Selling a Private Company: Everything You Need To Know
If you are selling your private company, there are many things to consider when making this important decision.3 min read
If you are selling your private company, there are many things to consider when making this important decision. Business owners, especially those with a family business, struggle with this difficult choice. The decision may end up being one of the biggest in a person's lifetime, both personally and financially. It is important that owners, employees, and family members know what to expect when a private company is sold.
There are steps leading up to the sale to ensure that you, your business, and everyone involved go through the transition smoothly from start to finish.
Some important points to consider if you are thinking of selling a private company:
- Make sure everything is automated, streamlined, and documented. Keep in mind that when you sell the company, you will no longer be available. It needs to run smoothly without you.
- Create a strong management team to help keep your business successful in your absence.
- Look to increase value of your business, whether that is increasing the profitability, reducing expenses, or just reallocating funds to achieve the best return on investment.
- Clean up the balance sheet and take a close look at business assets and whether same are needed for the operation of the business.
- Having a capable CFO or controller in place will help to create and implement strong financial controls. Buyers love to see accurate financials and reporting.
- Step back and look at cash flow, profitability, and business operations from an objective standpoint to pinpoint any trouble spots that should be addressed.
- Expand and diversify your customers as much as possible, and avoid too much customer concentration.
- Document the business's growth and your vision for the business.
- Create and share a forecast. Client's want to know the future of the business strategy and finances.
- Manage working capital, which can also free up. A buyer wants to see a "normal" level of working capital when thinking about buying.
- Seek professional help through legal, accounting and tax, legal, and acquisition experts.
In order to sell the company, you need to prove that the company can exist and thrive even when you are gone. If the potential buyer feels that you are so involved with the business that it will fall flat once you are out of the picture, they will likely think twice about buying. It is important to start these preparations early, before the sales process begins, to maximize the effects of any implemented changes.
Most business owners looking to sell a private company will put together a team of advisors to assist with the legal and financial aspects of the sale. This team will likely be different than the professionals used to take care of day to day business needs. The best time to hire advisors is 6 to 12 months before the sales process. These advisors will assist with preparations for a sale.
It is necessary for the owner to make sure that at the least, an experienced tax professional is involved with the transaction as taxes for the sale of a business can be complicated. An important consideration is how the transaction is handled, as a taxable or tax-deferred transaction. A taxable transaction may mean that there will be tax incurred at both the corporate and the shareholder level. Strategies can be incorporated by tax professionals to help reduce the tax burden.
It is important for an owner to consider both personal factors and market factors when deciding when to sell a private company. It would never be recommended to wait until personal situations force a sale or the owner is retiring, as market conditions may not be good at that time. It is best to prepare for a sale 2-3 years before the owner plans on retiring, and monitor the market closely.
Of course, it is also important for the owner to be sure about their decision. Indecisive sellers can hurt the selling process, as buyers are not very confident that the seller won't back out. If the owner plans his or her life after the selling of the business, that can help to create confidence in their decision. It is not uncommon for an owner with no future goals to change their minds about selling the business, and lose a lot of time and money.
If you need help with selling a private company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.