How to maximize the value of your business when selling – Part 1
Editor’s Note: This blog is the first in a two-part series about legal issues that can impact the sales price of your business.
By Carrington, Coleman, Sloman & Blumenthal, LLP
Congratulations! Someone wants to buy your business. It seems like a straight-forward transaction, and you want to keep legal fees down. So, how can you maximize the company’s value?
The sale of your business is a process that requires forethought and planning with a clear focus on the end goal and an understanding of the steps needed to get there. In order to get the highest purchase price for your business and to navigate the selling process effectively and efficiently, business owners should engage qualified attorneys and financial advisors early in the sale process, preferably before marketing it for sale.
In the first of a two-part series on maximizing value, we’ll look at a few things to consider:
Start with the end in mind. The sale of a business starts long before a prospective offer is entertained. Entrepreneurs who engage counsel upon launching a new venture and who consistently consult their attorneys on contractual and corporate governance matters will be in a better position to sell their company five or 10 years down the road. Similarly, business owners who engage in exit and succession planning early in a business’s lifespan will have lower costs and fewer issues to address when it comes to estate planning and estate administration.
Understand your options. There are various business, financial and legal issues to consider when choosing a transaction structure, all of which can impact the seller’s earnings and tax consequences. Many business owners think their only exit option is to sell their entire business to a third party. In fact, there are multiple options. For example, in addition to selling all of the stock or assets of a business, business owners can sell a majority stake in the company and retain a minority interest, gift or sell a portion of the business to key employees, or retain the intellectual property and license it to the new owner to secure future revenue.
Assess business and personal goals. Business owners should assess their primary business and personal goals prior to signing a letter of intent, to ensure the structure proposed by the buyer will achieve their objectives. This is your opportunity to assess your current and future financial needs and those of your family. Are you planning to retire or start a new venture with the sale proceeds? Are you willing to provide consulting services to the company, or do you want a clean break? Do you want to give a portion of the purchase proceeds to key employees or require the buyer to compensate them at or above their current levels? Do you want to sell the real estate or retain it and enter into a lease with the new owner? Do you have intellectual property or other assets you want to continue using?
Minimize tax obligations. How the transaction is structured and how the sale proceeds are allocated will play a central role in determining the seller’s tax liability. There are numerous strategies to reduce the seller’s tax liability and protect sale proceeds, but each requires careful planning well in advance of signing a definitive purchase agreement. Business owners should consult tax counsel and estate planning counsel at least 60 days prior to signing a letter of intent.
Get everything ready for the final purchase agreement. Generally the bulk of due diligence is completed once a letter of intent is signed. The prospective buyer will conduct a comprehensive assessment of the target business and its assets and liabilities. The buyer’s attorneys and financial advisors will request documents relating to all aspects of the business, including the company’s financial statements, tax returns, equipment and inventory records, employee benefit plans, real estate leases, loan documents, and contracts necessary for the operation of the business. The process is designed to expose all risks associated with the business, which the parties can then assume or delegate in the purchase agreement.
Read more tips on how to maximize the value of your company when selling in Part 2, an upcoming blog post on this topic.
Bret A. Madole is a partner in the Dallas office of Carrington Coleman and chairs the corporate, mergers and acquisitions, corporate finance and banking practice groups at Carrington Coleman. He can be reached at 214.855.3034 or firstname.lastname@example.org. This blog does not contain legal advice, nor does it create an attorney-client relationship.