How to Prepare Your Company for a Sale
Are you thinking about how to sell your business after weathering the pandemic and related economic fallout? If so, you’re not alone. The number of business owners who plan to retire sooner than originally planned has doubled in less than a year, according to research.
But deciding to sell your business is only the first step. Selling the business that you’ve poured your time, energy and life into building is no small task. For most business owners, the business is like a child they have loved and nurtured into adulthood—and selling it can be both emotionally difficult and financially significant.
For most owners, the business powers every other aspect of their lives. It provides a regular income, retirement savings, social interaction and structure to their days and weeks. When you make the decision to leave your business, you need to make sure the business is in the best shape possible to attract the right buyer and the right price.
By adequately preparing your company for a sale, you’ll be more likely to attract a buyer with whom you feel comfortable leaving your “baby” and a price that will ensure a financially comfortable retirement for you. Follow these steps to get your business ready for a successful sale.
Organize financials and reduce discretionary expenses
When you’re running your own business, it’s common to make pragmatic decisions at the cost of “perfect” accounting. For example, maybe your business operates in a family-owned building and pays rent that is below (or above) market rate. Or perhaps you run some personal expenses through the business account and reimburse the business from your personal account.
If you want to sell your business, it’s time to clean up your financial statements. That means stop overpaying or underpaying rent and remove any personal expenses. Also, work to accelerate the value of the business in anticipation of the sale. For example, you might increase the value of your business by signing new sales contracts, adding new equipment, or expanding your product or service lines. Potential buyers will want to review your financials, and it’s crucial that you have clean financials and a business that can accurately reflect its value on paper. Ideally, this process begins three years prior to marketing your business for sale, but it’s never too late to start.
Consider business structure
Before selling your business, you also have to think about the business structure you have in place—and how long it’s been in place. That’s because the tax implications on a sale vary depending on whether the business is a C corporation, S corporation or partnership.
For example, a C corporation that sells assets for a gain would be taxed twice, once at the corporate level and once again when the after-tax proceeds are distributed to shareholders and taxed as dividends. Some business owners convert their companies to S corporations before selling to reduce taxes, but this only works if you plan to wait at least five years before selling the business.
If a business is sold within five years of converting to an S corporation, the tax benefits of making the election will be voided. If you’re planning to sell in less than five years, avoid converting your business to an S corporation—or if you’re planning to convert your business to an S corporation, plan to wait at least five years before selling.
Select the right advisors for your transaction
To help navigate the tax implications of various scenarios, as well as other ramifications of selling your business, you need help from the right advisors. Keep in mind that the right advisors may not be the attorney, banker, accountant or other advisors you’ve always used.
Why shouldn’t you rely on the same advisors who have helped you launch and grow your business? Because the skills that were needed to grow your business are not the same skills and expertise you need to sell your business successfully. Because not all advisors are created equal when it comes to a sale, take time to interview your current advisors and others who may be a good fit. Find out their comfort level with selling businesses and how many deals they’ve done.
Also, prepare to pay advisor fees. Remember that you get what you pay for; if you want to achieve a successful sale, you’re likely to experience a smoother process when you have the right advisors helping you.
The type of advisors you need may depend on your ambitions for the sale of your business. For example, if you’re looking for an outside buyer, a business broker, or investment banker, can often provide a valuable network of connections. However, if you’re planning to do an internal sale, you may not need a broker and it may not be worth spending the money.
Value your business objectively
Attaching the right price tag to your business can help you attract the right buyer, and sooner. But valuing a business—especially a business to which you are emotionally attached—can be tricky.
Many business owners have a flawed perception of the worth of their business, Davie Kaplan advisors say. To arrive at the right figure, try to throw out your ego and your personal expectations. The true value is what someone is willing to pay for it, so you’ll need to conduct some research and determine a realistic range.
To truly maximize the value of your business and accomplish a successful sale, you need to start early. Most experts recommend about two years to get things in order to prepare your company for a rewarding sale.