10 Survival Tips for Small Business Owners

Building a successful business takes years of effort and attention. Having expended plenty of blood, sweat and tears over that time, business owners want to maximize their value when selling. Many of the qualities that make a business owner successful will benefit a business seller, too. However, not many owners have much experience in selling a business. It is a long, complex process. Here are some of the major issues business owners should consider before, during and after a sale to secure the best value for their hard work. Preparing For The Sale No matter what sort of business you own or how big it is, determine why you are selling and what your priorities are. Do you want to hold out for an all-cash sale, which may be harder to successfully negotiate, or are you willing to consider an installment sale or taking equity in the acquiring company? Do you have a minimum price determined by factors other than the business's value, such as your retirement plans? Do you want to preserve the jobs of family members or long-term employees? These and other considerations may seem obvious, but it is essential that you articulate them to yourself before you begin. It is generally wise to hire outside help. Look for advisers who have relevant experience and vet them thoroughly. Make sure your experts have no potential conflicts of interest in a sale. Advisers you might consider hiring include an accountant, a tax expert, legal counsel, an appraiser or valuation expert, an investment banker and an intermediary or broker. Some people may fill more than one of these roles, and not every business sale will require all of them. Almost every business owner, however, will want at minimum an accountant, legal counsel and an intermediary on their side before and during a sale. The broker or intermediary can be the point person for identifying and working with potential buyers. The accountant (and the tax expert, if they aren't the same person) will help you get your books in order and consider issues such as how to allocate the business's purchase price most effectively and how to deal with federal, state and local tax concerns. 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This protects both parties, but it can mean a substantial outlay of money at the beginning of the process. Also, if you have a business that is very small, you may have trouble finding a broker who is interested in your transaction. Many brokers who specialize in business sales look for businesses valued at several hundred thousand dollars or more. For very large businesses, an owner is more likely to hire an intermediary, who generally functions as a consultant and offers more sophisticated services. Once you have hired a team, work with it to understand how the sales process will unfold before you start. The better you understand the process, the more purposeful you can be with your choices throughout. One key aspect to have in order early is your bookkeeping and records. Consider conducting a mock due diligence process to make sure you are thoroughly prepared for a prospective buyer's examination. You may also want to obtain an objective third-party valuation. This will give you a realistic idea of your business's worth and will help you decide on a realistic asking price. Once a potential buyer has been identified, a tighter focus on compiling and presenting books and records is warranted, since the buyer will be able to specify the information for review and the preferred format. For example, many prospective buyers want to see books and records that have been prepared according to generally accepted accounting principles (GAAP), which most small businesses do not routinely use. The process of converting a business's books to GAAP can be a significant undertaking, so if this is a concern, it should be addressed early in the process. Finally, don't neglect personal preparation for letting your business go. Create or revisit your personal financial plan. Try to work out several scenarios for the sale to see how it will affect your short-term and long-term goals. For some business owners, especially founders, letting go of a business can also have an emotional component. Know what you plan to do next and accept that the new owners will change your business once you are gone. Both you and your business will begin new chapters after the sale closes. The Sale The process of selling a business can be protracted. Once you begin, prepare yourself for the sale to take six to 12 months, though, obviously, this timeline can vary. To make your business more attractive, consider improving assets, cleaning up potential liabilities and generally taking care to make your business look its best. Much as you might repaint your house before you sell it, you can take steps to spruce up your business, too. Consider the timing of the sale; try to avoid selling right before a lease or key contract expires so that a buyer doesn't face the prospect of renegotiating it as soon as he or she arrives. Ensure that your business continues to operate effectively throughout the sale process. The sale can occupy a large chunk of your attention if you are not careful. Be sure to manage your time wisely and do not neglect day-to-day operations. Keeping performance high will not only make the business more attractive from without, but also will keep morale and dedication high within your staff. This is another reason to hire outside consultants, as spreading yourself too thin may hurt the business