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Are You Ready to Sell Your Closely-Held Business?

13 January 2022

You’ve spent your life building things – your family, your business, your life. So, let’s start by saying “Congratulations!” Not everyone is an entrepreneur who manages to accomplish what you have – in fact, most people don’t, so count yourself as a high achiever!

But you’re looking toward a new phase of your life, one with less pressure, fewer obligations and more free time. Let’s assume, for purposes of this post, that your children have other priorities, and you have no partners interested in buying you out.

So, how do you monetize your business so that it can provide you with a return on your years of effort without your having to own and run it for the rest of your life?

There are a number of options open to you – but, we’re assuming your heirs and/or partners aren’t eager to take on both the business and your mantle as the person in charge. You might want to sell your closely-held business outright, in such a case.

Selling a closely-held business is a multi-phase process, with numerous steps making up each phase. Phase I is getting your business ready for sale – and getting yourself ready to sell the business. Often, when push comes to shove, owners of closely-held businesses find themselves reluctant to let go of the reins. That’s an emotional reaction, perfectly normal and human when contemplating relinquishing control of something you’ve spent decades building, nurturing, and running.

But it may be necessary to set those feelings aside, to get out of your own way, in order to move forward with your life and your long-term goals.

Your first steps should be to ensure your business runs like a well-oiled machine – a self-managing concern that can thrive without your day-to-day oversight. Make sure you have documentation in place, or hire someone to put this in place for you, covering the details of:

  • your business plan
  • processes and procedures for each main segment of your business (e.g., finance, production, delivery of products/services)
  • your sales process and marketing strategies
  • your finance strategy
  • organizational hierarchy, with job descriptions and itemized duties for each position, and who does what when, and where

Have your employees review this documentation. Solicit their input and make any necessary corrections, so that if an employee leaves, or their duties need temporary coverage, you have specific documentation detailing each major function of your business. Make sure employees are cross-trained to cover one another’s job functions, because emergencies do happen.

Make sure your team is well-versed in every policy, procedure, process, and duties as applicable to each of their functions as team members. This will make your business much more attractive to prospective buyers, as new ownership would be able to hit the ground running.

Next, you will need to put a team together to advise and support you through the selling process – you will likely want:

  • a financial advisor with experience selling closely-held businesses and the Transaction Advisory process
  • an attorney, preferably already known to you, experienced in selling closely-held businesses
  • a trusted banker who understands the ins and outs of your individual business, and
  • an advisor familiar with your industry and experienced whom you trust to market your business, target potential purchasers and be a liaison in getting you toward a purchase agreement.

In readying your business for sale, some recommended steps may seem counter-intuitive – for example, moves you’ve made to minimize your tax liabilities may make initially your business look less profitable to an outsider than it should. In order to present your business and its financial picture in the most favorable light to potential buyers, you may, acting in concert with your Transaction Advisory Team, want to consider:

  • Recasting your earnings to take into consideration costs and expenses an outside buyer is unlikely to incur (this is called “normalizing” your earnings). Such costs and expenses may include personal use of automobiles, travel and entertainment, etc. Review all of these costs over the last 3 to 5 years.
  • In recasting your earnings, bear in mind that one valuation tool many potential buyers employ is EBITDA (earnings before interest, taxes, depreciation and amortization), using a factor appropriate to your industry, to determine their offering price. There are other valuation approaches, such as net asset value, ratio of sales, and sales prices for similarly sized businesses in your industry and region. However, at the present time we are seeing EBITDA being used as a major factor in the valuation of businesses for purchase.
  • Identifying and explaining, via notes to your financial statements, any unusual, infrequent, or one-time events, such as the COVID-19 pandemic, weather events, and other disruptions to business outside your control. Also note any trends, whether positive or negative, over the past 3 years.
  • Identifying and explaining any and all major capital expenditures over the last 3 years.
  • Look at cutting (or eliminating) salaries or wages to any family members on your payroll. Company perquisites (company cars, etc.), too, should be eliminated. It’s not likely that a potential buyer will want to retain your family members as employees – and if they should, such valuable family team members could well be good candidates to replace you at your business’ helm, potentially obviating the need for a sale in the first place.

Note that these are only a few examples of strategies you and your Transaction Advisory Team may look at in readying your business for sale – God (and the Devil) are always, always in the details.

Timing the sale is also important in ensuring your get the best price for your business:

  • Is the general economic climate favorable for business sales, generally? Right now, as a general matter, the answer is yes. The 10-Year U.S. Treasury currently yields ~1.7%, which is lower than current inflation rates, making capital cheap at this time.
  • If so, is it favorable for a business in your industry, or for your individual business now? That is an individual determination, business by business.

Your Transaction Advisory Team can tailor a plan to maximize the on-paper value of your business based on your individual situation, and evaluate the timing of the sale. What will work for one business may not work nearly as well for another – I know I’ve said it before, but one size does not fit all.

Selling a closely-held business can take six months to a year, so if you are seriously considering the sale of your business in 2022, now is the time to contact us and get started.

If you would like to get the process underway, please click here to email me directly.

Until next time –

Peace,

Eric

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