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Preparing the Small Business for Sale

Written by: Michael B. Tule

Why Taking Action Now Will Help Drive Value Later

Most small business owners start and run their business for years without a single thought of ever selling it.  They do what they do out of passion for their craft, an opportunity they see to supply a unique product or service that the market demands, or out of a desire to grow something they can call their own.  Very few start a business because they want to sell it someday.  But over the life of a business, every owner will, at some time, contemplate an exit from the business.  And while there are different kinds of owner exits, we will focus on one particular exit strategy - the sale of a business to a third party.

While the current state of the economy may not seem like a good time to plan for a sale, a successful seller sees selling a business as a process, not an event.  Properly done, the planning and execution of the third party sale can take up to three years or more to complete.  How do you start the process? 

Define Your Priorities

  1. Why are you selling?
  2. What exactly, do you want out of the sale?  All cash with a full exit?  Are you willing to finance all or a part of the purchase price?  Do you envision a future role in the business after the sale?  Do you require a certain amount in order to make the exit?

This is an important first step that many owners neglect.  Don’t make that mistake.  Knowing your priorities ahead of time and the relative importance of each priority will smooth the process going forward.

 When Do You Sell?  How Long Will It Take?

  Trying to time an exit when all of the stars are aligned is, at best, a difficult strategy.  A better strategy is to prepare for eventual sale early, and take steps to enhance the value of your business well before the exit.  This process doesn’t happen overnight, so it is best to prepare now.

 What Steps Can You Take Now?

The most important value drivers relate to the financial performance and future potential of the business.  But there are other additional steps you can take which will enhance both your business and the likelihood of having a smooth sale process.  The key to a smooth sale is to avoid delays and future expense now, rather than when the transaction is ongoing.  Here are some simple steps you can take now.

  • Make sure your corporate and other records are formalized and that all transactions are clearly documented.  Consider documenting company policies and procedures.
  • Examine your material contracts (including real estate leases).  Eliminate any “sweetheart” deals which will detract from value.  Note particularly whether any terms and conditions will expire or require negotiation if and when a new owner steps in.
  • Determine whether material contracts and leases may be assumed by a buyer.
  • Inspect your corporate “vehicle.”  Meet with your lawyers and accountants to ensure proper corporate governance and tax planning.
  • Make sure you have a written agreement among shareholders/partners in place so that there are no disputes to hold up a potential sale.
  • Ensure that your intellectual property is protected and that you have proper agreements in place with your employees and contractors.
  • Consider a financial audit or review.  Audited or reviewed financial statements lend credibility to the financial results.
  • Ensure that you are in compliance with all laws and regulations affecting your business.
  • Assemble the team early.  Selling a business is not a job to be done alone.  The team should include at a minimum, a lawyer (with deal experience), an accountant, and depending on the business, an investment banker, valuation expert or business broker.

Regardless of whether you intend to sell, the above actions are simply good business practice and are worth doing periodically.  Keeping on top of these items will pay dividends when the time comes to plan for a sale.  Take action now and you will improve your chances for a successful third party sale exit.

Mike Tule is a member of the Corporate Department of the McLane Law Firm.  He can be reached at 603-628-1290 or at [email protected]. The McLane Law Firm is the largest law firm in the State of New Hampshire, with offices in Concord, Manchester, Portsmouth and Woburn, Massachusetts.

 

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