10 Tips When Selling Your Business (Part 2)
6. Create an exhaustive letter of intent (LOI).
Make sure that the LOI includes everything you care about. Sellers often make the mistake of thinking that the LOI just needs to capture the view of the deal from the "big picture" Sellers frequently face "deal erosion" when the LOI lacks the required products and information. In comparison, ensuring that all you want is in the LOI before signing gives you far more flexibility in post-LOI negotiations. A good tactic for reacting to the buyer's team's attempts to erode the agreement is to refer them to the signed LOI. This puts the buyer in the position of having to explain why, if he didn't really intend to honor the terms, he signed the LOI. That's a good position for bargaining with your squad. If what you want is not covered, it won't work because it didn't seem relevant enough to include it in the LOI.
7. Make sure that the management team is focused on the organization and not on the contract.
Right before the contract was set to be signed to request a concession, we all heard tales about how investors came back to the table because the financial results for the months just before closing did not meet expectations. The primary cause of the weaker results is sometimes because everyone on the management team concentrated on the deal rather than the business. That can be costly. Make sure that the strategy plan sets out straightforward tasks for who is operating the company and who is working on the contract. This is another bonus of using consultants from outside. Your management team may be able to develop and run the company, but they may not be able to sell the company. It would be rare if they could do both at the same time successfully.
8. In advance of the deal, understand your tax exposure well.
You will still have significant tax exposure while you have filed your federal tax returns on time and paid the tax. State, local and foreign governments' collection efforts, both feeling the pinch of a sour economy, are at an all-time high. Most have recruited more collection officers and have used modern or extended methods for collection. At the same time, communication technologies and other advances have allowed more access to multi-state and international markets for small- to medium-sized businesses. Our experience is that in their home state, many company owners overpay the levy, while ignoring the exposure in other jurisdictions. This exposure is also found by due diligence teams representing the buyers, which may hinder negotiations. Buyers want money put in escrow to cover for the possible exposure to liability (calculated for a worst-case scenario) and sellers see this stipulation as an effort to boost the buyer's contract.
Perhaps when the liability is found after the transaction closes, a worse outcome happens. Deal contracts often contain provisions that enable the seller in the jurisdictions in which it works to represent that it is completely compliant with tax law. If the company is audited after the sale is completed and the audit results in a material review, the liability also becomes the seller's responsibility. At a major disadvantage, the seller is. Since at the time of the audit, the vendor does not own the company, it must rely on the new owner for representation in the audit. Since the buyer assumes that the seller is responsible for the liability, it does not take the same degree of interest in the audit as it would otherwise have. This might not be in the seller's best interest. This can result in substantial evaluations, with the seller covering the debt out of pocket (often after otherwise saving or losing the selling proceeds), or it can eventually lead to lawsuits between the buyer and the seller.
9. Have a good personal financial plan post-sale.
Maybe your company is your most valuable asset. Have you considered how you would spend the proceeds to ensure that you have ample capital to accomplish other long-term financial goals, such as individual and family estate planning in line with private business advertising? You are likely to be the leading expert in estimating the revenue that your company will yield, the amount of risk on the market, etc. But do you have a personal financial plan in place post-deal? The following should be included in your plan:
How the proceeds should be spent, taking into account your personal risk tolerance, to replace the income you enjoyed from running the company.
If you should take more cash or accept an earn-out period at closing. How long, if so, should the earn-out period be? What is an acceptable trade off ratio (money now v. more money later)?
What kind of deal should be acceptable-cash, stock, a purchaser's note, etc.? Will holding the stock of buyers bring too much risk to your investment portfolio? How about a memo?
Where the tax obligation associated with the contract is now due or postponed. For the seller who is willing to take stock in the buyer, certain deal arrangements may result in tax deferral.
How are you going to cover the tax obligation connected with the deal? Know, if you have options exercised on the eve of the offer (or if limits on previously exercised options are dropped), the stock value minus the exercise price could be viewed as compensation (ordinary income rates). This could be in addition to profiting from the selling of your stake in ownership.
10. Consider participation post-deal.
Your sale plan should predict the degree to which you want to give up the company's power, whether you want to continue as an employee, whether you want to accept choices, how much authority you will have as an employee/officer, whether you will hold a board position, and how these things will impact your involvement in an earn-out plan. These are just some of the factors before finishing the contract that you need to analyze. Make sure that all sell my house without agents contracts are in writing and that they are checked by lawyers if you want to continue to lead the business and maintain any upside potential after a contract. It is not unusual for CEOs to be voted out of their own business in the recent past if they give up sufficient voting control.
You worked hard to build a successful company. It is a monumental task to sell your business. The rewards for preparing early and carefully would be worth the effort.