Preparing for a Business Sale
To prepare for a business sale, you must start internally. The interests and equity that will be transferred and the previously-agreed upon process should be memorialized in the company’s governing documents. These will vary based on entity type but buy-sell agreements are a useful and flexible way to plan for ownership succession. In an LLC, this is documented both through an operating agreement (process for exit, termination) and a buy-sell agreement if the transfer terms are not set out there.
These are legally binding agreements between or among owners and shareholders and the company that requires the shareholders or the company to purchase the stock of the business owner upon triggering events. The method used to determine the value and any other transfer restrictions are usually written into the agreement.
Business exit via a sale can still happen many different ways: It can be done through closing of the doors, liquidation, or winding up.
Getting company financials organized helps you as an owner to understand financial position of your business, communicate these values using a standard method, and serve as a baseline for a business valuation.
This means updating and organizing your internal systems and controls, reviewing and updating key metrics and performance indicators. You may want to work your accounting software or finance team to review a series of financial reports, including having at least three years of accurate and timely tax returns. To make the transition more smooth, work to eliminate loans to/from the owners or managers and resolve outstanding issues such as unpaid accounts receivable, debt, lawsuits, and environmental hazards. Lastly, demonstrating that accounts receivable can be collected can also help with transferability.
It’s never too late to get organized, and doing so expands your options available at exit.
As you go through succession planning and execution of your plan, you will need a baseline valuation. A business valuation gives a clearer picture of an ongoing business’ value, and it’s often different than the business owners assumes. Business owners have a hard time being objective- a business is their baby! I recommend working with a professional to develop a fair and impartial valuation. A liquidation is the market value of the assets less the liabilities and It is not an exact science, but is based on judgement, experience, and industry specific trends and standards.
The value of your business can be determined by many business valuation methods. Most valuations are a combination of two factors:
• The Assets, such as cash, receivables, inventory, equipment, and real estate
• and the Revenue stream or net profit over time
Common methods used are:
· Market Value- which is based on comparable company sales and direct market data to
· Asset based which is your company’s book value, net asset value, or liquidation value
· There is a cost approach and the Earnings based approach. There is also an income approach forward looking and uses projects and other economic factors.
· And finally, the Income Approach which requires a capitalization of the net cash flow and discretionary earnings.
A qualified expert should provide a few different views and be able to use this information to develop a fair market value conclusion, taking into account any discounts or premiums.
To learn more about long-term value drivers increase the value of your business over time and additional documentation, enroll in the Generational Wealth Planning for Entrepreneurs and Their Families online course.