Small business owners, listen up…
Do you know what happens to your business if something were to happen to you unexpectedly? If you answered “I don’t know,” you are one of many business owners who gave that response.
Fact is most business owners have no form of succession planning in place. Without a good succession plan, your family or other heirs might be forced to sell the company under duress and be shortchanged on the value of the business you’ve built. If there’s no clear plan in place for who’s in charge of the company, your business might end up directionless and at risk for failure.
Step 1: Prepare your financials. This would include profit and loss statements (P&L), cash flow statements, balance sheets and tax returns. The P&L statements show the results of the operating activities of your business. Having these prepared gives any buyers a good idea of your company’s ability to generate profits. These financials must be recast and consist of any addbacks. When preparing the balance sheet, it is important to keep everything current to determine the working capital in the company.
Step 2: Have your business valued. Having a valuation that is properly prepared and comprehensive can be critical if you were to sell your business. The main purpose of a valuation is to provide you with a fair market value for your business.
Any good business valuation should use several different methodologies for privately held companies. Once the company is properly valued, you should then look into the tax aspects of the sale. This can be done with a Tax Minimization Analysis (TMA). The goal of a TMA is to understand the after-tax net cash perspective. This will show you what you will walk away with when the succession plan is completed. After you receive a valuation of your business along with a TMA, it’s time to start finding someone to assist you in facilitating the sale of your business.
It is very important to retain legal counsel to represent you during the selling process. Along with having strong legal representation, working with a group of accountants/CPAs offers you many advantages as well.
Step 3: Prepare yourself and your team for the selling process. You would first want to obtain an LOI, which is a signed, binding agreement between a buyer and seller. Here, the intention to enter negotiations is laid out, and first-time essential terms are established that will carry over into the purchase agreement. Once the LOI is signed, the due diligence process begins. Note: You must have your team represent you during this process and narrow some of the buyer’s requests. Once the due diligence is completed and the buyers are pleased, you will move on to the purchase agreements. This binding, legal document governs the sale of your business.
These documents should be thoroughly reviewed by your team to determine the fairness/unfairness of the terms. This document should reflect how the deal is structured, so it is critical that it is properly drafted. For business owners, it may be difficult to let go of a business that you built on hard work and determination. Unfortunately, we cannot live forever and must have a succession plan in place for our business to be in good hands when the time comes.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. Ian C. Perry, an accountant with the firm, contributed to this article.
