Christine M. Hogan
5 Things to Consider if you are Ready to Sell Your Business
As a business owner, you've put in countless hours and hard work to build your business. But lately you have been daydreaming of selling the business and moving on to the next chapter. Before you sell your business, there are a few things you should consider. In this post, we'll discuss the top 5 considerations when selling your closely held business.
1. Valuation The first and foremost consideration when selling your business is its valuation. You need to determine the worth of your business, which can be done by analyzing its financial statements and assets. There are various methods for valuation, including income-based, asset-based, and market-based approaches. If using a multiple of EBITDA, it is important to have market research to determine what multiple is “market” for your industry and a company of your size and scope.
2. Due Diligence. A potential buyer will likely conduct due diligence to assess the company's financial and legal history. This may include reviewing financial statements, contracts, legal documents, and other pertinent information. As the seller, you should be prepared to provide all necessary documents and information promptly. The time to get your documents in order is before you begin conversations with a buyer. A thorough and organized due diligence system also allows your legal team to accurately disclose information in the purchase agreement, which is necessary to avoid indemnification claims after your transaction closes.
3. Tax Implications Selling your business can have significant tax implications, and it's essential to understand them before proceeding. For instance, you may be subject to capital gains taxes on the sale of your business, which can be a substantial amount. There may also be state and local taxes that you need to consider. Your corporate structure also plays a significant role in the options available to you. Therefore, it's crucial to work with a tax professional who can help you navigate these tax implications.
4. Deal structure. When selling your business, there are various deal structures to consider. For example, you may choose to sell your business outright, or you may decide to sell only a portion of it. You may also consider an earn-out, where the buyer pays you a portion of the sale price based on the business's performance after the sale – this is a good option where you business is just recently beginning a major uptrend that may not be accurately reflected in the most current year-end financials. Often, where the business owner is the face of the business, the Buyer will ask the owner to stay on for 2-3 years after Closing to ensure a smooth transition – in this case, the owner should be negotiating a Consulting Agreement or Employment Agreement for such period. It's essential to consider the pros and cons of each deal structure and choose the one that best suits your needs. You may also want to find out how the buyer plans to handle your current employees – if there will be a mass layoff, certain laws and notice requirements would apply.
5. Confidentiality. Maintaining confidentiality during the sales process is crucial, as disclosing sensitive information can harm your business's value. You should have a nondisclosure agreement in place and ensure that potential buyers are qualified and trustworthy. You may also consider using a business broker or intermediary to maintain confidentiality and manage the sales process.
Selling a business can be a complex process, and it's essential to consider various factors before proceeding. By keeping these top 5 considerations in mind, you can ensure a successful sale and a smooth transition to the next phase of your life. It's also important to work with professionals, such as lawyers, accountants, and business brokers, to guide you through the process and help you achieve your goals.