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Talking Technology By Steve Burns, Capital News contributor Last week we looked at five ways to prepare your business for sale; even if you think that this event is in the distant future. We looked at determining your objectives for selling, how to let go, how to value your company, how to evaluate the timing of the sale and seeking out potential purchasers. This week we will look at five additional items to consider when preparing your business for sale. Understand purchasers Purchasers often have different rationale for purchasing your business. For instance, some want to purchase a business and get actively involved in the running of the business, which may not be the type of purchaser that you are looking for. Also, regarding the purchase price, many purchasers want to borrow half or more of the purchase price. They say they will give you cash and that you really should be indifferent to where it comes from. In my opinion, this is simply not true. Your commitment to help in the transition of the business will extend beyond the closing date for things like non-compete and consulting agreements. What if the business just can't survive under the new load of debt? If you are really interested in the continuance of your business, you will do your homework on how the purchase price will be financed. Another key aspect to consider is if you would be willing to help finance the business by either taking back debt instead of cash or through an earn-out of future earnings, which you will help generate. I have seen too many business owners sell their business by taking back debt or by structuring a complex earn-out, only to have business go south. This results in them either losing the business altogether or taking back the business in the event of default on the debt after it has lost momentum and market credibility. Financing your purchaser's purchase price either through debt or an earn-out is not always ideal. Remember that any money owed to you will likely be subordinated to the outstanding bank debt, which means that if the bank is not paid, you will not be paid. Not a position that any seller wants to be in – selling a great business that you may never be fully paid for or that may be worthless if you end up taking it back. present information If there was ever a time when your financial statements were important, it is when you are selling your business. For instance, audited financial statements are best as they allow you to close the transition faster, to make fewer, shorter guarantees and to demand more cash at the closing. In my opinion, audited financial statements reassure buyers and can encourage a higher price. You will also need to provide a purchaser with realistic financial projections for your business. Here is another opportunity to add value to the purchaser by providing them with projections that have been reviewed by a third party. Engage the services of a professional, such as your accountant, to review the key assumptions associated with the projections. Projections that are professionally prepared and which are realistic can often become the cornerstone for price negotiations. Business valuation experts can also be very helpful in this process of “setting a price”. Tax implications of sale You need to understand the tax consequences of selling the assets of the business versus selling the shares of your company. Purchasers prefer to purchase assets and sellers usually have a lower tax cost to selling shares. It is important to understand how the purchaser would like to buy your business as this may impact the purchase price. For instance, if the purchaser insists on purchasing assets, then the “asset based purchase price” should be higher in order for you to be in the same after tax position as you would in selling shares. This is always a key part of the negotiations. Remember that there are significant tax implications if you decide to accept debt as part of the purchase price. Consult a tax professional before sitting down to price negotiations. Careful in negotiations Purchasers can take advantage of a seller at any point in the process and vice versa. Experienced purchasers will know that negotiations last more than one day and they might be more accommodating when you have a number of prospects that are interested in your business. However, when other purchasers have moved on, the remaining purchaser can surprise you with a price reduction, allegedly attributed to new information uncovered about your business. Keeping alternative buyers active throughout your negotiation process, even when everything looks very positive, is the best defense. Proceed as usual I consider the sale of your business to be very similar to the patience required in seeking investors for your business. Both have the potential to be all consuming and result in you taking too much time away from growing your business. If the transaction falls apart you will want to have made key decisions along the way. Deferring capital expenditures or other critical management decisions in anticipation of a sale may not be in your best interests as the sale may not actually happen. Proceed as usual and you will preserve your market position and your competitive edge. Even though you may never have the privilege of selling your business, by taking these small steps you will not only have the option of selling but you will also maximize the value of your business - both now and in the future. Steve Burns is the president and CEO of Burns Innovation Group Inc. and Steve Burns Inc. Chartered Accountant, which provides consulting and accounting services to entrepreneurs. He can be reached at 763-4716. |
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