The Exit Strategy: Preparing Your Business for a Successful Sale

By: Benjamin R. Skjold, Esq. and Nathan M. Brandenburg Esq

Equity in one own’s business is typically that owner’s most valuable asset. Most small business owners are too busy building and maintaining their business to devote much time or energy to planning an exit strategy. Because the business is treated only as an income producing asset, instead of a capital asset that can be sold, capital value is never realized. In order to capture the full value of the business, it must have an intrinsic value separate from its owner. Hence, although it is never too late to begin planning an exit strategy, the earlier the better in order to maximize value.

The Books and Records Must be Current and Verifiable

A business entity, such as a corporation or a limited liability company, should have current, updated minutes for the meetings of its board of directors and owners. Records should be formalized and clearly document all significant transactions. There are no exceptions for businesses owned by one person. Do not be misled simply because you can set up a business entity with the free forms on the secretary of state’s Web site you will get what you pay for. You should obtain professional help from an attorney that specializes in setting up and maintaining business entities in order to maximize the limited liability protection such an entity can provide.

Moreover, financial statements must be accurate and correlate to the business’s tax returns. As when setting up a business entity, you should obtain professional accounting help from an accountant that specializes in working with businesses similar in size and industry to your business. As many business owners find when negotiating for the sale of their businesses, it is difficult to obtain a “top-dollar” price when the financial records are incomplete or inaccurate. A potential buyer’s offer and future cash flows depend on the accuracy and honesty of a business’ financial records.

Identify and Protect Your Intellectual Property

Has your business built a brand? If it has, it should be protected with a trademark. If there is a product, is there a patent? A potential buyer would certainly want to be assured that there is legal protection for what is being purchased. There are legal protections available to protect these aspects of your business and you should seek professional legal advice to ensure that you take advantage of these protections to the fullest extent available.

Employess

Does your business have agreements with its key employees to prevent them from competing, soliciting customers or other employees or using your business’s confidential information when they leave? A potential buyer wants to be reassured that the business’s assets are not going to evaporate after a sale with inevitable employee turnover.

Operations

Start writing down your business’s policies and procedures. If necessary, create a procedure manual that documents exactly how to best run the business; be sure to include any undocumented policies and/or procedures. Not only will the business benefit from the efficiencies gained when hiring new employees whose training will be associates by reading a manual, but potential buyers can more easily evaluate the business and assets whether a new manager could successfully take over with minimal training.

Contracts

Does your business have supplier and/or customer contracts? Make sure the terms and conditions will not expire or require renegotiation upon a sale. You should terminate contracts that might trouble a potential buyer, that financially drain the business or serve little purpose.

Location

Review your real estate lease(s), especially if the location of your business plays an important role in your business’s ability to generate revenue. You should make sure the lease does not expire or require renegotiation within the time frame in which you plan to sell your business. If you think the business’s location or the attitude of the landlord will discourage potential buyers, consider moving or possibly acquiring the real property.

Plan the Sale: Who is the Buyer?

If you plan on selling your business to a family member, a succession plan must be implemented to reduce taxes and begin the process of transitioning control to the next generation. If you plan on selling your business to the business’s current management, certain tax and financing issues should be addressed as soon as possible. If you plan on selling your business to a third party, the business’s books and corporate records must be pristine and easy to comprehend to attract buyers and achieve a solid sales price.

Conclusion

The above business principals are critical to your ability to achieve the maximum sales price for your business. When contemplating a sale, you should be proactive in assembling a team of qualified professionals. Although it is all too often very easy to neglect the corporate formalities required to maximize the value and limited liability protection of your business, such neglect can cost you and your business a substantial payout at the time.