There comes a time in every entrepreneur’s life when he or she makes the decision to sell. That decision can be motivated by a number of factors, but the outcome is the same: you need to get your house in order to be able to sell. Here are a few practical tips to consider:
- Think like a buyer, not a seller
Buyers want profit, not potential. They want clients, not contacts. They want to see what is really happening, and not what you believe might happen if only … (fill in the blank). Yes, the business has been your baby, but don’t think like that during the sales process.
- Know your business story
Be able to articulate how you source your customers. Is one particular channel more advantageous than the other? What are the costs associated with each? What is your customer retention rate? What is the referral rate? What is the average cost of servicing a client?
Who are you dependent on in your supply chain? How do you interact with them? What are your contractual arrangements? Who are your downstream entities, if any? If there is a change of control in your operations, do any of those relationships change?
- Get your records in order
This is so important and people often try to shortcut this step. First, what type of entity do you have? Do you have all your corporate records? Are all meetings and decisions recorded properly? Are you compliant with all federal, state and local requirements?
Now look at your finances. Do you have at least three years of financial records available? In addition to your tax returns, do you have a balance sheet, income statement, and statement of cash flows that you can produce? If you can, have your accountant produce these for you, preferably in an audited format. If you cannot, produce them yourself but be sure to have supporting documents to validate each.
Next up are your employees. If you are reliant on certain key employees, be sure to review their employment agreements (if any) or consider putting ones in place. One thing your successor may want to lock up are your key individuals to help transition once you are gone from the business.
Another area to consider are your intellectual assets. Do you have a register of your trademarks and/or patents? Do you have solid agreements with your employees as to ownership of any intellectual property created while in your employ? Do you own the intellectual assets of your business?
- Be ready to talk about your business
Ideally, you should have two people ready to help you with the conversation: your accountant and your attorney. Your accountant will have helped prepare your financial records. He or she will help you tell your financial story. Your lawyer will help you tell your business story safely and then memorialize the deal.
Even before any sale your attorney will provide you with two key documents. The first is a non-disclosure agreement (“NDA”). An NDA is put in place before you even discuss selling with a potential buyer to prevent them from acting on the highly confidential information you will be sharing with them to your disadvantage. Don’t have sales discussions without a signed NDA, you could easily regret it. The second is a letter of intent (“LOI”). The LOI is what is initially negotiated and signed between you and the buyer. The LOI lays out the general terms of the purchase, and it add provisions to protect you in case the sale doesn’t go through. As just one example, it’s smart to put a non-solicitation clause in an LOI. This will keep the potential purchaser from hiring away your staff in order to set up his or her own competing business.
Finally, as I’ve discussed previously, don’t try to sell your business using some downloaded form off of the Internet. You obviously thought your business was worth investing in before you considered selling it, now make sure the sale is done right.
- Be honest
This goes above all others. Don’t lie, don’t exaggerate, don’t mislead. It will all come back to haunt you either as the deal unravels when the truth comes out or later when the buyer sues you to set aside the purchase and seeks damages. It’s not worth it.
Even if you aren’t planning on selling your business in the near future, if you follow these tips now, you’ll be ready to sell when the time is right.
The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
