- PLAN AHEAD
- Is the business owner ready to sell?
- Is there a management succession plan?
- Does the owner need to sell?
- What will the owner do with his or her free time after the sale?
- BUILD A TEAM
- A variety of advisors, specialists and professionals are required to successfully complete a business sale transaction.
- An investment banker or business broker may be required in order to locate potential buyers.
- Additional resources required include:
Attorney Financial Advisor
CPA (Audit and Tax) Insurance Professional
Banker Employee Benefits Advisor
Senior Management CFO/Controller
- TIMING IS EVERYTHING
- When financial performance is strong, values go up, but an owner often doesn’t want to sell as they want to reap the rewards of the strong financial performance.
- Inversely, when financial performance is weak, values go down, but owners often are ready to sell instead of waiting for the next up cycle or working through financial challenges.
- Rapid change in the industry, due to technology or regulatory changes, can also affect timing.
- Other influences on timing are changes in interest rates and income tax rates.
- UNDERSTAND VALUE
- Owner valuation expectations need to be managed.
- Many transactions are driven by EBITDA multiples or some form of discounted cash flow analysis.
- Key value drives in most business typically include:
Product or service quality
Customer profile (concentrated versus disperse)
Growth and profitability trends
- CLEAN BOOKS AND RECORDS ARE KEY
- Reviewed or audited financials from a reputable CPA firm almost always expedite the sale process.
- Regularly reconciled general ledger accounts are important and make an interim date sale easier.
- Stable and size-appropriate accounting and information systems provide reliability.
- Quality budgeting and forecasting will aid in establishing business value and the corresponding purchase price.
- Comprehensive and complete business documents – particularly contracts – will accelerate the closing process.
- TRANSACTION STRUCTURE MATTERS
- The business owner needs to understand the difference between:
Sales of shares and sales of assets
Financial buyers and strategic buyers
- The owner will also need to be to understand and be prepared to negotiate typical transaction sale terms including:
Purchase price components Escrows and holdbacks
Post-transaction earn out Transition services agreement
Working capital provision Key employee retention provisions
- In certain circumstances, an employee buy-out may be the most logical form of business sale.
- TAX CONSIDERATIONS CAN BE COMPLEX
- Evaluation of tax issues should go beyond just Federal Income tax.
- Additional tax areas include:
State and local taxes
- The buyer will typically want an asset purchase for step-up in asset basis.
- Sellers usually prefer a stock sale in order to provide the most efficient tax structure.
- Entity structure is important – C corporation can lead to double taxation.
- How does the transaction fit into an estate plan?
- Personal versus business goodwill must be understood and evaluated.
- Charitable contribution considerations also arise as the transaction may provide gifting opportunities.
- DON’T UNDERESTIMATE THE RESOURCE COMMITMENT
- Selling a business takes time and money.
- Continuing smooth operations while engaged in a transaction is often difficult.
- Understand and be prepared for the due diligence process.
- FINANCING CONSIDERATIONS ARE OFTEN CRITICAL
- Financial buyers often borrow a portion of the purchase price.
- Is the deal bankable?
- Is the owner willing to consider seller financing?
- BE PREPARED TO STICK AROUND
- Post-transaction owner involvement is often required.
- Owners may desire (or may be encouraged by the buyer) to retain a financial interest in the business after the sale.
- Owner employment contract and noncompete provisions should be understood and negotiated.
Hagen, Kurth, Perman & Co., P.S.