Many business owners will eventually exit from the organization. Whether it be for retirement after a long successful run or a tempting buyout of your startup, exit for most will happen eventually. If the business is successful, or even if it is facing some troubles, the most common exit is through a sale of the business, either through a sale of shares or assets.
Taking the long view: What you need to do well in advance of any sale of the business
Don't put off until tomorrow what you can do today. Even if you're not currently in the market to sell, think about under what conditions you would sell. Understand the trends in the market place and the implications for your business. Taking a long view, and keeping the business paperwork in good shape, will smooth the way for an eventual exit. Here are five tips to keep in mind:
1. Tax Rules the Day
Remember shareholders own the corporation and the corporation owns the assets of the business. Whether you will eventually sell shares or assets, you will need to understand the tax implications – for the corporation and for the shareholders. The eventual purchaser may dictate whether the deal is a share or asset deal but you can be well versed in the consequences of both. If things change in the way the business is organized or owned, update your understanding of the tax implications.
2. Get your Minute Book in Order
Do the records of the business reflect the key players' understanding of who owns and controls the business? Have there been promises of shares, options or transfers of shares that need to be recorded? Is the business being run in accordance with its governance structure, bylaws and shareholder agreements? Does the public record reflect reality? How many shareholders do you have and who are they? If you can answer these questions to your satisfaction, you're in good pre-sale shape!
3. Prepare for Due Diligence
When a potential buyer comes along, management is often reactive – think about being proactive instead. Implement a system for keeping information about the corporation and its commitments so that it can be easily located and identified when a buyer shows up. Tracking your business's obligations, rights and liabilities, and of course any unique or unusual provisions, in contracts, employment agreements, security agreements, loan arrangements and similar agreements, will definitely assist in the due diligence process.
4. Negotiating Agreements
The business is constantly negotiating agreements, contracts, purchase orders and other terms and conditions. Are these "sale" friendly? Where possible, negotiate clauses that allow for assignment of the contract and/or change of control of the business without the consent of the other party. Take note of agreements that include clauses such as (i) termination if there is an acquisition by a competitor of the other party to the agreement, (ii) exclusivity, or (iii) restrictions on how a new owner can run the business, including pricing.
5. Deciding when to Sell
Prepare a list of criteria that will help determine when it is the right time to sell. These criteria could relate to:
- Achieving certain milestones in the business
- Required expansion/growth for the next phase of the business
- Agility – if an incredible offer appears on the doorstep, would you be willing and able to jump on it?
- What consideration (cash, shares or a combination) would the corporation and/or the shareholders be willing to accept?
Speak to your advisors early and often (despite some costs – it will be worth it in the long run). Legal counsel and accountants will be able to provide valuable upfront information and advice to help you develop your exit plan.
When the opportunity is ripe: The brass tacks of negotiating and closing a deal
Whether you are shopping your business around or a promising offer falls in your lap, eventually you and a purchaser will need to agree on the fundamental terms of the sale. Keeping the following five tips in mind can help you assess whether you have a viable deal:
6. Determine Your Valuation
How do you value the business you will be selling? Does the value change if you are selling assets or shares? Do you need a third party independent valuation to understand the value of the business? What is the competitive landscape?
As the business changes so too will its valuation. Having a reasonable sense of what your business is worth before an offer materializes will save you immeasurable time and headache in deciding if it's the right offer for you.
7. What's in the Price?
So you receive an offer, and the price does match your valuation - you still need to decide if it's the right price!
Is the purchase price for the whole business or will some things be excluded, such as cash left in the business for day-to-day operations?
Payment mechanics can also vary greatly – and the time over which the funds are paid out. Deferred payments and earn-outs, escrow payments, and security for time-delayed payments are all options to be considered.
8. Key Players
The lines between founders, officers, directors, employees and shareholders can blur when key players have multiple roles. Each group can have different interests and different roles to play in the transaction. Will a founder or officer stay on after the sale? Will they be required to leave? Who will keep the business running efficiently while the transaction is ongoing?
9. Early Discussions with Purchaser
Have discussions with any potential purchaser about key elements of the transaction up front to see if there is enough common ground for a letter of intent. Consider the following:
- Are there key conditions that are essential to the corporation/shareholders?
- Continuing employment arrangements
- Non-competition and non-solicitation restrictions
- Assumption of certain liabilities (such as environment, litigation, insurance and tax claims) by the purchaser and indemnities to be given by the seller.
Selling a business often takes longer than expected. Plan for sufficient time to get all the stakeholders on board, due diligence completed, and any governmental and third-party approvals that are required. Consider outside dates after which the transaction cannot proceed or the terms will need to change.
Time invested in advance, while the business is operating normally and in the early phases of negotiation, will pay off when the time comes to at last finalize your deal and sell the business.