We’ve all had that bad dream: You sit down for the big exam. You turn over the test. Everyone around you starts writing furiously as you read question after question, hands sweating, heart pounding, mind screaming as the nightmare sinks in – you didn’t do the work. You are unprepared!
And that was just a school exam.
Imagine the panic, disappointment, and discouragement when you are selling your business as you walk into your closing knowing there were so many things you should have done through the years to get ready for this day. If you were better prepared you could: take your kids and grandkids on that fabulous vacation, move into that perfect house on the golf course, or invest more for a faster and better start on your next venture… or would that have been ventures.
What can you do today to prepare for your future?
As the saying goes, “begin with the end in mind.” The best time to think about selling your business is when you begin. But more often than not, the business’ future sale was not on your mind at its beginning.
In fact, when you just start out, you don’t need to spend a lot of time thinking about the ultimate sale of your business. But as you build and grow, you should focus along the way on the things that create value someone will want to buy.
When you start a business with partners or co-owners, you must consider, ”Who controls the sale?”, ”How are owners bought out?”, and many similar issues. Failure to carefully think all these issues through and properly documenting the agreements can be very expensive and very difficult if negotiated later. I’ve seen these issues delay and kill a potential sale.
When starting out, you need to consider the proper legal form for your business: the legal entity (corporation, LLC, etc.) and the tax status (S Corp, etc.). These are two separate concepts. Get these concepts wrong at the start, and you will deal yourself a choice of delaying your sale for two plus years or handing 40% or more of the profits from your sale to the IRS. Understand that you need to get the correct advice for your business today to maximize your profits when you sell it in the future.
If you’ve been in your business for a while, the time to start preparing your business for sale is: as soon as the idea crosses your mind. (NOW.) Begin by assembling your team of advisors. (Who belongs on your team of advisors during the process of selling your business? –see my full whitepaper. )
With your team, consider the following:
• Build value in your business that your buyer will pay for such as customer lists, pipeline of new business, intellectual property.
• Create an organization with policies and procedures, and a management team capable of running your business themselves – without you. Do this if you want to sell a business, not interview for the job of running your business for the new owner.
• Resolve any issues with any co-owners or investors that may interfere with a sale. This may require buying out other co-owners or amending your documents governing your corporation, partnership, or LLC.
• Sign your key employees to an employment contract with noncompete And nonsolicitation clauses. This helps keeps value from walking out the door and provides the new owner with stability during the ownership transfer. Make sure the noncompete clause is enforceable in Texas (or your state).
• Safeguard your intellectual property by legally protecting it. An attorney specializing in intellectual property law can help you protect your trademarks, patents and copyrights. A good business lawyer can help you protect your trade secrets.
• Remember the last time you bought or sold a house. The broker spent a bunch of time making sure the house was clean, presentable, and had flowers on the table. The same holds true with your business. Beyond making your facilities presentable, you’ll also want to:
o Clean up your financials to the extent you can. Collect or right off those old receivables. Discuss this with your outside accountant.
o Pay down debt or refinance at better terms where possible.
o Reduce wasteful spending.
o Fire nonproductive employees and hire key employees for important vacant or missing positions.
The good news is that these are all things you should be doing anyway: improving your balance sheet, cultivating your marketing and sales pipeline, streamlining your operations, and increasing your cash flow. The last is, of course, a key metric where buyers will focus.
Understand what you need to do and how long it will take. Factor this in your timeline for the sale. You don’t want to rush your business to market before you have it ready. Having it ready will mean greater value for the buyer and more cash for you. And remember: ready does not equal perfect.
Do not put your business up for sale as soon as the thought hits you. You must prepare your business for the sale process. This takes some thought and planning. Ideally, you should begin when you start your business, but no later than when the idea first strikes you.
John H. Walker