- Correspondent
Two weeks ago, my article encouraged family business owners to be sure to include an assessment of their personal hopes and dreams, in addition to the dollars, when considering selling their business. Continuing on that theme, if you have ultimately decided that selling the business is the best choice, below are some tips for preparing your business for sale.
Preparing for a sale
Preparing for a sale
There are three fundamental actions that need to be taken to increase the likelihood of receiving a good deal when selling your business. Clean up the financials. As a family-owned business, your financial objectives inherently differ from a publicly owned business.
"Family businesses have to do away with the 'Family Social Security System': tickets to sporting events, toys with motors, and nonworking family members who are on the payroll," says John Kober, a partner at the law firm Morgan Lewis.
All of these types of items need to be removed from the company financials before presenting them to prospective buyer. Along these same lines, family-owned businesses can find it beneficial to bulk up the internal benefits in order to reduce profits, in turn lowering the tax burden.
While this might make sense from a tax view, from a buyer's perspective they want to see a record of profitable results. Finally, make sure the inventory in the warehouse matches the number on the balance sheet.
Audit financials. Once the financial statements are cleaned up, it is time to have an accounting firm declare them truthful. To the eye of the buyer, your financial statements may look wonderful, but it is equally important that they are accurate. Buyers will insist on audited financials anyhow, so having this item checked off shows that you are serious.
Strengthen management. If you are the business, then buying the company without you is pointless. If you are willing to stick around for a few years, then a deal may be worked out.
But if your goal is to receive a check and head off to the beach, then you will need to develop a company that can operate as much as possible without you by building a good management team. Not only will the buying company be looking for this, it will greatly increase the value of your company.
Assembling the team
There is an appropriate corollary to the age old advice that the worst lawyer to hire to defend you in court is yourself: The worst person you can have represent you in the sale of your business is yourself. There are three fundamental reasons for this:
This is not what you do for a living. Selling a business can be very complex. You may think you are saving money, but you are really just adding a lot of risk.
Business owners are emotionally susceptible to someone calling their baby ugly. A neutral third party can more rationally work through the issues that arise during negotiations.
Leaving yourself as the behind-the-scenes ultimate authority increases your overall negotiating leverage.
We had a client whose son had mismanaged the company, built up a mountain of debt and was losing money. Once we got the business back on an even keel, we recommended selling all or part of the business and getting some help to do it.
"Over my dead body" was the response. "I didn't build up this company just to hand it to someone else."
A couple of months later, I received a call from the son saying that he saw the light and even had a large buyer on the hook. While we again reiterated the importance of hiring a qualified professional to help them, they demurred. Sadly, we discovered later that the large company backed out at the last minute, driving them into bankruptcy, and enabling the large company to pick up the pieces for cents on the dollar.
The best answer is really to assemble a good team including a CPA, an attorney, and an investment banker. Furthermore, it is equally important to designate someone to be the team lead, preferably a neutral third party who can balance the different interests of the team members.
You, and possibly multiple generations, have spent a lifetime building up the family business. Deciding to sell it is difficult. You owe it to yourself and your family to take the proper steps to optimize the value of your business to a potential buyer.
Columnist Henry Hutcheson is a nationally recognized family business speaker, author and consultant with ReGeneration Partners in Raleigh.
"Family businesses have to do away with the 'Family Social Security System': tickets to sporting events, toys with motors, and nonworking family members who are on the payroll," says John Kober, a partner at the law firm Morgan Lewis.
All of these types of items need to be removed from the company financials before presenting them to prospective buyer. Along these same lines, family-owned businesses can find it beneficial to bulk up the internal benefits in order to reduce profits, in turn lowering the tax burden.
While this might make sense from a tax view, from a buyer's perspective they want to see a record of profitable results. Finally, make sure the inventory in the warehouse matches the number on the balance sheet.
Audit financials. Once the financial statements are cleaned up, it is time to have an accounting firm declare them truthful. To the eye of the buyer, your financial statements may look wonderful, but it is equally important that they are accurate. Buyers will insist on audited financials anyhow, so having this item checked off shows that you are serious.
Strengthen management. If you are the business, then buying the company without you is pointless. If you are willing to stick around for a few years, then a deal may be worked out.
But if your goal is to receive a check and head off to the beach, then you will need to develop a company that can operate as much as possible without you by building a good management team. Not only will the buying company be looking for this, it will greatly increase the value of your company.
Assembling the team
There is an appropriate corollary to the age old advice that the worst lawyer to hire to defend you in court is yourself: The worst person you can have represent you in the sale of your business is yourself. There are three fundamental reasons for this:
This is not what you do for a living. Selling a business can be very complex. You may think you are saving money, but you are really just adding a lot of risk.
Business owners are emotionally susceptible to someone calling their baby ugly. A neutral third party can more rationally work through the issues that arise during negotiations.
Leaving yourself as the behind-the-scenes ultimate authority increases your overall negotiating leverage.
We had a client whose son had mismanaged the company, built up a mountain of debt and was losing money. Once we got the business back on an even keel, we recommended selling all or part of the business and getting some help to do it.
"Over my dead body" was the response. "I didn't build up this company just to hand it to someone else."
A couple of months later, I received a call from the son saying that he saw the light and even had a large buyer on the hook. While we again reiterated the importance of hiring a qualified professional to help them, they demurred. Sadly, we discovered later that the large company backed out at the last minute, driving them into bankruptcy, and enabling the large company to pick up the pieces for cents on the dollar.
The best answer is really to assemble a good team including a CPA, an attorney, and an investment banker. Furthermore, it is equally important to designate someone to be the team lead, preferably a neutral third party who can balance the different interests of the team members.
You, and possibly multiple generations, have spent a lifetime building up the family business. Deciding to sell it is difficult. You owe it to yourself and your family to take the proper steps to optimize the value of your business to a potential buyer.
Columnist Henry Hutcheson is a nationally recognized family business speaker, author and consultant with ReGeneration Partners in Raleigh.
