Process Pays: Know The Path Before You Start

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Consider these statistics:

• Only 20% of all of the businesses listed for sale actually sell.
• 75% of all anticipated business sales fail to close.
• The average time it takes to sell a business is 225 days, but 2 years is not uncommon.
• Failure to perform pre-sale planning is the #1 reason why deals fail.
Business owners who take the time to prepare their business for sale are much more likely to sell the business, sell it in less time, for a fair amount, and with better terms. What does that preparation involve? Understanding the sales process will go a long way toward beating the odds against successful completion of the sales transaction.
Timeline–Owners commonly sell their businesses for any of the following reasons: retirement, partner disputes, illness and death, becoming overworked, or boredom. Preparing for the sale as early as possible provides the seller an opportunity to improve financial results, business structure and customer base to make the business more profitable and, therefore, more attractive to a buyer. An owner who has the time to plan for a sale should begin to do so at least one to two years ahead of his/her expected exit.
The Team—Professionals with experience in handling issues involved in the sale of the business are critical to the process. A business broker, business valuation expert, CPA, attorney and other trusted advisors should work as a team to navigate the sale from the time it is listed to closing.
Business Valuation—Before an owner lists the business for sale, it’s worth must be determined. This is important to ensure that the asking price is not too high or too low. A business valuation expert will draw up a detailed explanation of the business’s worth. The document will add credibility to the asking price and can serve as a gauge for the listing.
Marketing—The Selling Memorandum (also called a Deal Book) is essentially the formal sales listing. It is an advertisement of a business’s strengths without giving too many of its trade secrets away to competitors. It includes financial information, growth potential, the company’s history, a description of the customer base, marketing strategy, how the business differs from its rivals in the market, where it is located, number and nature of employees and management staff, details of the ownership structure, and why it is for sale.
Letter of Intent—Effective marketing efforts will ideally identify serious, qualified buyers. A potential buyer submits a letter of intent (LOI), which serves as the starting point for negotiations. The LOI serves to formalize the purchase process by setting out basic terms and conditions of the sale. It is a non-binding agreement that states the prospect’s thinking in terms of valuation, deal structure, post-sale plans, etc. It sets out what the transaction actually involves, explaining what will be paid and when, what assets the company has, the contractual obligations already in place, other liabilities, employment contracts, and precisely what the buyer expects to purchase. The LOI also usually includes a standstill or exclusivity clause for a certain period of time that prohibits the seller from seeking other purchasers while the standstill is in place. At the very least, the LOI establishes whether the buyer and seller are within negotiating range of a deal.
Due Diligence— This is the verification phase of the process and typically the least enjoyable, most stressful, part of selling a business. Due diligence is the buyer’s opportunity to verify that the information provided by the seller is indeed true and accurate. The process delves deeply into the business to allow the buyer to achieve comfort in committing to the purchase. The buyer generally brings in an accountant in to examine the financial records of the company and often a lawyer to review certain documents such as incorporation papers, corporate minutes, leases, and contracts the business may have in force. It is not uncommon for a buyer to conduct financial audits, environmental audits, IT audits, and interviews with key employees and other specialized due diligence activities that may be industry specific. Unfortunately, half of all deals fall apart in the due diligence stage because of facts and/or circumstances discovered during due diligence. It is not rare to discover financial reporting issues or previously undisclosed facts that could affect the price or even salability of the business. For some, it simply boils down to the fact that the seller may not be able to provide the documentation that the buyer needs to complete the deal.
Final Negotiations and Deal Structuring— Concurrent with the due diligence activities is when the last phase is entered– final negotiations and deal structuring. Here is where additional agreements are drafted including exhibits, schedules, consulting agreements, leases, assignments, and third party consents. The final agreement will basically state what is being sold and for how much, what exactly happens upon closing, how existing contracts and debts are transferred, and any warranties or indemnities. It could also include a restrictive covenant preventing the seller– within a particular time period and/or geographic area – from competing with the business once it is sold. It also arranges for escrow, which is where a third party holds the purchase money until all conditions of the sales agreement have been met, such as the actual transfer of the assets to the buyer. Usually, the agreement goes through many drafts, and it’s not finalized and signed until closing.
There are a number of factors that can arise at any point in the process which will impede the negotiations or kill a deal entirely. It is not uncommon for a buyer to walk away because the seller is slow in getting information. Being prepared for the process will help eliminate the deal breakers which are avoidable, and allow the owner to focus on the elements which will result in an ideal transaction.
This is Part II of a four part series on selling a business. Read C3 Advisors’ blog for Part I on Build for the Buyer, and future articles on Combining Cultures, and Tax Tactics.

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