Trusted advisors can help review your goals and optimize outcomes as you prepare to sell your business.
Amid the daily challenges of running and growing your business, preparing to sell it may feel like the last thing you need to worry about right now. "But even if you’re convinced a sale is years away, business and market conditions or your personal situation can change, sometimes faster than you think," says Rob Schipper, Head of Investment Banking at Fifth Third Bank.
So to start, you may search: "How to get my business ready to sell?". From organizing finances to important documents, early preparation of selling a business is key.
The better prepared you are to evaluate the specifics of an offer, the easier it will be to navigate the process and make decisions that are advantageous for you, your family, and your business. Offers can come unexpectedly from a competitor often requiring a quick response. Being prepared enables a business owner to be proactive and strategic versus reactive and opportunistic. Even if you never go through with a sale, the very process of preparing could help you better understand your company and your long-term goals.
Steps to Consider Ahead of Time
Planning involves multiple factors about your business and your personal life and family. Some key steps include:
- Assemble an experienced team. Rather than pulling together experts after you have received an offer, start bringing together trusted advisors with a variety of experience and expertise right now. "Middle-market companies should have a solid team of advisors—including bankers, lawyers, accountants, wealth managers, and board—in place before considering a sale offer," Schipper says. Your Fifth Third Relationship Manager can help you put together a team, and members of your board can also be a valuable resource.
- Understand what you need from a sale. Will a sale fund your dream retirement or enable you to pursue your next entrepreneurial venture? Whatever your dream, having a clear vision will make for an easier transition when the time comes. An up-to-date sense of your company’s value could help you understand how close you are to being able to finance those dreams. An M&A advisor who understands the market and your industry could help, and you also might consider enlisting a third-party valuation specialist. "Fifth Third’s investment bankers often help owners understand valuation in the context of various strategic alternatives months and often years ahead of a sale," says Schipper.
- Consider your estate and charitable goals. Transferring ownership interest to family members, trusts, or other entities before a sale could help you capture allowable valuation discounts and reduce transfer taxes later. "These and other potential benefits may only be available if you act well in advance of a sale," says Frieda Rakhman, Managing Director of Fifth Third’s Business Transition Advisory Team. "Missing out could mean less money for you as the owner, and a smaller transfer to your loved ones." Likewise, if charitable giving is among your goals, your team can help you plan to support the causes you care about when the time comes to sell. Depending on your business and tax and cash flow situation, that could involve donating shares, donating cash from the sale, or creating a charitable trust or foundation.
- Assess the impact on your personal finances. You may have some business expenses, such as vehicles, that serve both business and personal purposes. Since these will become personal expenses after the sale, comprehensive financial planning prior to a sale can smooth the transition, avoid surprises, and help prepare you for post-sale life. As part of this planning, consider what the sale will mean financially for your children or other family members who may have been involved in the company.
Responding to an Offer
"Offers can come from out of nowhere and frequently have tight time frames," Schipper notes. Here are some steps for when the clock actually starts ticking.
- Review your objectives. Consider the long-term goals you established for your post-sale life. Ask yourself whether this opportunity will or won’t support those goals.
- Protect your information. Even as you try to learn everything you can about the buyer and the offer, be sure to communicate guardedly and avoid sharing too much information early, Schipper advises. A nondisclosure agreement, drafted with your lawyer’s help, could protect confidential information and prevent the buyer from approaching your employees if put in place early.
- Do your due diligence. Think about how well you know the prospective buyer and whether they have the financial wherewithal to complete the acquisitions. A little advance homework can help you go into conversations prepared rather than reactive.
- Prepare for their due diligence. As part of their own due diligence, prospective buyers will want to see that your contracts are in order and that your financial statements follow accounting standards. They will also want to know about your liabilities for legal issues or taxes. Investment bankers or other financial advisors can help you prepare these documents.
- Carefully negotiate the letter of intent (LOI). A lawyer who specializes in M&A can help ensure you understand the full implications of the deal. "A transparent LOI that clearly sets out deal terms, including clear consideration language and the parties’ obligations, will leave less to chance and misinterpretation," Schipper says. If you have been approached by a buyer, you have negotiating leverage. Use that to your advantage in the LOI process as it will form the basis for drafting the ultimate purchase agreement as part of a deal.
- Foster a competitive process. One reason buyers make unsolicited offers is to increase their chances of buying companies at below-market values. Researching other potential suitors could put you in a more competitive position to attain the best-possible price and outcome.
As with your business itself, the goals you hope to achieve from a sale are likely to evolve over time. So it is important to stay flexible in your planning, Schipper notes. The same holds true for an actual sale. "Even under the best of circumstances, the sale process can be complicated and unpredictable," he says. "That is why it’s so important to be ready to adapt along the way."
Fifth Third has a full-service team of bankers to help our relationships evaluate, plan, and execute a business sale or transition. Contact a Fifth Third Relationship Manager, Investment Banker, or Private Banker to learn more.