Selling the business to employees or ivnestors is another exit strategy option.  There are Pro's and Con's to this option.  Here is what you need to know.

 

The Pro's and Con's of Selling The Business To Employees

 Pro:

 1.  Less due diligence is required because you already know the employees.

 2.  Employees are also more likely to preserve the things you want in the company.

Con:

 You may have to self finance part of the sale.

The Pro's and Con's of Selling The Business To investors (Acquisition)

 Pro:

 1.  You can make a great deal of money.

 2.  You can be totally free of the business once it is sold.

 3.  Your current investors (Venture Capitalists) will like this option because they get to make good returns on their investment.

 Con:

 1.  May have to sign a non-compete agreement which require that you not start another business in the same industry or sell the same product/service for a certain period of time (1-2 years).

 2.  Tax consequences:  If not properly timed the tax consequences could be big.

 3.  More work involved in finding the right buyer. 

 4.  This process cost more because you have to hire professionals such as Accountants, Lawyers, Brokers, Tax Experts, etc. to do the due diligence in order to sell the business.
Business Valuation
Before you decide to sell the business you have to determine how much the business is worth.  See business valuation.

To Sell Your business You Will Need The Service of The Following Professionals:

Accountant:   Draw up the historical and projected Financial Statement and other data required to place a proper value on your business. Gathers and organizes financial data requested by the buyer during the due diligence phase of negotiations.

Lawyer:   Utilize an attorney who specializes in mergers and acquisitions.

Business broker:  If you decide to list and sell your business on your own you do not need a Broker.  However, a Broker can save you a lot of time and headache by doing the leg work to find and screen buyers for you and walk you through the process.  Many Brokers also provide services such as Valuation and Tax appraisal, etc.

Business Appraiser/Valuation Analysts:  Determines the value of your business and can assist in answering questions during the negotiation process. 

Tax Expert:  Because of the enormous tax bill you may face and the opportunity to overcome tax obstacles you need a Tax Expert.  They can guide you through the IRS obstacles and help you to achieve the best tax savings.

Keep in mind that these professionals work with each other regularly and can recommend to you which ever member of the team you require.

Key Issues You Need To Consider When Selling Your Business

1.  What are your priorities:

Establish your objectives by specifying the end result of the transaction:  the minimum price you are willing to accept;  do you want to cash out completely or are you willing to finance part of the sale; do you want any involvement in the business after the sale; are you willing to sign a non-compete agreement; do you want to new owners to guarantee employment of the employees for a certain period of time; are you selling part of the company or the whole company, etc.

 

2.  When is the best time to sell (timing your decision):  Internal & External factors:

You want to time the sale of your business to gain as much tax advantage as possible, but you also want to time it to the best market conditions.  Consider all the internal and external factors that could influence the timing such as, personnel departure, financial difficulty, changing competitive situation, etc.

 

3.  Legal and Ethical issues:

Be prepared to make full disclosure to the buyer in order to avoid any legal entanglements later on.  Ensure that any partners or co-owners and shareholders fulfill their obligations as well.

 

4.  How can you add value to the business before selling:

 

Improve your Income:  Do whatever it takes to increase revenues.  Find ways to cut cost.  The more you earn the higher you can value the company.  Utilize your Accountant to cleanup the books and recast your financials.

Improve your assets. Sell off or dispose of any unproductive assets or un-sellable inventory.   If they are not productive to you they won't be productive to the buyer and they will not pay for them.  Get rid of them and take whatever tax advantage you can get for them.  You may also want to put in new equipment and get rid of the old ones.  Make some improvements to the facility.  Do some house cleaning.

Clean up potential liabilities. Legal liabilities can turn off potential buyers.  If you have any pending legal liabilities it would idea to get them taken care of before you put the business on sale.  Liabilities could include  product liability claims, employee lawsuits, IRS audits, insurance disputes, environmental problems, etc.

5.  Minority ownership: Minority interest discounts:  If small blocks of stocks are held by the owner's children or employees State Laws protect those holding minority interest and require that they receive their pro rata share of the sales price.  In other words if 10% of the stocks are in the hands of minority owners then 10% of the sales price will go to those stock holders if the whole company is sold.  If a part of the company is sort then the portion of the sales price to goes to minority owners could be discounted between 20 to 40 percent.

6.  The Next Generation:  Think of ways to reduce the estate or capital gains tax burden on your family. One way of doing this may be to give or sell them a minority stake in the company.

7.  Who are you selling to:  Do you want to sell to Employees, Family members, Investors or the public (as in Initial Public Offering).

The Major Steps Involved in The Sale of A Business

1.  The letter of intent: The buyer states his/her intent to guy at a certain price and agrees to confidentiality. 

2.  Due diligence:  This is your opportunity to investigate the buyer to determine if he/she is the right buyer.  This is also an opportunity for the buyer to further investigate your business.  This is done on a specific timeframe.

3.  Purchase agreement:   If both parties are convinced that they are right for each other a formal agreement is drawn up and signed. 

4.  State law requirements: Your legal team will check to ensure that the applicable State's law requirements are being adhered to.  For example, state law may require that creditors be notified and stockholders vote on the transaction, etc.

5.  Closing the deal:  Sign the documents to hand over ownership and make payment.