How To Successfully Sell Your Business

Caveat emptor — let the buyer beware — has been a famous warning since ancient Roman times. But when it comes to a family business, “let the seller beware” may be the most prudent advice.

Every year, family businesses are sold to outsiders for a variety of reasons. Sometimes, a sale is forced because of estate taxes, which can represent as much as 55% of the estate's value, when the founder or surviving spouse dies. If the older generation is unaware of how significant the tax burden could be, or if they did not plan adequately for paying it, their heirs may have to sell or liquidate the business to cover taxes.

In other cases, the heirs may use a life insurance policy, a bank loan or assets from the company retirement plan to pay estate taxes. Still others might opt to take the company public to raise needed capital. Each of these methods can potentially weaken the company by forcing the owner to give up control or prevent needed investment in expanding or improving the business. Ultimately, the company's value could deteriorate to the point at which a sale becomes inevitable.

Sometimes the founders themselves decide to sell. For example, if an owner-couple has no children, or if their children aren't interested in joining the business, they may sell once they reach retirement age. Other reasons include a founder's or spouse's declining health, insufficient capital to support business expansion, the need for cash to fund a secure retirement, burnout and the desire to pursue other interests.

Common Problems
Whatever the reason for selling the business, many owners and heirs tend to encounter these problems:

• Lack of expertise — While the owners or heirs may be highly skilled in their own industry, they usually lack the knowledge and skills to sell a business. Those who try to sell without expert assistance often make poor or uninformed decisions and fail to get the most advantageous terms possible.

• Unclear goals — As in any area of life, you can't get what you want if you don't know what it is. Owners contemplating a sale must move beyond the simple objective of selling the business and "getting the best deal" to clear, detailed goals on how much they want for the company and what terms they are willing to accept. Often, this goal-setting will be tied in with the owners' personal and professional goals and retirement plans.

• Lack of trust — If the need to sell the business is urgent or unexpected, owners may not take the time to consult business advisors and other trusted associates. In fact, they may feel the sale is so important that they cannot trust anyone else to make the required decisions.

• False sense of urgency — Potential buyers may pressure the owners to make a quick decision, or the sellers themselves may create an unnecessary sense of urgency out of a desire to get it over with. The result can be hasty choices that are regretted later.

• Emotional attachment — Owners typically have invested so much of themselves in their businesses over such a long period that they are unable to separate emotional attachment from the need to make clear-headed business decisions. Often, such owners have unrealistically high ideas of what their companies are worth.

• Financial fears — If the owners have not planned adequately for retirement, the business and its assets may represent most (if not all) of their retirement security. In addition, other family members may be depending on the sale of the business to fund their own needs (such as college educations for their children) or to provide an expected inheritance. Such factors create great pressure on the sellers to get the best deal for everyone, and fear of making a mistake may prevent timely decision making.

While these problems may seem daunting, there are several steps family business owners can take that will significantly boost their chance of making a successful sale.

What Makes a Sale Successful?
Setting goals. Perhaps the most important factor in selling any family business is formulating concise, realistic goals for the sale. Owners can begin this process by asking themselves several questions.
For example, once the business is sold, will you retire, continue to work (either for the company or as a consultant) or will you pursue other interests? If you intend to retire, where will you live, and how much money will you need to maintain the lifestyle you want? If you decide to keep working, what resources will you need to set up a consulting practice or open a new business? If you aren't eligible for Medicare yet, how will you obtain health insurance? What will it cost?

What are your personal goals following the sale? Your spouse's goals? Is there a special hobby you've always wanted to pursue? Do you plan to travel more? Would you like to move to a new house or relocate to another area? What resources will you need to meet such goals?

Will special circumstances increase your need for financial support or affect the terms of the sale? For example, do you or your spouse have any significant health concerns? Is someone in your immediate family chronically ill or mentally or physically disabled?

Valuing the business. Once you have set your personal, professional and financial objectives, the next step is to analyze the business to determine its value and to project anticipated performance five to 10 years into the future. Among the areas to focus on are expenses, sales and cost of sales, cash flow, and anticipated profits. In addition, you should compare your company's results to what is typical for your industry. It's important to take the time to conduct this step properly because it is the basis for every other step in the selling process. Given its complexity, you may want to call on your accountant, attorney and other professional advisors for assistance.

Once you have analyzed your company and the industry, you will know how attractive your company is to potential buyers in terms of assets as well as intangibles, such as customer goodwill or strong vendor relationships. You also will know if there are any potential problems, such as aging equipment or higher-than-normal expenses.

At this stage, you can compare the valuation results to the personal and financial goals you have set to see if the sale will enable you to meet those goals. If not, you may need to modify your goals. Or, like someone selling a house, you may decide to address certain problems (such as investing in new equipment) or make changes in the business (such as shedding unprofitable divisions or noncore activities) to increase its value or attractiveness.

Getting the right help. In general, owners should not negotiate a sale themselves. One reason is that their emotional attachment to the business may cause them to seek a buyer they like personally rather than one offering a fair price and advantageous terms. Also, if there are any pressures to settle the sale quickly (such as an urgent need for cash or unexpected illness in the family), the owners may be tempted to take the first offer they receive, regardless of its quality.

If you haven't already involved your closest business advisors in the selling process, now is the time to do so. Besides providing crucial data and serving as a sounding board throughout the process, an accountant, attorney, management consultant or other business advisor can help you select an intermediary to negotiate the sale.

Depending on the size and complexity of your business, your selling options and your personal and financial goals, you may decide to have one of your current advisors handle the negotiations. Another possibility is to work with a business broker, who typically earns a percentage of the selling price once the deal is complete.

For large family businesses, an investment banker may be the best choice. You'll pay more for a banker's services than you would for a broker, but such professionals provide a much wider range of services, a customized approach, access to a broader array of potential buyers and well-honed negotiating skills.

Working Out Terms
Based on your business valuation, your goals and the input of your advisors, broker or investment banker, you should already have a good idea of how much you can expect to be paid for your business.

As part of the negotiations, you'll also need to settle on the form of payment. For example:

• Do you want the sale to be taxable or tax free? If you choose the latter, be aware that there are numerous constraints that may make a taxable alternative more attractive.

• Will you be selling the company's assets or will the deal be structured as a stock sale?

• Will you require the buyer to pay you immediately, or will you defer part of the payment?

• Will there be any other "strings" to the deal, such as employment for yourself or any family members?

Noncompete clauses? Stock options?
Regardless of the terms you negotiate, you will need to consider any possible risks and make provisions for minimizing them. For example, if you will retain substantial stock in the company after the sale, you will need to consider terms to cover the possiblity of stock prices dropping dramatically. Your business advisors can help you identify risks and options for managing them.

A Final Word
While it may seem attractive to remain as involved with the business after the sale as they were before, former owners often should resist this temptation. Such behavior only adds to the stress of the sale and may raise unpleasant feelings and emotions, such as a sense of grief or loss.

Instead, even before negotiations are complete, owners should make detailed plans for spending time away from the business immediately after the sale. Taking a class, increasing volunteer activities, going on a long vacation or visiting with children and grandchildren are all good alternatives. Whatever you choose, remember — enjoy yourself and the fruits of your successful sale.