Know your exit strategy for when preparing your business for sale

Knowing your exit strategy years ahead of a sale is critical to maximizing the value of your business and ensuring a successful transition to a new owner. 

Without an exit strategy, you run the risk of the following problems: 

Don’t be irreplaceable

Think about your operations and consider what would happen tomorrow if you ceased to exist. Would the business be able to adapt and still produce revenues, or would everything fall apart? 

This hypothetical is a prospective buyer’s reality, and if it becomes apparent that the business would suffer severely without your own knowledge and skill set, then the value of your business is going to be diminished in their eyes given the effort it will take for them to transition the business. Make necessary plans to train managers and employees so that skills are spread out and that processes are teachable and reproducible. 

Don’t undervalue finding the right buyer

Sometimes business owners are tempted to put all their attention into maximizing ultimate sale value, thereby neglecting that for a sale to occur, the right buyer needs to be found first. The ideal is to find a buyer who is enthusiastic about your business and devoted to its success, meaning they’re willing to fund a sale at full value. 

If your intended strategy is to pass your business to a family member, make sure they have personally approved the plan, and that training begins now. Financing is often included in family succession plans: ensure both you and your successor understand what it will mean to finance the sale and get the necessary pre-approvals. The same is true when selling to a manager or partner.

Consider using NDAs and employee incentives tools to smooth your transition 

Non-disclosure agreements

Non-disclosure agreements (NDAs) are legal agreements in which an individual agrees not to disclose specific information to outside groups. NDAs are often utilized within companies while they prepare for a change in ownership. This is for several reasons.

NDAs can allow you to engage in needed conversations with your partners and management team about your vision and plan for a sale with confidence that news of a sale will not reach the larger business before you are ready. News of a sale will introduce questions for employees, and it’s best to be sure you are fully prepared to answer their questions when they find out. 

NDA’s can also ensure that buyers seeking to understand your business’s operations cannot gain access to sensitive information through the sale process to use for their own benefit, or to share more broadly.

Employee benefits and incentives

Your employees will likely be concerned about their own futures amidst a transition to new ownership. One way to help employees is to offer them benefits and incentives, provided employees stay with the business through the sale. 

Be specifically thoughtful about “key man risk”, which is when the absence of one or more employees or managers with special training or knowledge could hurt the business. Discuss plans to mitigate the risk with your partners and management team. 

Address liabilities ahead of a sale and make legal preparations

It is critical to consider liabilities ahead of time and to do your best to either resolve them before a sale or to plan to disclose them to prospective buyers. Buyers will inquire after the business’s debts, disputes or lawsuits with employees, suppliers, and customers. If these issues have gone to court, a buyer can find this information through their own due diligence. 

Don’t be tempted to hide anything. This can tank the sale, and even worse, get you into further legal trouble with the buyer. Buyers who take ownership over your business who discover undisclosed issues with the business often sue the previous owner for losses.

It is impossible to completely avoid liabilities in business. There are a number of ways to mitigate the problems that liabilities could bring to a sale.

• Work to address liabilities ahead of time to have them resolved before the sale process.
• Fully disclose liabilities to the buyer throughout the negotiation process so that buyers feel informed and do not feel they have been lied to.
• Consider including clauses in your sale agreement that put a limit on when and how the buyer can make claims against the seller.
• Negotiate indemnities to minimize your potential liability. Indemnification refers to an agreement where a buyer and seller agree to pass legal responsibility for claims on the business to the seller, even after the sale. This is a common way to resolve the presence of liabilities. Talk with your attorney about what is fair given the nature of the liabilities themselves.

Do your due diligence and organize your records

Sellers run the risk of getting caught flat-footed by prospective buyers if they haven’t ensured they have the detailed and accurate operational, financial, and legal documentation necessary to back up their business’s value and operational health. Prepare to answer questions from buyers so that you can project confidence and keep the sale on track.

If you’re reading this and don’t immediately know where you would find financial statements, payroll summaries, inventories, leases, contracts, employee benefit plans, details on loans and liabilities, supplier info, and so on, prioritize getting these in place now. Unprepared sellers are often surprised at how much work this can take if they are not already organized. Organization reassures buyers of the business’s value.

Utilize advisors who are invested in the success of your sale

Selling without consulting experienced advisors opens you up to major risks like unforeseen liabilities, lost value, and missed opportunities. Organizing a team of advisors like attorneys, accountants, and brokers puts prospective sellers on the right track to successfully leaving their business in better hands. Sellers deserve all the financial security they can get from the business they have built and managed.

Ready to start planning out your business’s future?

Bridge Financial is a one stop shop for small business owners who are preparing to sell and optimize their business. We provide both certified and free business valuations! If you have any questions related to the selling process, sign up for a free consultation.