Protecting Your Assets
Selling Your Business
Whether you started your company decades ago, worked your way up through the ranks or inherited your business, one thing is certain: You will eventually leave the company, most likely through retirement. If your retirement plan means selling your business, it’s important to note that a successful sale is largely dependent on the owner’s level of preparation.
Focus on maximizing the value of your business. Businesses are traditionally sold based on a multiple of cash flow or earnings. The multiple varies widely, depending on the industry, the economic environment, the types of assets being sold and the prospects for the future. A good rule of thumb is that businesses will sell at a value ranging from three to eight times annual earnings before interest, taxes, depreciation and amortization. While business owners have little control over the multiple, they can move the needle by increasing the cash flow and earnings prior to the sale.
Build a Pro Team
It’s important to begin planning with advisors at least two to three years prior to the planned sale of the business. Many owners are hesitant to surround themselves with experts due to concerns about confidentiality. A well drafted confidentiality agreement, which includes non-disclosure and non-compete language, will allow you to share information with advisors and potential purchasers while maintaining confidentiality.
Your Team of Experts Should Include:
- Investment Banker or Business Broker A good investment banker or business broker should understand your industry and suggest strategic and tactical changes to implement in the years preceding the sale to increase earnings and the ultimate sale price. Choose an advisor who will be your partner in maximizing value.
- Private Financial Advisor Begin planning with a private financial advisor a few years prior to the sale of your business to review and implement strategies that may save tax dollars during the sale. An experienced certified financial planner can assist in modeling retirement planning and cash flow scenarios to help business owners determine how much money they need to realize from the sale of their business to support their lifestyle.
- Certified Public Accountant A CPA with experience in your industry can share strategies to improve margins and your bottom line.
- Mergers and Acquisitions Attorney A specialized M&A attorney can help minimize liability and often has experience drafting and negotiating term sheets.
Commercial Banker A seasoned commercial banker should be able to share best practices to increase profit margins and cash flow, as well as provide an estimate as to how much debt your business can support — a key variable when negotiating a sale. Once bank debt is exhausted, businesses can be financed using private equity, preferred securities, warrants and other hybrid instruments. But each come with their own consideration. If you know what your business can support, you will be in a better position to analyze potential offers.
Helping Your Business Find a New Owner
It may be helpful to have some knowledge of the loans available to interested buyers. One great financing option when purchasing a business is a loan through the Small Business Administration (SBA). The SBA 7(a) guaranteed loan program is built to finance goodwill and business assets for individuals looking to buy a business. Some of the benefits of SBA financing include:
- Longer terms — up to 10 years financing
- Loan amounts up to $5,000,000
- Competitive rates and terms
- Potentially as little as 10 percent equity from the buyer
- Seller financing available to limit buyer down payment
- Other options include business term loans and lines of credit.
Price and Payments
Price is only one component of the sale of your business. Consider how long you are willing to consult or work through the transition. Since time is your most important commodity, a sale with a three-year consulting agreement may be much less attractive than a sale with a one-year agreement. If you plan to start a new business, a non-compete agreement becomes extremely important.
Another important component is whether you receive a one-time cash payment or payments over time. While conventional wisdom may be to “take the money and run,” in this low interest rate environment consideration should be given to holding a note. A properly collateralized note may bring a much higher return to the business owner and provide tax advantages when recognizing the gains. Additionally, if the prospects are great for business growth, and you will be consulting for a number a years, an earn-out agreement may allow for a larger payout than a one-time sale. Each of these options has pros and cons, which is why business owners need to surround themselves with advisors who are knowledgeable about the many different scenarios.
Timing is Everything
It is ideal to sell during the optimal time in your industry cycle, as well as a friendly economic environment, when banks are lending money and/or private equity is readily available to finance the sale of your business. During the financial crisis, very few successful sales were completed, as the capital simply wasn’t available. In the current environment, low interest rates create more capacity for debt service. Banks are lending more money, and private equity is flush with capital to finance deals.
As head of operations, client relations and strategic decisions, it will be difficult to sell your business, maximize value and walk away into the sunset. It is important to begin delegating management of day-to-day operations and turn your focus to strategy and increasing profitability to make the company more attractive to potential purchasers. You can spend a lifetime implementing new business strategies. The key to a successful sale is to begin planning early with a team of trusted professionals at your side.