This is the last installment of a series discussing potential pitfalls relating to selling your business.  Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the BuyerSelling Your Business: Why Accurate Financials are Important; and Selling Your Business: 5 Critical Deal Points. Today we’re going to discuss why it’s important to have a business plan.   

It’s the end of the year and you have made that decision: you want to sell your business next year and retire.  Congratulations!  Previous installments in this series discussed the importance of deal points, accurate financials and having any legal issues resolved to avoid any pitfalls when you sell your business.  But to get to the point of making a deal with a buyer, you first have to have a marketable business.  A business plan is the essential tool you need to help market your company.

Business Plans are Road Maps for Buyers

The question on every prospective buyer’s mind is “What makes your business so special that it’s worth $_____________?”  A business plan helps buyers understand your assets and why someone would want to buy your business.  For example, a business plan can summarize historical and projected financial data, market share, marketing strategies and analyze your competition.  Your business plan should also summarize what key intellectual property your business owns, as well as any proprietary licensing that is in place.  This information attracts prospective buyers to dig deeper – especially if the business plan is packaged well because it conveys a sense that you run a disciplined business.

Putting it All Together to Tilt the Scales in Your Favor

We’ve talked about a lot of important issues in this series.  If you are looking to sell your business remembering these key points will help your sales process get off to a good start:

  1. Prepare or update your business plan to market your company to prospective buyers.
  2. Have your accountant audit your financials.
  3. Make sure a prospective buyer signs a confidentiality and non-competition agreement before you allow them to conduct any non-public due diligence.
  4. Qualify your buyer. Why waste time allowing a buyer who can’t meet your payment terms or get financing from a lending institution?
  5. Use a lawyer to prepare, review and advise you on all letters of intent or sales agreements.
  6. When negotiating back and forth with a prospective buyer, make sure all of the terms are documented in writing!

Hope you have enjoyed this series.  Merry Christmas and Happy New Year!  See you in 2017.

Vacant Retail Building with For Sale Real Estate SignThis is the fifth installment of a series discussing potential pitfalls affecting the intended sale by JR and Sue Ellen Pawlenty of their business Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer and Selling Your Business: Why Accurate Financials are Important. This month we discuss the Top 5 Critical Deal Points and Recommendations.

Get to the Offer Stage Quickly by Term Sheet or Letter of Intent.  Before signing any written understanding, JR and Sue Ellen should consult a trusted representative to assist them in preparing a well drafted non-binding Letter of Intent, which is critical to setting goals and expectations for a clearly understood, viable offer that represents a good probability of closing.

  1. Payment Terms – Price and Timing. Unless you are paid in cash in full at closing, there’s more than setting price. Expect to negotiate both time and money – deferred and/or contingent payments such as earn-outs, seller notes and stock all depend upon whether your buyer is strategic or financial. Taking a modest down-payment with a note secured only by your company assets and giving the buyer control over your company’s operations, for example, is a recipe for probable disappointment, if not certain disaster.
  2. Reps and Warranties. These are essential statements of fact made by the buyer and seller to each other about various aspects of the transaction, typically including finances, customers, taxes, contracts, ownership, legal issues, intellectual property and more. While both pledge their statements to be true, difficulty of proof and ability to collect realistically impact any agreed upon remedy. Making sure that the statements (promises) you make are clear and accurate is critical.
  3. Indemnification. If a representation or warranty of either you or the buyer is incorrect, the transaction documents address who is responsible and how damages are determined; attorney’s fees are frequently assessed against the loser. Careful attention to contract language addressing both the promises made and the scope of liability imposed for misstatements is crucial.
  4. Transition. Expect the buyer to require your continuing participation to transition the sale. Delaying negotiation of your role and compensation risks an undesirable commitment of time at an almost certainly reduced compensation.
  5. Employees. What assurances does the buyer require about key employees? What is the buyer’s plan for both key and support employees post-closing? Will the buyer retain them with the same compensation and benefits? Be careful when you tell your team. Wait for a solid plan and a solid buyer so you can answer– what does this mean to them?

Tilting the Scales in Your Favor

Beyond the deal points there are some lessons learned that are worth knowing, particularly if this is your first “rodeo”:

  1. Your first “buyer” likely won’t.
  2. Run your business as if you were going to own it forever – it improves your negotiation position.
  3. Due diligence is a two-way street. Check out your buyer’s ability to perform.
  4. Run a litigation check on your prospective buyer.

This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.   

Avoid Losing the Sale

Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business.  Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.

Potentially Avoiding Litigation

When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense.  One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.

Boosting Your Business’s Market Value

Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth.  You should also consider having the business appraised.

Other Important Records

If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing.  Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.

If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.

You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.

Tilting the Scales in Your Favor

Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.