By Douglas W. Clayton
Cantey Hanger LLP
At some point in the life of most business owners, they conclude it’s time to sell the business. It is exciting to harvest the fruits of one’s labor, but it can also be stressful.
The business owner might be concerned about getting the best price for the business, the fate of the business and its customers, employees and vendors after the sale, how much of the purchase price will be taxed by Uncle Sam, or how the business owner will spend his or her time after the sale.
Being prepared for a sale can help reduce the business owner’s level of stress and maximize the chances of a successful sale. Five tips:
Each potential buyer is going to serve up a detailed due diligence request list. The buyer will seek to review the business’ formation documents, material contracts, financial statements, tax returns, patents and other documents evidencing intellectual property, leases, employment agreements, licenses and permits, and other books and records of the company.
A well-organized data room with all this information readily available will reflect favorably on the business and will facilitate timely due diligence by potential buyers.
Scrub Accounting Records
The surest way to spook a potential buyer is to provide financial statements that prove to be inaccurate.
A business owner should ensure that his or her accounting records are complete and correct. Buyers that have confidence in the seller’s financial statements are more likely to make an attractive offer to buy the business.
The most important financial measure a buyer will focus on when valuing the business is its earnings before interest, tax, depreciation and amortization (EBITDA).
EBITDA is a measure of the business’ ability to generate cash flow. While many objective and subjective factors will impact the ultimate purchase price of the business, the starting point for any valuation is typically a multiple of the business’ EBITDA. With that in mind, a business owner preparing for a sale will usually want to manage the business to maximize its EBITDA.
Incentivize Key Employees
Putting a business on the market often has a negative impact on the business’ employee morale. Uncertainty about their employment future can make employees less focused on their work and more likely to seek employment elsewhere. Therefore, the business owner might consider retention packages, deferred bonus plans and other compensation structures that encourage key employees to stay with the business and have an economic stake in helping complete the sale.
Engage an Experienced Tax Advisor
All business transactions have tax consequences, and it is best to have a tax advisor engaged before the sale of a business to help maximize the after-tax proceeds of the sale payable to the business owner.
For example, a sale of the assets of a business often has very different tax consequences than a sale of the stock or other equity of the business. And when assets are sold, the manner in which the purchase price is allocated among the assets can dramatically affect the taxes of the buyer and the seller.
Douglas Clayton is a corporate and securities partner with the law firm of Cantey Hanger LLP, where he is vice chairman of the firm’s Business Transactions Practice Group.