News

Handful of Hazards

February 21, 2017

Five common pitfalls to avoid to ensure a successful third-party sale

 

Your only child was happy to walk away from the family business at the age of 18, and your key employee of 20 years has made it clear that she is not interested in buying your healthy but stressful business.

So, with much discussion, you and your spouse have decided to sell to a third party; that is, a buyer not related to the business.

It is critical that you don’t attempt a third-party sale without support, whether it be a trusted adviser, accountant or specialist. While there are many steps to a sale, five hazards seem most common.

(1) DON’T MISS THE FIRST STEP

Many business owners are so excited about starting the process of finding a buyer that they jump forward to the search by reaching out to advisers and business brokers. We suggest you begin with the end in mind by considering many important questions:

  • What is the value of the company?
  • How is your company structured?
  • How is that structure taxed?
  • What can you expect to net out of the sale?
  • What is ideal with regard to terms of sale?

Do you want the money in a lump sum or does it benefit you to take it over time?

Of course, there are the obvious questions around the legacy of the company being in good hands and how employees will be retained and treated by new ownership.

But first answer the questions around whether a sale is financially viable to you and your family.

(2) REMEMBER THE WINDOW DRESSING

For the same reason your windows are dressed on your home, you will want to take time to “pretty up” your business both at your facility and how you present it on paper.

For example, a business owner spent a minimal amount of money and time clearing out the junk piles in the back of his lot and also focused on a clean, uncluttered environment with everything in its right place.

In addition, he created a business plan that focused on strengths, weaknesses, opportunities and threats to the company for the future. He also documented realistic projections on growth and shared an organization chart with all positions and compensation, including thoughts on the near future.

In the next few months, a number of buyers were impressed with this commitment to detail, and it created comfort for a great offer from one of them.

(3) DON’T BUY A NEW CAR TO SELL IT

It is obvious that buying a new car and reselling it anytime soon is not a wise financial decision, yet many business owners continue to take the profits from their performance and put them back into refreshing existing assets, equipment and furniture.

If inappropriately booked as an expense, you reduce your earnings, which may affect your value and your selling price. If placed on your balance sheet, it is still rare that you will receive appropriate compensation for a relatively new asset, much like a depreciated new vehicle.

Look to buy used if you need something, or let the maintenance expense budget be used on the older equipment.

Full disclosure on the “state of the assets” is recommended, but it is always easier to negotiate from a position of strength.

(4) LEAD THE BUYER; DON’T LET HIM LEAD YOU

You may receive an overture or two from buyers. Determine if they are serious or just kicking tires by determining their intent.

Require that they sign a nondisclosure and/or confidentiality agreement. Also, have them send you a letter of intent, which includes an offer price, terms of sale and a settlement date.

If they are serious, they will do this and include earnest money. This money may be held in trust or escrow as the sale proceeds through the due diligence stage and the buyer secures financing.

Without those elements, the sale may go through unnecessary delays that only benefit the buyer and never the seller. In addition, a buyer dragging his feet may lead to the final pothole.

(5) DON’T SPILL THE BEANS

As the closing date approaches, remember to “keep it zipped!”

Rumors may start to swirl with even the smallest bit of information escaping about a sale. It is critical to avoid a mass exit of employees or a critical loss of a key employee in the days leading up to the sale.

Most employees may be uncomfortable with an unknown entity such as an outside buyer and feel the grass will be greener across town with a competitor. Consider a “stay bonus” or deferred compensation for a key employee who will be necessary for the business’ continued success.

Vendors may be concerned with rumors and want you to take precious time to reassure them. And customers may pull their business or renegotiate prior to closing.

Selling a business is not an easy task, by any means. But by avoiding these five hazards, you are on your way to a profitable sale of your most valuable asset.

By DANIEL CROWLEY Special for Lehigh Valley Business, February 20, 2017 at 9:58 AM

Dan Crowley is director, business advisory services for Quadrant Private Wealth in Bethlehem. In addition to merger and acquisition work, succession planning and key employee retention are a few of Quadrant’s specialties. He can be reached at dcrowley@quadrantprivatewealth.com.

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