If you are one of these business owners, however, it is vital to ensure you have thought about an appropriate exit strategy. The last thing you would want is for your life's endeavors to be undersold, meaning your exit strategy must be designed to ensure that your self-made business sells for all that it is worth. Could underselling your business be a bigger financial risk than paying capital gains tax?
First, you will want to ensure your business is positioned well financially.
- To obtain the best selling price, you must present your business favorably from a financial standpoint. Identify any financial structural changes that are necessary to best position the sale. Then, project your future revenue, profitability and cash flow to reflect your desired selling price.
- You should have current, accurate, and consistently prepared financial statements to demonstrate to the buyer that your business' financial history will translate into future success and positive earnings. Although it may incur additional costs, you may want to consider providing the potential buyer with audited financial statements certified by an independent accountant. These statements give potential buyers the most comfort possible. At the very minimum, you should have your accountant start preparing "reviewed" statements, and inform you where your statements vary from generally accepted accounting principles.
- Start to maximize your financial reporting profit and cash flow rather than trying to minimize your taxes.
- Prepare financial statements that separate all extraordinary or infrequent expenses that distort your company's true profitability or reflect personal benefit or expenses. Make sure to distinguish any perks, excessive salaries or bonuses, or affiliated party payments.
- You will need to "clean up" your company's balance sheet to make it as lean and mean as possible. This includes: physically tabulating your inventory and making any necessary adjustments; reducing excess inventory to the lowest possible operational level; turning over delinquent accounts receivable for collection or write-off; disposing of excess or unused assets for cash; reflecting all liabilities on the balance sheet and footnoting material contingencies; settling all stockholder and affiliate loans and accounts, and settling all tax liabilities, judgments, and overdue payables.
- Prepare and update your company's business plan, including financial projections and cash budgets. This will not only help you better operate your business, but will also provide the basis for a "sale memorandum," which may be useful in explaining your business to potential buyers. Without a business plan that can be adapted for selling purposes, you may limit the number and type of potential business buyers, which may ultimately reduce your selling price.
You will also want to think about the legal positioning of your business.
- A buyer won't bother if the sellers are at each other's throats. Clear all potential legal impediments to the sale in order to obtain the best price for your company. Coordinate and resolve any disagreements and pricing goals with your other shareholders.
- Define your sales goals and criteria and get some objective, expert advice on the value of your business. Your desired price should be consistent with the inherent value of the business, not made up to keep up with your neighbor who sold his business for $20 million and is now living in Palm Springs.
- Identify all your personal guarantees which will need to be released as part of the sale process. Bring your corporate records up to date.
- Settle any other ongoing legal disputes and have all available records. Identify and make copies of all your important contracts, leases and loan agreements so that the buyer's due diligence will go faster and be less complicated, and you can identify any required consents or approvals.
- Don't try to hide problems! Smart buyers will find out. Addressing difficult business or legal issues up front will save you legal costs and enhance your credibility, and in turn, the selling price. However, make sure each potential buyer signs a confidentiality agreement in advance of inspecting your business.
- Begin to identify strategic buyers and think about hiring an experienced investment banker to coordinate the sale process.
- Consult your tax advisor to determine the best form of transaction and type of consideration which will minimize your tax obligations. Think about how you would like your key employees to be treated by a buyer, and make sure they feel secure about their future.
- Determine what business role you are willing to assume after the sale. Also consider whether you will be needed for transitional purposes.
- Finally, make sure you clearly define to your lawyer the post-sale liability exposure you are willing to accept.
You've no doubt grown wise from your many years of successful business experience, and have earned the right to start envisioning your retirement. Taking these steps and determining an exit strategy in advance of a potential sale will help you to obtain the highest possible selling price, and avoid your business being under-bought.
Steven R. Barth is a partner at Foley & Lardner, specializing in business acquisitions and securities laws.