As we’ve written previously, business owners cannot simply decide to sell their company one day and begin marketing it the next day. There is a lot of preparation that goes into the sale of a business, from accounting to budgets to projections to financial and tax planning to valuing the company to determining the preferred type of buyer. . . .
Selling a company takes careful planning and forethought followed by a series of key actions that demonstrates the owner is serious about a sale. One of those actions often includes hiring professionals like CPAs, attorneys, investment bankers, and business advisors to help advise the owner and assist with the sale preparations and execution.
In order to determine if an owner is, indeed, ready, willing and able to proceed with the sale process, we typically ask a series of telling questions.
How the owner responds often reveals whether they have thought through the sale process, considered life after the sale, and the odds that they will follow through with the sale. If the owner cannot answer these questions thoroughly, thoughtfully, confidently, and knowledgeably — in other words, without sounding like they are “making it up” as they go — they may not genuinely be ready to sell their company. In short, being able to answer the following 8 questions is essential for an owner to move forward successfully with the sale process.
Why are you considering a sale? Reasons for selling a company are typically personal to the owner. However, if the owner does not have a strong answer to this question — something along the lines of, “I want to retire or my spouse wants to spend more time with me,” “I have other interests I’d like to pursue (philanthropy, sports, hobbies),” “I need to diversify my net worth,” “The company needs investments/resources that I am not prepared to commit to/provide,” etc. — it may give potential buyers reason to second-guess the owner’s commitment to a sale.
Have you undertaken financial planning and tax planning? Financial planning, including tax implications, is important for owners who are considering selling their company. It must be done in advance of the sale process so the owner can determine their cash flow requirements to achieve their objectives, including the minimum pre-tax and after-tax proceeds needed from the sale.
What are/do you have value expectations? A key “tell” if the owner is serious about selling or not is how realistic their valuation expectations are versus reality. If the owner is not willing to sell their company for a penny less than $20 million, and the actual fair market value is $10 million, they may need to regroup and rethink their objectives and priorities before bringing their business to market.
Can you live on the net proceeds? If the company is a “lifestyle” business that benefits the owner (and their family) and supports their current standard of living, the owner needs to consider how they will maintain their lifestyle post-sale. As such, the owner should assess whether or not they can “afford” to sell the company, and ensure the expected net sale proceeds are sufficient to maintain their current standard of living.
What will you do post-sale? Owners must consider how they will spend their time once the sale closes. Would they like to remain with the company and for how long? What will they do once they are no longer running the company? Once the sale closes, the reality of the “what now?” can hit hard. Owners that remain with the company or with outside interests, hobbies, family obligations, and philanthropic pursuits, for example, are less likely to get “cold feet” about a sale than owners who do not have a life outside the office.
How does your spouse feel about a sale? Owners’ spouses tend to have a lot of sway over their decision to sell their business. Those with spouses pressuring them to spend less time working and more time at leisure may be particularly incentivized to follow through with the sale.
Have you tried to sell before? Is this the owner’s “first rodeo,” or have they tried to sell the company before? Why were previous effort(s) unsuccessful? The owner’s previous experiences will likely influence how they respond to current prospective buyers or offers, for better or worse.
Are there logical buyers? Does the owner have buyer candidates in mind, and have they thought about what buyer characteristics are important to them? Is the owner seeking a strategic buyer who will pay the highest price, or are there non-financial objectives at play, i.e., does the owner want to leave a legacy, perpetuate a brand, create security and opportunities for existing management and employees, etc.? It is important for the owner to know their objectives for the sale at the outset, and what types of buyers they are seeking to help them achieve those goals.
Owners have a lot to consider before marketing their company for sale. Their answers to these 8 questions can provide a lot of insight into whether or not they have thought through all of the implications of selling their business, and what their goals are in doing so. Sometimes, being brutally honest with themselves can help the owner determine if they are truly ready to “pass the torch,” and make sure they are 100% committed to completing a successful sale.
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