What to do If Someone Wants to Buy Your Business
Forbes’ recent article entitled, “What Should You Do When You Receive An Unsolicited Offer For Your Company?” suggests that it’s important to follow a structured three-step process to make certain you make the right decision and get the most successful outcome.
Is it the right time to sell? You need to see if this is the right time to sell your business. Examine your company and your personal readiness. Determine if the business is performing at a high level and is poised for rapid future growth. Look for any unaddressed issues that might harm value. On the personal side, think about whether you know how much you need to receive to fulfill your financial obligations and secure your future. It is also important to make sure that you have done needed tax and estate planning, so that you do not overpay taxes.
Is it the right buyer? If you are still thinking about selling, next determine if this is the right buyer. Think about what they will do with your company after the acquisition, and whether they will retain your staff or combine it with other operations. Will you have an ongoing role? You must also determine if the buyer will pay the best price and whether it is all cash or if you will retain equity in your company or the buyer’s company. You should also ask if there are earn-outs that depend on the future performance. Almost always, you want to be paid cash. In other words, if the purchase has to be financed by the buyer, you want a bank to finance the sale. If you are financing the sale, this is much more risky. You have to make very certain that this is the right buyer, because the value of your business (and your security) will be at stake. You’ll also want to price in a life insurance policy on the life of the new owner (and get the new owner to pay for it as part of the purchase price), plus many other things, including security on the buyer’s other assets (just like a bank would require, since you are the bank).
Do you have a strong advisory team? Smart business owners prefer to use an experienced business transactional attorney, preferably one well versed in tax law. You are going to want to know the full tax impact of the sale. After all, you will have to pay capital gains taxes, and probably taxes on income classified as ordinary income as well. You need to know the net after tax cash flow of the sales price paid (in a lump sum or over time), versus the net after tax cash flow of the business itself. Your tax attorney will work closely with your CPA to determine this after tax cash flow. Also, because the buyer will likely want to do an asset sale for tax purposes (as opposed to a stock sale for tax purposes), you will want to price certain assets as certain values to minimize your taxes. The buyer will want certain concessions to maximize their future depreciation, and thus, their after tax cash flow. It can be a delicate balancing act, and this is no venue for amateurs.
Further, an inexperienced deal lawyer may negotiate hard on terms to “prove value,” which may, in effect, only obstruct the deal. If your attorney does not have the right bedside manner, he or she could make the deal go south. That is, an inexperienced lawyer could make you hold fast on terms the buyer needs to get the deal done. An experienced tax and transactional attorney can also frequently move to a good deal in less time by clearly setting parameters and getting buy-in on early drafts rather than a continuing series of drafts back and forth. Choose wisely.
Reference: Forbes (May 11, 2021) “What Should You Do When You Receive An Unsolicited Offer For Your Company?”