and dedication, it’s understandable to want to make sure the selling process goes smoothly and yields the best possible outcome. Yet selling a business for the right price requires thoughtful preparation and cannot be attained by simply putting out a “for sale” sign. It takes time, effort, and planning to successfully sell a business.
While finding the best time to sell your business takes advanced planning and deliberate action, identifying steps not to overlook when preparing to sell helps set you up for a seamless and profitable transition. In this article, we’ll help you gain clarity by exploring 5 key steps to consider as you make this important move.
1. Begin Your Exit Planning Early
One of the most costly mistakes business owners make is not starting early enough. A successful exit plan begins with enough time to strategize and implement how you can get the most value out of your business while mitigating taxes and creating enough value to maintain your lifestyle. In order to do this, you need to focus on converting your business wealth into personal wealth.
What most entrepreneurs don’t understand is that planning for a successful exit or succession is good business practice even if you don’t plan on leaving soon. Some tax-efficient business sale strategies require more than a year or two of advanced planning. So even if you do not have a sale on the immediate horizon, it is never too early to meet with experienced advisors.
2. Know What Your Business Is Worth
When it comes to putting a price tag on your business, it’s not as simple as you may think. It’s important to know all the details of what makes your business marketable to a buyer.
Some of the most important factors are a strong management team, a diversified customer base, and strong cash flow. Some less obvious factors include your physical assets, such as the building from which you run your business, along with your equipment. Additionally, intellectual property and digital assets, such as proprietary technology, your website and online presence, are part of your business value.
Most business owners don’t think about all the pieces that create value. That’s why it’s important to have a business valuation done. We suggest an informal one to begin with, which is less expensive. Too often business owners run to a formal valuation at great expense and time without yet knowing the direction. Knowing the true value of your business is critical to proper business planning and meeting personal goals. A good informal valuation process can help answer the questions that can lead you to make informed decisions for your future.
3. Verify Your Business Can Operate Without You
This is one of the hardest parts of planning for your business yet the one that significantly increases the value. Buyers pay for self-managing companies where the owner is not critical to the future viability of the business. This is a harsh reality for some entrepreneurs. It involves having a strong management team in place with good processes to deliver stronger profits and cash flow into the future.
The most devastating scenarios can happen to us when we least expect it, whether that’s disability or death, and you must be prepared. Most experts suggest a buy-sell agreement linked with a life insurance policy so your family and business are safeguarded. Another part of succession planning that some business owners might not know about is getting coverage on key employees who can successfully run your business in your absence.
However, if you don’t have someone to pass the business on to, it might be wise to start thinking about how you can effectively sell your business while retaining its value—another reason why starting sooner rather than later is important.
4. Get Your Books in Order
When selling a business, buyers will examine your books closely, which is why it’s important to have everything in order ahead of time. Potential buyers will be able to clearly see the value of the accuracy of your financial statements and how they comply with legal requirements, making the sale of your business that much more appealing.
One way to improve the quality of your financial reporting is to hire a reputable accounting firm to conduct a Quality of Earnings report, which is a detailed analysis tailored to a buyer’s requests that analyzes both the amount and source of a business’s earnings. Its main purpose is to check for anything that may indicate risk for the buyer, and better inform them of where a business’s profits come from.
5. Understand the “Letter of Intent”
A Letter of Intent (LOI) is a non-binding expression of the intent of two parties to pursue a transaction. LOIs are critically important for both buyers and sellers and require professional advice, primarily for three reasons:
- The LOI clarifies which portions of the transaction are legally binding and which are not.
- The LOI represents an important stage in the parties’ relative leverage, and failure to recognize and preserve that leverage in the LOI may result in a lost opportunity.
- A well-constructed and properly detailed LOI serves as a springboard for the quick and efficient completion of the deal by aligning both parties.
When dealing with an LOI, it is essential to take the time to fully understand its contents. This is particularly important when it comes to “earn-out” provisions, which outline how the seller receives payment based on the company’s performance after the sale. Confirm the terms of the LOI are realistic and well defined so both parties have a clear understanding of expectations. Failing to do so could result in misunderstandings, disputes, and even legal action down the line.
We Are Here to Help
Preparing for the sale of your business is an endeavor that takes careful planning and preparation. In addition to the steps above, you’ll need to think about growing revenues, improving profit margins, and gaining a competitive edge in order to make your business more attractive to buyers so you can command a higher price.
At Solidarity Wealth, we have experience helping entrepreneurs just like you through this transition. We understand the complexities and make it our goal to simplify this process as much as possible. We have an experienced team of professionals ready to guide you through the sale of your business with confidence and ease. If you’re ready to see what we can do for you and your financial future, reach out to us at email@example.com or call 385-374-1665 to schedule a discovery call.
For over a dozen years, Jeff has advised some of the country’s most successful families on all aspects of their wealth. With his background as a former tax and estate planning attorney, Jeff has advised clients through business sales, funding rounds, IPOs, complex tax and wealth planning transactions, private and public market investments, executive compensation packages, and much more. In short, Jeff helps clients navigate the unique challenges of wealth and better predict their financial future.
In addition to co-founding Solidarity Wealth, which serves as a multi-family office for successful families in the Mountain West, Jeff advises single family offices on a broad array of challenges. Jeff also serves as the Managing Partner of Solidarity Capital, an income focused hedge fund.
Prior to co-founding Solidarity Wealth, Jeff was a Wealth Advisor at one of the country’s largest Private Banks where, at the time of his resignation, Jeff was ranked as one of the top Wealth Advisors in the country. Jeff also worked as a tax and estate planning attorney at a prominent law firm in Houston, Texas.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor with honors from the University of Texas School of Law. Outside of work, Jeff is married and the father of three amazing children. He is a huge sports fan and enjoys spending time with family, golfing, and skiing. He has also served as past President of the Salt Lake Estate Planning Council and is a frequent speaker on tax and estate planning topics. To learn more about Jeff, connect with him on LinkedIn.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.