Selling your business is one of the most important decisions of your career. There are many issues that need to be considered, all of which could not possibly fit within the scope of this short article. Having said that, I can offer some high-level advice.
First, failure to invest in a strong M&A team can put you at significant risk. Hire an M&A lawyer who has a specialized skill set for managing business transactions. Hire a tax accountant who will be best at investigating what you will walk away with post-sale after transaction costs and taxes owed to various government entities.
Finally, hire a financial planner who can help you determine the sale number you need to match your desired lifestyle in retirement.
Second, give yourself at least two years to address concerns that could affect the sale of your business. Settle any litigation or threatened litigation, which will need to be disclosed to potential buyers. Make sure key employees that have options will be vested and remaining options are issued so they receive capital gains tax treatment and not ordinary income.
Make sure your financials are in order. Does the data that your organization produce tell the story that you need it to tell to receive the highest valuation? Are your financials prepared in accrual or cash-basis? The accrual method is preferred, even with its estimates, because it provides a clearer understanding of the financial performance of your business.
Third, prepare your management team for the sale process. Some sellers keep their employees in the dark while others communicate their plan widely.
Whatever path you choose, make sure that your company’s normal operating cadence is as uninterrupted as possible. Rumors and gossip can negatively impact your company’s performance. In all the investments I have made, only once did I invest in a business that was underperforming at close.
I can tell you that no buyer will buy your business if it is not performing. It needs to be operating optimally to close the deal and get the value that the business deserves. Having said that, total secrecy is not possible. There are too many information requests, particularly financial, that will require you to include other personnel to contribute to a smooth sale process.
Finally, consider using an investment bank or broker to sell your business. Investment bankers and brokers provide a very valuable service by bringing you potential buyers, managing the sale process and maximizing value.
Bankers and brokers normally receive some sort of monthly fee for their time spent, plus a success fee based on the value of the business when sold. There are many methods for calculating that success fee, but the most common, particularly for smaller deals, is the Lehman Formula.
The Lehman Formula is a sliding scale that pays 5 percent on the first $1 million of value, 4 percent on the next million and so on and so forth, but never going below 1 percent. ●
Jeffrey Kadlic is co-founder and managing partner at Evolution Capital Partners.