By Wally Kraemer
This is the first of a series of articles to give business owners some background about the process of selling a business.
The first step is to ask yourself questions about whether it's time to sell. For example, do you get great joy in going to work every day and running your company, but would also like the security of having the money that will come to you from selling it? Would you expect to sell your company and continue to run it on behalf of the buyer?
Although I have seen exceptions in my decades of representing sellers, in most instances after the sale, the seller soon becomes unhappy about working for the buyer. Often a seller comes to me after working a few months for the new owner asking, "Can you get me out of my employment agreement?" In short, unless the sale price is good enough that you are willing to risk losing the enjoyment of running your company, it may not the time for you to sell.
On the other hand, if coming to work every day is getting less rewarding and you have or can develop other interests, then it is perhaps the time to think of selling. Let's consider some other practical issues.
TIMING: Over the next few years is the value of business likely to substantially increase or decrease? If you are confident that the value of you're business is likely to increase, your first inclination may be to wait. Instead, you may be able to structure a deal where you receive today's value at the time of sale and additional contingent payments (called an "earn out") if the business meets projections. A later article will discuss the benefits and risks of pricing tied to earn outs.
TAXABLE SALES: Most sales of businesses result in the seller owing substantial taxes to US and state governments. Will you have enough income and assets available after the sale to sustain your current life style? Ask your accountant to estimate what taxes you are likely to incur if you were to sell pursuant to an asset purchase agreement (called an "APA"). Most sales are structured as an APA. Your accountant can help you estimate what you are likely to be paid for your company, reduced by tax costs and other expenses of sale. Take this number and talk with your financial planner about whether, when added to your other assets, what you will receive will be sufficient to sustain your lifestyle. Keep in mind that you can no longer count on investments returning 8% or so per annum-- be realistic!
TAX FREE SALES: It's occasionally possible to structure a sale as a tax free reorganization. Under this arrangement, the seller is paid in the shares of the buyer's company and avoids taxes so long as he or she continues to hold those shares. The downside is that until the time of the sale of the shares, the seller bears the market risk. In my judgment, a tax free reorganization only make sense if the likely buyer is a major public company whose shares are of investment quality.
In summary, bottom line questions for you to ask yourself are :
If the answers are yes, you may be ready to move ahead with selling your company.
Future articles will explore pricing earn outs, asset purchase agreements, and many other issues you'll want to consider.
Wally Kraemer concentrates his practice on representing and advising business entities, and has represented corporate clients in a wide variety of transactions. For more information about him and his practice, click here.