You've come to the decision to sell your business and you find yourself wondering what to do next. Rest assured, you're not alone. Planning for the sale of a business is no small undertaking and is made up of a variety of different tasks — some more time-intensive than others. It is important to start preparing as early as possible to ensure everything runs smoothly and your sale is the most profitable.
Here's a quick overview of what you should do to plan and prepare for the sale of your business.
1. Understand the types of acquisitions.
There are several types of acquisitions, each entailing its own complexities regarding deal structure, tax planning, cash flow planning, and so on. Familiarizing yourself with the most common types of acquisitions is a good idea to prepare for the sale. Knowledge is power, as they say.
The sale will likely fall into one of these categories:
- Vertical Acquisitions - This type of acquisition involves the purchase of one company by another company within the same industry but provides a different function to the supply chain.
- Horizontal Acquisitions - Horizontal acquisitions involve the purchase of a company within the same industry, usually offering a similar product or service. Think of it as cornering the market by acquiring the competition.
- Conglomerate Acquisitions - This type of acquisition involves one company purchasing another company from a different industry, usually to minimize the effects of market fluctuations. If, for example, customers stop buying a particular product, the other business could serve as a stabilizing force. People will likely continue buying the other product.
- Market Extensions - Similar to horizontal acquisitions, market extensions involve
the purchase of a company within the same industry. The biggest difference
is that they're not direct competitors, as they often serve in different
markets.
2. Get your finances in order.
Do you know the financial standing of your business? The answer to this question involves more than simply gross sales. As you prepare to sell a business, you want to make sure all your business financials are in order. This could mean pulling together financial statements, key industry metrics, business projections, outstanding liabilities, relative growth in net income, and even numbers pertaining to your customers (including the relative size of your customer base).
The following are only some of the financial documents needed to sell your business:
- Profit and loss statements for
at least the last two to three years
- Tax returns from the last two
to three years
- Current balance sheet
- Cash flow statement
- Statement of seller's
discretionary earnings
- Note for any seller financing
- Insurance policies
- Copy of the existing lease
- Employment agreements
- Supplier and distributor
contracts
- Personal financial statement
for the buyer
- Offer to purchase agreement
You may also want to compile additional financial documentation to substantiate the financial position of your business. If the business exchange includes any trade secrets, you may also need to involve non-disclosure or confidentiality agreements of potential buyers.
3. Identify the value of your business.
As you gather and organize the financial documents needed to sell a business, you may have some idea of your business's real-world value. However, the current market is ever-changing. This is a good time to hire a professional in business valuation services to conduct a comprehensive business appraisal.
Business valuation services will evaluate all aspects of your business and then offer an estimate of its current worth (i.e., fair market value) based on objective measures. It will entail an analysis of your capital structure, future earnings prospects, financial statements, current assets, and management team — among other components. Comparisons to other companies will also be made during the business appraisal.
4. Pull together a business profile.
You may also want to consider creating a business profile to make your business attractive to potential buyers. This can serve as a teaser, sharing details about your business that go beyond what can be found on your company website.
5.
Define the goals of a sale.
Selling your business can take many different forms, apart from the common types of acquisitions. Perhaps you only want to sell a portion of your business. Maybe you want to stay on for a few years after selling the entirety of the business. You may even want to keep the business in the family, which would require you to go through business succession planning. Define the goals of the sale before you get too far into the process.
6.
Work with a team of advisors.
Selling a business isn't something to do on your own. You'll want to work with a team of advisors to help you through the process and ensure the sale is profitable. Working with a business broker is a good place to start. You'll also want to consider an accountant, a tax advisor, and a personal financial advisor. Most importantly, contact a mergers and acquisitions attorney to head up the legal aspects of the sale.
If you'd
like more information on selling your business or need legal advice on the
potential sale of a business, please feel free to contact Krogh & Decker, LLP today. We'd be more than happy to
sit down and discuss the mergers and acquisition process to help you make the
best sale.