So, you are considering selling your business. Every small business owner should have an exit strategy, even if retirement or another career shift is not imminent. The time to begin planning is two to five years because that is the time it may take to arrange the transaction in a way that benefits you most.
Why does it take so long? There are three big reasons:
Firstly you obviously want to get the best price, which means being savvy about the market. An objective viewpoint can be very useful.
Second, to get that price you may need to tidy up your balance sheet and assess what it is about your business that is truly valuable. Perhaps it’s the income; or alternatively it could be intellectual property, real estate, your expertise during a transition period or even a stellar management team. It may take some preparation to preserve these less obvious sources of value.
Finally, remember that any liabilities you may have incurred in building your business will not necessarily transfer to the new owner at the time the assets do. Some careful legal drafting may save you quite a bit of grief.
Watching the market
Some people recommend working with a business broker for precisely this reason. Brokers tend to charge from seven to ten percent in commissions and additional for marketing costs. As a business owner you will need to weigh up the time and expense of using a broker rather than a private sale.
What is your business worth?
There are three basic approaches to valuing a business. A holistic approach would involve a little bit of all three. The first involves simply subtracting the liabilities from the value of assets. Keep in mind though, that there is a significant difference between selling a business at liquidation value – selling tangible assets, like tables, chairs and computer equipment – and selling it as a going concern.
The second looks at the sum of pretax earnings, owner’s salary, interest expense, depreciation and any personal expenses. That sum is then multiplied by a factor between 0 and 3 to predict future performance. The secret is in the factor. For small businesses that usually comes in somewhere between 1.5 and 2.5.
The third involves looking at recent sales of similar businesses. This may involve assessing what kind of buyer will find your business attractive from a strategic point of view. This is an opportunity to evaluate some of those intangible factors that may make your business especially valuable to the right buyer.
Losing the liabilities
The first step to ensure your business is no longer carrying any liabilities is to do an audit of all potential risks. This should include not only existing contractual obligations, but any potential claims or lawsuits arising from environmental issues, employment agreements, product liability suits, taxes, and vicarious liability for actions taken by company personnel.
Step two is to reduce or eliminate some of these risks before the transaction is even contemplated perhaps by terminating contracts, eliminating a product line or changing business practices.
Step three may involve a swirl of side agreements; the key concepts are assumption, indemnification and insurance.
A buyer may agree, likely for a reduction in purchase price to assume the seller’s obligations under a contract. If the buyer fails to follow through however the seller will still be liable. This is why a seller must thoroughly vet the buyer’s financial ability to pay.
A buyer might also agree for a similar price reduction to indemnify a seller for legal liability that might arise in any number of contexts, such as employment or product liability suits.
A seller can also insure against risk or require that the buyer secure a promise to assume risks or indemnify against liability with an insurance policy.
Don’t forget the taxes
The tax consequences to the seller in an asset sale can be complicated, especially when several different kinds of assets are being sold. Carefully consider whether Capital Gains Tax or Goods and Services Tax will apply to your sale.
Some financial advisers suggest that sellers have several years of mock returns prepared in anticipation of a sale to fully grasp potential tax consequences.
And remember the employees
The usual practice in an asset sale is for the seller to terminate all the employees and for the buyer to then rehire some or all of them when the transaction is concluded. If the talents of certain key employees are essential to the deal, the buyer may want to make sure that these employees will agree to execute employment contracts before the transaction occurs.
The attorneys at Owen Hodge Lawyers would be happy to help you prepare for the sale of your business. Please call us at 1800 770 780 to schedule a consultation.