Although it may seem odd to prepare for your exit long before it happens, every business owner should have an exit plan from day one. Potential investors will want to know your long-term plans and your exit plan may determine how you operate or organize your company. But once you get to the point where you’re truly thinking about selling your business, it’s time to become even more detail-oriented.
What Are You Selling?
First, you should think about what exactly you are selling. Do you plan to sell just the assets of your company? Or will you sell all or part of your stock or membership interest? You should also consider the intangible assets of your business like your reputation and the business and consumer relationships you’ve built over the years. Will licenses or franchises be included in the sale? What about your key employees? Will they agree to stay if you sell or will they want to find new employment?
Valuing Your Company
Next, you’ll need to think about how you will set a price for your company. There are three main methods for valuing a company:
- Comparable Company Analysis
Under the comparable company or “trading multiples” analysis, you compare your business to similar businesses by looking at trading multiples like the price-earnings ratio or the company’s return on investment. Using comps is probably the easiest method of valuation.
- Precedent Transactions
A precedent transaction analysis involves comparing your company to similar companies that have recently sold or been acquired in the same industry. This can be useful for a merger or acquisition, but can become quickly outdated in a rapidly changing market.
- DCF Analysis
A discounted cash flow analysis is performed by building a detailed financial model to forecast the value of the company based on different scenarios. It can be complicated and very detail specific.
In addition to valuation, you should also think about how the buyer might finance the purchase of your business and whether you are willing to provide financing for the buyer.
Prepare for Due Diligence
In the run up to a sale, you will also need to prepare for due diligence. You will need to compile documentation for things such as tax returns; record books; financials; liens; assets and ownership; the value, duration and assignability of contracts with suppliers and customers; franchise agreements and licensees; leases; environmental matters; employee matter, plans and contracts and retention agreements with key employees.
Letter of Intent and the Purchase Agreement
In advance of the sale, you will need to consider the terms of any letter of intent or sale. This will include things such as the price and asset description, but also any representations, warranties and covenants that you are making as the seller. You will also need to include indemnification clauses where one or both parties will hold the other harmless for losses caused by the other party. Finally, consider a dispute resolution clause. If a legal issue or breach of contract arises, you can specify in advance the law and jurisdiction over the suit, as well as whether alternative dispute resolution is required.
Selling your business can be a fruitful endeavor, but it does take time and careful planning. Be sure to involve your attorney, and other financial professionals, in the planning stages to ensure a smooth sale and transition.
Who is Rochelle Friedman Walk?
Rochelle Friedman Walk, Esq. is an experienced, thoughtful and strategic attorney, business executive and neutral mediator. She has been court-appointed as a receiver and mediator, and is a member of the FINRA arbitration and mediation panels. She is known for her negotiating skills and the ability to bring parties together in win-win, creative solutions. She offers a practical and business-oriented approach to the practice of law. Her background in business enables her to relate well to clients and to quickly define the work and potential solutions.