This blog serves as a follow up to my blog posted earlier this year entitled “Prepare to Sell Your Business” and identifies a few more areas that a business owner should pay attention to prior to marketing his or her business for sale. You can find Part One here.
- Sort out the Real Property: If the properties your business operates out of are leased, make sure you pull the leases to review the lease terms. If a term will be ending soon, or the lease has become a month-to-month lease, and the location is integral or important to the nature of your business, consider negotiating an extension or entering into a new lease. Having a lease with a long term in a valuable location will likely catch the attention of prospective buyers, who will not have to risk going through the potentially lengthy process of negotiating a lease extension or new lease themselves on a tight deadline before a closing. During extension negotiations, you also may be able to loosen the typical “no assignment” provision in the lease to allow you to assign the lease freely to anyone who buys your business. If the properties your business operates out of are owned by you, consider whether you would like to retain ownership of the real property upon a sale of the business and lease the real property back to the new business owner, or whether the real property must be included in the sale. Keep in mind that some buyers may be reluctant to lock themselves into a location through a purchase. Regardless, it’s often a good idea to place the real property in a separate, single-purpose LLC to keep liability from the property separate from the business or the individual owner.
- Identify Key Employees (Part 2): In Part 1, I mentioned that it might be a good idea to try to incentivize key employees to stick around if a prospective sale of the business is looming. Conversely, it may also be a good idea to identify key employees for the purpose of having them execute restrictive covenants that would limit their ability to compete with the business or hire the business’s employees if those key employees decide to venture off on their own. An additional competitor in the marketplace (and one of your own making, no less) may drive the value of your business down, to say nothing of the loss of expertise or capacity of the departing employee. Be sure to have a lawyer in the state in which you operate draft any restrictive covenants, as they are prone to being overly broad and unenforceable.
- Accounting / Tax Considerations: You should seek the advice of a CPA / tax counsel prior to negotiating or entering into a contract for the sale of your business. For one, experienced CPAs are often capable of identifying problem areas in your record-keeping that are easily fixed and that will yield a higher purchase price from a buyer. Because most business valuations are based on a multiple of earnings, every additional amount of earnings you are able to show through simple improvements to your accounting methods can produce significant results. Even something as simple as changing the way you record receivables may increase the value of your business. Trained experts will also be able to help identify expenses in your business that are unique to your ownership of the business and therefore should be removed from any valuation based on earnings. Additionally, by seeking appropriate advice early, you may also have time to structure your business and your ownership of the business in a way that maximizes your tax advantage in the event of a sale of your business.
The points listed in this post represent only a few additional points you should be concerned with prior to the sale of your business. There may be more or less depending on the nature of your operations. If you have questions about this post, or are thinking about selling your business, please feel free to reach out to me directly for assistance.
Ruari O’Sullivan takes the proactive approach. In working with business owners, he anticipates their issues and puts structures in place to protect their interests.