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Thursday, Mar 30, 2023

Smooth Selling

Selling a business is a complex undertaking that requires patience and careful planning to maximize your company’s market value.

One of the first steps owners should consider taking is “an internal exam” to make sure they are emotionally prepared for a sale, said Paul Johnson, partner for the regional law firm of Procopio, Cory, Hargreaves & Savitch LLP and co-chair of its mergers and acquisitions practice group.

“If you have been the principal owner of an organization for any number of years and you want to sell your business, you have to be ready for a change in how you are viewed,” Johnson said. “A friend of mine said you have to go from everyone laughing at your jokes to being third in line at Starbucks. Now you are no longer the boss. It really is a lifestyle change.”

Lawyer David Boatwright, co-chair of mergers and acquisitions and strategic joint ventures and one of Johnson’s colleagues at Procopio, said it is very difficult to run the business while involved in the sales process.

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The process requires stepping back from day-to-day operations to look closely at the internal operations of the business, the two said.

Steps to be taken include making sure contracts with customers are signed and that employees have signed nondisclosure documents.

“When an acquirer walks in, he’ll have 20- to 50-page document asking about everything that could possibly be wrong with your business,” Johnson said. “They’re going to expect straight answers about what is wrong.”

Johnson said it is best to have a lawyer review company documents and recordkeeping to eliminate surprises.

“Take care of things first,” he said, such as having audited financials prepared. “It’s important to organize your operations and records so a new owner can easily take over.”

Fully Consider Terms

Boatwright, who has taken part in sales, mergers and acquisitions, and strategic joint ventures ranging in value from a few million dollars to over $1 billion, said some owners decide to sell too quickly, without fully considering the terms of the sale.

“Our worst nightmare is when a client walks in with a signed letter of intent and asks you to review it quickly to see if there are any major problems with it,” he said. “The great clients, when they are thinking about selling, call you up and ask you: ‘What should I be thinking about? What should I be doing?’”

Matt Bradvica, a tax partner in the San Diego office of accounting firm

McGladrey LLP, said sellers should market their companies strategically to buyers who are likely to pay the most.

“Don’t sell your company to the first guy who approaches you,” Bradvica said. “This is your most valuable asset, in most cases. Get as many interested buyers as you can.”

Put Your House in Order

Before businesses contemplate sales, it’s very important that they diversify their client bases, said Wade Hansen, CEO of Cabrillo Advisors, a business valuation firm. The idea is to ensure the bulk of your business is not concentrated with a few clients. A company with a diversified client base is viewed as less risky to buy.

As you get ready for a sale, make sure you have solid accounting records available for at least the past two years. It’s also important not to make significant operational changes that could impact the performance of your business at a time when the company is being watched by potential buyers.

One of the challenges business owners face is keeping their minds on their company’s operations while they court potential buyers, Boatwright said. It’s important to keep your management team focused on running the business rather than getting deeply involved in the details of a sale.

Another important task for sellers is to keep the news of a possible sale private until they are ready to make the announcement.

“You don’t want a lot of people in the company to think they are being sold,” he said. “They may look for work elsewhere. It’s important not to create the appearance of a sale taking place until it’s ready to happen.”

Bradvica agrees. If key employees think you are planning a change in ownership, they may leave for other jobs, which could devalue your business.

“It really can cause a toxic environment.” Bradvica said.

Timing Is Important

Boatwright said business owners should keep an open mind when preparing for sales. After you’ve weighed all your options, you may decide that it’s not the right time for you to let go of your business.

“Timing always is important,” he said. “You don’t want to sell when there are bad economic times, if you can avoid it. Ideally, you want to sell when your company has really very positive earnings trends. It has been a very uneven transactional market since 2008.”

He said 2007 was “an off-the-charts good year” for selling businesses and that “we have not come close to those levels.”

Johnson said things are improving, however.

“I have seen a slight uptick in businesses being bought and sold,” he said. “That means people are confident about the economy. Things are getting done. Investments are being made. It’s not at the point yet where I would say it’s a frothy market where people are bidding up companies.”

Tom York contributed to this article.


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