By Mike DuBose with Blake DuBose
In 2018, sales of small businesses reached record numbers for the third year in a row, according to the latest Insight Report from BizBuySell, an organization that tracks business-for-sale transactions nationwide. One reason for this trend is that Baby Boomers—who, in many cases, started small businesses from scratch and kept them within their families for decades—are now reaching retirement age. Last year, I became part of this statistic myself!
When I began the DuBose Family of Companies in 1981, I was simply trying to make a living while honoring strong entrepreneurial urges to “go my own way.” As years passed, the businesses blossomed (although there were some stumbles and failures), eventually numbering six. It wasn’t until 1990, however, that I began carefully planning their estate and succession processes. Driven by a philosophy of “hope for the best; plan for the worst,” the strategies were designed to address a wide variety of circumstances, including my sons taking over the businesses or selling them to third parties.
In 2018, I sold four of the six companies to different buyers back-to-back. Although I planned for this eventuality years beforehand and enlisted the help of several experts, the process was still very complicated, stressful, and time-consuming.
To assist others as they navigate similar circumstances, I’ve compiled the following tips:
Build relationships with small-business experts. Before you need them for a company sale,look for an excellent CPA with accounting, tax, and business sales experience who is certified in business valuation and an attorney who is also a CPA. Work with both over time so they are familiar with your business. They won’t be cheap, but they’ll pay for themselves in useful tax and legal strategies before and after the sale!
Know when to sell. To optimize profits, try to sell your business in a good economy, when you are mentally and financially ready, and at a point that your company’s financials look attractive to potential buyers. Don’t wait until there’s an emergency, or you might be forced to sell under less-than-ideal conditions.
Develop strong accounting and bookkeeping processes. Buyers will want to examine documents like balance sheets, income statements, tax returns, inventories, accounts payable/receivable, customer contracts, insurance policies, etc. for the last 3-5 years. Your financial, inventory, and other systems should prove that your business is worth purchasing!
Think about desired price. Review your financial records for the past five years and determine the revenues and benefits the business generated for you annually. Consider how much money you will need to live, as well as expenses your company pays for (such as health insurance) that you will personally assume after closing.
Seek professional opinions on business value. Accurately valuing a company requires a certified professional determination of its assets, liabilities, and future earning power. Both parties in a potential business sale should conduct independent valuations. (Sellers will seek to maximize gains, while buyers want to avoid overpaying for what may be a business built solely around the current owner’s skills or reputation.) Seek professionals with CVA, ABV, or CFA credentials to help.
Most buyers only wish to purchase company assets (customer contracts, inventory, websites and domains, intellectual rights, brand names, non-compete agreements, accounts receivable, etc.), which protect the buyer from hidden liabilities. After the sale, many buyers will keep a similar legal name and brand as the old business for a smoother transition in the eyes of customers, Internet search engines, and the public. Stock purchases offer more protection for sellers, who can walk away from the sale with less liability exposure and additional tax advantages.
Find buyers. Methods include contracting with business and real estate brokers, exploring existing networks through word of mouth, and/or gauging potential interest from long-time, proven employees who know your company’s value. I utilized all these methods to sell my businesses and real estate.
Confidentially throwing your sales net out amongst as many individuals as possible can be tricky. Once competitors and brokers learn you’re considering selling, word travels fast, and it can negatively affect customer loyalty and company income. Employees may start looking for other jobs…or even worse, take your customers and intellectual rights to start new ventures of their own! Work with human resources and legal experts when developing employee contracts and policies to protect the company from such damaging scenarios.
Throughout the sales process, employee welfare should be one of your top priorities. My former staff is like family to me, so I offered them incentives to stay until closing (and/or negotiated with buyers so that they might remain with the businesses), paid them severance, and provided them my assistance in finding other jobs. If you treat your employees well before and during the sale process, they will likely continue their good work up until the end!
Negotiate wisely. In addition to sales price, you will also need to reach an agreement with the buyer on the deposit, settlement period, any training you’ll provide to them, and staff arrangements. Don’t rush this process—details are critical, and you’ll need input from many different sources. As with any negotiation, sellers should ask for items knowing that the buyer will come back with counteroffers. Look for a fair deal that’s attractive to the buyer and has benefits you’ll be happy with as a seller. Remain patient, reasonable, and flexible, and consult outside experts to guide or represent you. Try not to appear “hungry,” which can harm your negotiating power!
Determine how proceeds will be paid. Most business owners want their money up front; however, this single payment will trigger significant taxes. Work with accounting and legal experts to structure the sale advantageously so portions of some payments are taxed at lower rates.
Alternatively, require a sizeable down payment and finance the sale with buyer loan notes, which allow payments to be made over years with less tax exposure. However, there are significant risks under this strategy if the buyer cannot make payments or the business fails. If you go this route, obtain letters from CPAs certifying that the buyers have assets (outside of trusts) to make the payments, and require irrevocable personal guarantees from the buyer, new company owners, and family members. A unique strategy to ensure that you are paid in full (even in the event of the buyer’s death) is to require them to purchase a life insurance policy equal to the sales amount with you listed as the beneficiary.
Prepare for the settlement period. Once all details are agreed upon, buyer and seller will sign a Letter of Intent (LOI). If constructed properly, this is a pending contract. You’ll want to consult legal and financial experts while developing it.
The LOI normally includes a 60-day “due diligence” or “discovery” period where the buyer digs deep into the business’s records and assesses its financials, liabilities, assets, history, current condition, and future possibilities. Prepare for many distractions during this period as the buyers and their agents frequently contact you for information! Truthfully share all details of your business, including strengths and weaknesses, to build credibility and goodwill.
Close the deal. Once the discovery period is over, a formal, detailed, and mutually agreeable final contract will be developed. Obtain the input of your small-business attorney and CPA to ensure that the agreement accurately reflects both the buyer’s and seller’s final intent and utilizes smart tax strategies. Once the closing is executed, the contract is final!
The bottom line: You have probably spent decades building and growing your business…so don’t skimp on the planning before selling it! Structuring the sale correctly may take months, but doing so will allow both parties to walk away from the closing with smiles on their faces!
Mike DuBose has been an instructor for USC’s graduate school since 1985, when he began his family of companies, and is the author of The Art of Building a Great Business. Please visit our blog for additional published business, travel, and personal articles, as well as health articles written with Surb Guram, MD.
Blake DuBose is president of DuBose Web and was instrumental in helping Mike sell the family businesses.
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