For most business owners, the sale of their business will be the single most important transaction of their lives—one that must be planned in advance, requires outside resources and is fraught with emotion.
Business owners should begin planning for such an event well before the desired sale date, as much as two years in advance. The first step in the planning process is to consult with your team of professional advisors. Most business owners already have a financial advisor, accountant, business lawyer and estate planning lawyer whom they trust. These professionals can be invaluable in positioning the business for sale, advising on structure and strategy, minimizing the tax implications, and implementing retirement and wealth management plans for the sale proceeds. A little time and money spent with this team can avoid costly errors in the long run.
Another key member of the team is a professional business consultant: a business valuation expert, business broker, or investment banker who can help the business owner arrive at a realistic assessment of the sale value of the company and provide advice on what can be done in the ensuing one to two years to maximize the sale price of the company. This professional will also help to identify likely purchasers and advise on which are likely to pay the highest price. Are you more likely to get a better price from a competitor in the same geographic region, from a strategic investor, from another business in the vertical structure of your industry, or from the public company that is consolidating the market?
Navigating Due Diligence
Once the business is ready for sale and potential buyers have been identified, a curious process known as due diligence takes place. This is the process by which interested potential buyers request various documents, financial reports, and other information to determine if the business is of interest, and what the purchase price might be. Business owners walk a fine line in this process as they are sharing their most confidential information with potential buyers who are often their competitors. Nothing should be shared without a carefully drafted confidentiality and non-disclosure agreement, but even a well-written agreement is not always honored by the other party. Business owners should move carefully and incrementally, disclosing only so much as is needed to satisfy the reasonable requests of the potential purchaser. A business owner must assess the seriousness of the potential purchaser, and constantly weigh the potential harm of disclosure against the anticipated benefit to the transaction.
Important Documents
Assuming the business owner and prospective purchaser reach an agreement on price, a term sheet or letter of intent should be signed by the parties to memorialize the important terms of the transaction. Other terms will be fleshed out as the attorneys prepare the definitive purchase and sale agreement, but the term sheet or letter of intent is the place where the parties set forth basic terms such as price, structure of the transaction, method of payment, continued employment, non-competition or non-solicitation covenants, warranty and indemnification periods. It is important to identify and memorialize these salient deal terms at the beginning in order to prevent the terms from being renegotiated later, perhaps at a point in the transaction that is disadvantageous for the business owner.
Once the salient terms have been agreed to, the lawyers will get to work on the definitive agreement, which will set forth all of the other terms of the transaction. This period of negotiation and drafting can last from days to months, depending upon the size and complexity of the transaction and the agreeableness of the other party. Once the definitive agreement has been signed, the parties then make any regulatory filings that may be necessary, and prepare to close the transaction. The length of time to closing will depend upon the complexity of the transaction, whether regulatory or other approvals are needed, and whether financing or equity capital is needed to pay the purchase price.
Dealing With Emotions
As if the sale process were not complicated enough, layered on top of the work involved in selling your business is the emotional impact of parting with your most prized possession. For many, building and running their business has occupied most of their working lives. Their ideas, strategies, sweat, mental exertion, worries, risk, liability, and family are all wrapped up in the very thing they are selling. Staring them in the face at the conclusion is often uncertainty and how they will spend their time as the business owner may be going from working virtually non-stop to not working at all. It is natural to be stressed about the sale of your business, to be uncertain about whether it is the right decision to sell, and to worry about what comes next. Often there is consternation over whether allowing the next generation of family members to take over the business would be a fairer, though less remunerative, course of action.
Such emotions and stresses are natural and to be expected. The key is to not allow them to cloud the decision or cause deal paralysis. Similarly, the desire to “get it all over with” to end the stress and emotion should not be allowed to drive the transaction either. At times like this, business owners are best served by heeding the advice of their trusted advisors, who have been through this scenario many times and can offer dispassionate advice and guidance. Your advisor will make sure you are not taken advantage of in the negotiations because you fell in love with the idea of selling your business, and, conversely, that you are not unduly influenced by separation anxiety.
Although not for the faint of heart, a business sale can be the most rewarding event in the business-owner’s career. It should be pursued in a planned and methodical way, with a team of professional advisors, and sufficient time to strategize in order to accomplish the most successful outcome possible.
Joseph A. DiBrigida Jr. is a shareholder at Sheehan Phinney Bass + Green in Manchester. His practice concentrates on all stages of business representation, from formation to financing and venture capital; to business planning and advising; to sales, acquisitions and mergers. He can be reached at 603-627-8158 or jdibrigida@sheehan.com. For more information, visit Sheehan.com.
Current Issue - May 2024