How owners can prepare for the process of selling the business Featured

9:01pm EDT July 31, 2011
How owners can prepare for the process of selling the business

Smart Business spoke with Bruce Andelson of Greenberg Glusker Fields Claman & Machtinger LLP about how the right advisors, accurate business value and being prepared make the process of selling the business more successful and less painful.

Recently, my friend Larry asked me a deceptively simple question: How can he sell his business, which makes doors and windows. He has never sold a business before and does not know what to do or how to begin.

If that sounds familiar, you are not alone. BizBen.com, a leading business website, estimates that in California alone more than 13,000 small businesses were sold in 2010. In the vast majority of cases these business owners are just like Larry, longtime owners and first-time sellers. Selling a business is like a journey. Arriving at the destination can be great, but the road can be bumpy. However, if you follow some basic rules of the road, the trip can be smooth.

Select your advisors… carefully

Larry needs to first carefully select his advisors and remember to select those right for him since one size does not fit all. He will certainly need a lawyer and an accountant and will have to determine if his regular lawyer and accountant are right for the job. To do so, he should ask probing questions such as: How many business sales have they closed and do they have the required skills for the sale? Are they familiar with his industry?

Larry learned that his accountant was suited for the work, but not his lawyer. He used one lawyer to obtain some patents for him several years earlier, another when his company got into a dispute last year with a terminated employee and a third when he needed financing to purchase some machinery. All seemed to be fine lawyers, but none were qualified to help Larry sell his business.

How can Larry find the right lawyer? I encouraged Larry to ask for recommendations from his accountant, his other lawyers and other business owners. Then, Larry should hold a “beauty contest,” in which the lawyers showcase their legal talents, and choose the one that impresses him the most.

Larry will also need someone, either a business broker or an investment broker, to help him find a buyer. Business brokers and investment bankers do much of the same thing, but a business broker usually handles sales of less than a few million dollars and an investment banker deals with larger sales. Larry should find an investment banker/business broker the same way he found his lawyer — by asking for recommendations from others and asking questions. What other companies have the banker/broker sold? Is he familiar with your industry? How long has he been a banker/broker? What is his plan to sell your business?

Honest evaluation of what your business is worth

Your team is in place, what do you do next?

Although businesses are generally not sold like real estate with an asking price, Larry should, with the assistance of his advisors, calculate a range of values for his business so that he will know what to expect and be able to target the most likely purchasers. Larry initially wanted to sell his business to certain key employees, but after he calculated a likely purchase price he realized that those employees would not be able to meet Larry’s purchase price and expectations.

Get ready to rumble

Larry has selected his advisors and determined a likely purchase price for his business. Is it time for him to go back to making doors and windows? While sometimes it is best not to “sweat the details,” that is not the case when selling a business.

Add a little touch-up paint

When Larry sold his last house he probably did a little painting and made sure the lawn was mowed. The same holds true when selling a business. Some of the things to do are:

  • Clean up any messes
  • Get his books in order
  • Make sure he is operating legally and with all required permits

Make your life easier during crunch time

I advised Larry that, before he retires, he will have some long days at work to prepare for the sale of his business. By doing the following, Larry can get ahead of the process:

  • Prepare a list of the business assets he will be selling
  • Prepare a list of employees and relevant information about them
  • Gather important business documents
  • Make sure that the agreements with his two minority shareholders are up to date

What doesn’t kill you makes you stronger… maybe

The sale process can be arduous, expensive and intrusive and it is important to make sure it is not deadly. I suggested a few things Larry can do to protect his business before the sale closes and he has been paid:

  • Operate on a need-to-know basis, and let only a few key employees know what is going on until the very end of the process
  • Protect his business secrets by obtaining a confidentiality agreement from prospective purchasers before disclosing anything but the basic information
  • Designate a small team of employees to deal with the gathering of information and other tasks during the sale process
  • Keep his advisors up to date on developments in the business — good and bad. No one likes surprises.

When you sell your business, remember the three all-important letters: AVP. Select your advisors carefully, estimate the value of your company and prepare for all contingencies. Done right, AVP will streamline the selling process and garner a greater asking price.

Bruce D. Andelson’s practice focuses on mergers and acquisitions, emerging growth and high-technology businesses, succession planning for closely held companies, and compensation issues for highly paid executives. He works extensively with entrepreneurs and with merchant banking, venture capital and angel investment companies. He can be reached at BAndelson@greenbergglusker.com or (310) 201-7464.