No Time to Waste: Proper Planning is a Critical Piece to a Successful Business Sale

August 24th, 2017

The following article appeared in the May 2015 issue of Smart Business Magazine as a result of an interview of Mike Makofsky conducted by Mark Scott. Mike Makofsky is a Principal at McCarthy, Lebit, Crystal & Liffman.

Owners looking to sell their business should begin planning as soon as they can, says Michael D. Makofsky, Principal at McCarthy, Lebit, Crystal & Liffman.

“The sale of a business is one of the most significant events in an owner’s life. An owner is understandably eager to close the deal, monetize and move on to the next chapter,” Makofsky says. “However, it is not very realistic for an owner to suddenly decide to sell a business, try to do so quickly on one’s own and expect an optimal result.”

Smart Business spoke with Makofsky about steps an owner can take to make the process run more smoothly.

What are some key first steps when you’re looking to sell your business?

You need to know the value of your business before trying to sell it. That goes beyond income, revenue, debts and expenses — it is an understanding of what your company is worth on the open market. You may overestimate the value of your company, only to be disappointed with lower offers from potential buyers. A valuation can provide a clearer view of the state of the business. With that frame of reference, you are more equipped to handle offers.

A potential buyer will conduct due diligence. Proper preparation can help you as the owner more readily identify information buyers are interested in. Consider the questions a potential buyer might ask. This enhances your credibility and minimizes potential surprises that could lead a buyer to try to renegotiate a deal or walk away altogether.

How can advisers help you get a better deal for your business?

Owners often try to sell their business by themselves. After all, you know your company better than anyone. However, you may not understand how to fairly value your company, how to market it, how to negotiate legal documents, tax implications or how to manage the proceeds. There are many complexities in mergers and acquisitions that, if not handled properly, can lead to unfortunate results. Assemble a team of professionals who can guide you through the process. Experienced investment bankers, accountants, M&A attorneys and financial advisers can help navigate the transaction. When you have a strong team of advisers, they can interact with potential buyers and present the best picture of your company. They can also work through issues and mitigate risks, all of which can lead to a successful transaction closing. When owners contemplate a business sale, many envision selling their entire interest to a third party. This traditional type of sale, however, may not always be possible or in your best interest. Advisers can help develop alternatives that provide flexibility to better meet your needs.

What are some common concerns that come up in a negotiation?

In a purchase agreement, an owner makes representations and warranties regarding various facets of the business. Representations often include statements regarding financial information, payment of taxes, conditions of assets, intellectual property and status of contracts. You must be able to confirm the veracity of all representations before signing a definitive agreement. With respect to intellectual property, for example, does the company really own what it purports to? Companies routinely require employees to sign invention, confidentiality and non-compete agreements that assign ownership of intellectual property created by the employee to the company and ensure that employees cannot “set up shop” down the street. Not having effective agreements in place beforehand creates intellectual property risks for a prospective purchaser.

Another example is customer and/or vendor contracts. Are there written contracts in place and are they valid? Many contracts also require consent from the counterparty prior to assignment, or contain provisions allowing a party to cancel or terminate in the event of a change in control of the business of the other party. To avoid altering these relationships, the process of obtaining consents or waivers of the change in control provisions needs to be managed carefully.

While there are many situations that can disrupt a transaction, advisers can help identify issues like these in enough time to rectify the situation and facilitate a smooth closing.

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