and ultimately reduce the price you can obtain. Consider carefully who in the business needs to know that your company is for sale. You have a duty to any partners or co-owners, as well as to shareholders, which may dictate a certain level of disclosure. However, widespread knowledge that the business is for sale can create anxiety among employees, customers and vendors. This, too, can reduce the ultimate selling price. Once you or your broker has identified a prospective buyer, it makes sense to prequalify the candidate to make sure nobody's time is wasted. During the prequalification process, you will also want to secure confidentiality or nondisclosure agreements. Serious buyers should not have problems agreeing to such terms; if they resist, treat it as a red flag. (The same holds true for your team of advisers, who should also formally agree not to disclose sensitive information about the business.) The prospective buyer should offer a letter of intent, which is a nonbinding offer outlining all the major terms of the proposed transaction, including the total purchase price, the structure and all other important conditions. The letter of intent serves as a basis for you, your buyer and your respective lawyers to negotiate terms and draft the final legal documents. Be sure to have a good idea of which terms you are willing to compromise on and which are deal breakers. As a rule, the more thorough and specific you can be during the early stages of a deal, the better. A key decision for many business owners will be whether they want to structure the sale as an asset or a stock deal. Generally, buyers prefer to purchase assets because they can obtain a step-up in basis, resulting in enhanced tax deductions in the future. Buyers also limit their own risk in an asset sale. Sellers generally benefit more from a stock sale, if one is possible, because they obtain clear, long-term capital gains treatment by doing so. If the seller holds stock in a C corporation, the seller may have no choice but to hold out for a stock sale to avoid double taxation. In other cases, an asset sale will tend to attract more buyers, but a seller should not hesitate to ask for a higher price accordingly, given the benefits to the buyer inherent in an asset sale. In many cases, the structure of the business dictates the tax treatment of the sale. For example, the sale of a sole proprietorship is always treated as an asset sale. While a stock sale is relatively straightforward, an asset sale is treated as a sale of all business assets, with a portion of the purchase price allocated to each asset. Allocating the purchase price among assets is often a key part of the negotiation process, as buyers and sellers may want certain assets treated differently to receive the most favorable tax treatment. For example, buyers might want more of the purchase price allocated to hard assets, which they can depreciate, as opposed to intangible assets or goodwill, which generally must be expensed over longer periods of time. Sellers want the opposite, because the sale of hard assets often results in ordinary income tax treatment, whereas intangibles and goodwill can often receive capital gains treatment. Both parties must agree on the final allocation, as the buyer and seller will both disclose this in their tax filings with the Internal Revenue Service. You should also address issues of transition as part of the selling process. Will you stay on for any length of time to ease the transition? If so, you will need to negotiate an employment agreement explicitly outlining the terms of such work. If not, how will you hand over the business and when? At what point will key employees be notified? Follow best practices even in the small details as you proceed through the negotiation and the sale. Keep good, clear records and follow any directions from your lawyer carefully. Meeting exacting ethical standards is the right thing to do, and it also limits your liability. As a seller, not only do you have duties to your partners or shareholders, but you also have legal disclosure obligations to potential buyers. Make sure there is no question that you have met all such obligations fully. After The Sale In most business sales, your involvement with the business does not end on the day it's sold. Founders and key executives often receive employment contracts to stay on and help the business transition to the new ownership. Depending on how the sale was negotiated, this can also include additional incentive payments, or "earn-outs," which are contingent on how the business performs during the first few years after the sale. Earn-outs are common when founders and key executives stay on through the transition, providing them with incentives to keep the business running smoothly. Most business sale contracts include noncompete provisions, under which an owner's ability to continue to do business in a certain geographic area or industry can be limited. Remember that Uncle Sam will take a healthy share of the business sale proceeds. Work with your accountant to prepare all necessary tax filings following the sale. The tax impact could extend over multiple years if you receive payments under an installment sale. Selling a business is complex, and this article discusses only some of the legal and financial considerations involved. Do not hesitate to bring in a team with experience and to take the time you need to educate yourself before you proceed. Most business owners only sell a business once. It is important to get it right.