A successful, lucrative exit—it’s the dream of so many entrepreneurs who envision building their business and one day selling to the highest bidder.
While others may recoil at the thought of selling their ‘baby,’ the vast majority of the entrepreneurs that I’ve worked with in my career would leap at the chance to exit their business for a fair or even above-market valuation—at least in theory. What many don’t understand is the work and stress involved in achieving that desired outcome.
Walking away from a business that has employed you and a group of employees (which could include family members), possibly for much of your adult life, is far more difficult than it first seems. Indeed, exiting a business is one of the most stressful and emotional experiences that an entrepreneur can face. Even if the exit isn’t being undertaken as a result of acute financial difficulties—such as a steep economic downturn or ongoing financial mismanagement—it’s a process that requires patience, a strong support network consisting of family and friends, and adequate strategic reflection.
Here are seven questions to consider before hanging a ‘For Sale’ sign on your business:
What will you do after the sale?—All too often, entrepreneurs who have devoted countless hours to their business sell, but quickly find themselves depressed and lost with no office to visit each day. For many, in other words, life on the golf course doesn’t offer the same sense of fulfillment as running a successful business. That’s why it’s important to consider what you might do with your life after the sale. Can’t imagine not running your company? Then it may not be the right time to sell.
If the price is acceptable, under what terms?—Establish your minimum selling price and preferred terms, and be prepared to stand by them. Many buyers will include purchase agreement clauses that restrict a seller’s ability to open a competing business or work in the industry for fixed periods. Others might require you to ‘earn’ your way out of the business by achieving certain revenue or other milestones within a fixed timeline. Failing to do so could mean exiting the company for a reduced selling price. In the latter scenario, you essentially wind up being an employee of the company you once owned. Not surprisingly, many entrepreneurs struggle to work under such conditions, choosing instead to walk away with only a fraction of their target sale price. Understand that without the right leverage, buyers can impose draconian purchase terms that could make your life miserable. Structured properly, however, an exit can benefit of all parties.
How much time can you dedicate to selling the business?—There is a very good chance that you’re so busy operating and attempting to grow your business that taking time to compile the necessary financial information and other details required to sell is all but impossible. This is a major consideration because selling a business is akin to taking on a second job—at least if the process is managed properly. Even if you have a third-party firm handling the sale process, key decisions will need to be made, which means setting aside ample time to ensure your sale goes according to plan.
Are there any impending tax or legal problems to consider beforehand?—There’s nothing like an ill-timed lawsuit or tax challenge from Canada Revenue Agency to derail an otherwise viable sale—or at the very least weaken your position to the extent that the buyer gains the upper hand in negotiations. Work with an accountant to analyze your recent tax filings and be prepared to make voluntary disclosures to clear up potential liabilities or oversights. The same advice applies when it comes to potential legal problems, ranging from HR law to intellectual property issues—and any threats in between.
Is the business overly dependent on you?—Many entrepreneurs put their business on the market only to realize that they are the business. Without their skills, operational expertise and creativity, the company is essentially worthless. This is particularly true of service businesses—even larger ones—that are driven by a charismatic, hands-on leader. See our recent blog on succession planning for points on how to develop a transition strategy to help make your business sellable.
Have sales and/or profits been stagnant or declining?—In the lead-up to any potential sale, your managerial priority should be profit maximization, optimizing operations in a way that helps produce upward, positive trends across your balance sheet. Signs of financial weakness will give a prospective buyer reasons to question their purchase, or push down the selling price.
Are you prepared to reveal financial information?—Many entrepreneurs love the idea of selling their business, but recoil at the thought of opening their books to a buyer. But ask yourself: Would you buy a business without being able to assess its financial health in a comprehensive and transparent way? The answer is probably, ‘No.’ Be prepared to organize and provide detailed financial statements for the previous three to four years, and have arguments ready if any potential red flags surface.
Hartley Cohen, Partner