Tips on How to Sell Your Privately Owned Business From A Position Of Strength
Are you an entrepreneur or small business owner that built up a solid profitable company and are thinking about possible exit strategies such as either stepping down or sale or M&A deal?
Selling your family-owned business is likely to be one of the most important transactions of your life. You’ve worked hard to build equity. When it comes time to monetize, it only makes sense to work just as hard to exit from a position of strength. Whether you’re thinking about retiring or you’re just considering a change, exiting your business successfully can be at least as hard as building it in the first place. Should you sell? Do you even have a business that’s saleable without you? Can you get more for it if you do some other things first?
You might be wondering how can you approach the process with confidence and know your company’s value proposition and be in a position of strength? Whether you want to sell to an outside buyer, partner with a private equity group, sell to employees via a management buy-out form an ESOP, retain control, and institute incentives for others to run the company? Having an exit or succession plan is important.
Well, recently I read an interesting Forbes article by David Tobin, founder of TobinLeff, an M&A Advisory firm, which explained that be in a position of leverage when you sell your company, there are steps you can take and strategies to employ to maximize the selling price and your net worth. Mr. Tobin stated that “some of them include preparation, crystallizing your value proposition, having a go-to-market strategy, negotiating terms early in the process, having a fallback position, and staying true to your values.”
Here are some of Mr. Tobin’s exit strategy business planning tips.
1 Get prepared
Selling your business can be a stressful event. It’s a roller coaster of emotions. Mr. Tobin explains that “you have to be realistic, commit to the process and take stock of what you have to offer.” You also need to take an objective view, because many people think their business or home is worth more than the market does?
Ideally, you’ll begin your preparations a few years in advance of your target exit date. Work on the value drivers that can impact the price and terms you can command—profit margins, recurring revenue sources, new business systems, client concentration and your management team, just to name a few.
Explore putting in place incentive plans (phantom stock or equity-based) for key employees to participate in the liquidity event and to be motivated to stay with you and the buyer throughout.
Brainstorm and think about the possible questions a potential buyer is likely to ask, such as:
- Why do you want to sell?
- How dependent is the business on you?
- What are your recurring revenue sources?
- How scalable is your company?
- How sustainable is the business?
- Where are the growth opportunities?
One of your goals should be to find a way to reduce the dependency on yourself and other departing shareholders to run it. Otherwise, the offers may be lower, or the deal terms may include onerous earn-out provisions, because of the potential risk of the business declining without you.
2 Craft Your Vision And Value Proposition
Do you have the corporate vision and strategy in place to make these decisions, or do you need to do some strategic planning first? Do you need to increase your profitability to be able to attract an outside buyer or fund an inside deal?
Potential buyers may pay premiums if they see growth opportunities and/or your company provides strategic opportunities. What is special about your business that could not easily be built or bought? Where are the opportunities for growth? What resources are needed to capitalize on opportunities in the marketplace? Present your value proposition with passion and conviction.
3 Plan Your Go-To-Market Selling Strategy
Mr. Tobin stated in his article that an important strategic decision to make “is whether to negotiate a deal with one or a few select buyers or to direct your mergers and acquisitions team to initiate a broader auction process.” He went on to further explain that in most situations, it will serve the business owner well to have multiple offers to consider from qualified buyers. However, getting multiple offers does not always require a broad shotgun approach if you can identify and tell a compelling story to targeted buyers who may want your company for strategic reasons.
Another strategy is to look into building an advisory team. It’s hard to sell a business on your own while running the business. Take time to evaluate M&A advisors. Do they have experience in your industry with companies of your size? Does your current business attorney have experience in M&A work, or do you need to bring in a specialist?
4 Negotiate Terms Early In The Process
Before signing a letter of intent, negotiate as many terms as possible. This isn’t only about the multiple or the price. There are other important deal elements—like the working capital target, the indemnification cap, and whether you will be personally liable for any of the representations you make. Of course, the letter of intent requires the involvement of your attorney, as well as your M&A advisor.
5 Have A Fallback Position
Your fallback position is your plan B, and you should have one. A fallback position ensures that if you or the buyer decide to terminate the deal, you’ll be left with options. This might involve maintaining the controlling interest while instituting incentives for others to run the company. It might mean you have a framework for a management buy-out plan, or that you have investors you can turn to.
6 Stay True To Your Values
One of the most important considerations in navigating the sale of your company is to remain true to your values. As noted, this is an intense, emotional process. Staying true to your values can mean listening to what your gut tells you. If the deal somehow doesn’t feel right, chances are it isn’t.
7 Tax Considerations For Selling a Small Business
The tax implications of selling a small business has many moving parts, and as the seller, you’ll have a lot of decisions to make. However, some of those choices are restricted by the IRS. Other decisions will be negotiated by the buyer, since their interests can run counter to the sellers.
There are four main tax-related issues to keep in mind when selling a business:
- Whether proceeds of the sale are taxed as ordinary income or capital gains
- If the sale is an all-cash deal or requires payment installments
- Whether the sale is one of assets or one of stocks
- Whether the sale can be treated as a tax-free merger in the case of a deal between two corporations
Keep in mind these issues are relevant for federal income taxes. Different states have different rules and may collect more or fewer taxes than the IRS on the same deal.
First, to the IRS the sale of a business usually is not considered to be the sale of a single asset. Instead, with few exceptions, all the individual assets of the business are treated as if they were being sold separately.
Then there is the matter of how a sale of business assets will be taxed — as long-term capital gains or as ordinary income. The difference between the two has major tax implications.
If you sell an asset that you’ve held for more than 12 months, the proceeds will be treated as long-term capital gains. The maximum tax rate on capital gains for most taxpayers is 15%.
Proceeds treated as ordinary income are taxed at the taxpayer’s individual rate. Currently, the top individual federal income tax rate is 37%, more than twice as high as the long-term capital gains tax rate. Other things to be aware of include the asset allocation of the business as well as how the deal structure affects taxes.
It will benefit you to put time, energy, and thought into planning now for your exit in the future. Prepare in advance for one of the most important transactions of your life to ensure that you approach the sale of your company from a position of strength.
Thomas Huckabee CPA offers an integrated suite of advisory services from estate, trust and gift planning to income tax planning to strategic planning, we can help you grow your business to sell or increase the value of your business to pass on for generations to come. Contact us for a free consultation today.