What You and Your Partners Need to Consider Before Selling Your Business
When multiple partners own and run a business, getting everyone to agree on day-to-day decisions isn’t always easy. Getting partners to decide when to sell the company and on what terms can be challenging and even confrontational.
To avoid confrontation and ensure all partners’ needs are met in the sale of the company, the partners should openly discuss expectations and develop common ground on the terms of an acceptable sale before embarking on the sale process. Specifically, the partners need to agree that it’s the right time to sell, have a general understanding of what terms will be acceptable (not just price) and the expected succession plan following the sale.
Partners Should Discuss These Key Considerations:
Is it the right time to sell?
There are several factors to consider in determining the best time sell.
Financial Performance:
While every company has good and bad years, buyers want to see steady financial performance, and ideally, revenue and profitability trending up each year for the last three years. If your last year wasn’t as strong as prior years, it may be best to wait on selling the company until you can reestablish consistent financial performance.
Market & Customer Conditions:
The state of your marketplace and the status of your customers should be considered. Buyers want to join a growing marketplace rather than one in decline. Are a significant portion of your sales to only one or two customers? What if one of those customers stops buying from you? If possible, customer concentration should be reduced before going to market.
Management Team:
If the partners are integral to key functions like business development, project management, and office administration, for example, it’s best to have already developed a strong management team who can step up and fill the partners’ roles following the sale.
Partner Status:
Does each partner really want to sell? Depending on age, financial stability, and family considerations, one or more partners may not be ready to give up the business. What does the company’s operating agreement require when selling the business? Can one partner buy out the others? Are the partners all in reasonably good health? Selling when under duress should be avoided, if possible, as it can force one or more partners to take a lower offer than was otherwise expected in better times. In some situations, not all of the partners need to sell or if they do, they could continue to work for several years.
What Are Acceptable Offer Terms?
Partners must consider the likely terms of potential offers and develop specific criteria, or range of criteria, they are willing to accept when presented offers.
Purchase Price & Taxes:
The purchase price isn’t necessarily one lump-sum check issued at closing. The price could be broken into several forms of payment including cash at closing, a sellers note (debt), seller’s equity rollover, or an earnout. How the buyer allocates the purchase price in the sale (ex. to assets, A/R, goodwill) will greatly influence the partners’ tax obligations, especially when the sale includes significant capital equipment. The partners should consult with their tax professional to understand their likely tax obligations on the proceeds of the sale.
Employment & Non-Compete Agreements:
The buyer will likely expect the partners to remain in the business for a transitionary period as well as not engage in any competitive business following the sale. The partners may be compensated for their service to the company. The value of this compensation typically is based on market salaries and could be significantly lower than what each partner currently earns as an owner of the business. The partners should discuss an acceptable level of compensation each must receive to move forward with a buyer’s offer. See #3 below regarding succession plans.
Personal Assets:
The partners may each have a vehicle, insurance policy, or other assets provided by the company. The buyer may or may not want to allow the partners to keep such assets as part of the sale. The partners should discuss what assets they expect to keep following the sale.
Closing Date:
The buyer will propose a closing date in their ‘Letter of Intent (LOI)’. While this date can be negotiated before signing the LOI, all partners must ultimately agree to close on the same date.
What Is Each Partner’s Succession Plan?
The partners should expect to remain with the company for a transitionary period following the sale, especially when they are integral to daily operations. It is unlikely that all partners can leave at the same time if each is integral to the company’s operations. The partners need to develop a reasonable phased timeline for each of their exits that provides the buyer with the greatest level of support and assistance to ensure they are successful.
The Importance of Partner Alignment Before Going to Market
Selling a business is an intense process and will require you and your partners to participate in frank, cooperative discussions and timely decision making throughout the entire process, from initial planning through the closing date. This cooperation and decision making can only occur if the partners are in general agreement on the timing, terms, and succession plan before taking the business to market and engaging with buyers. You may consider retaining an external advisor who can guide you through the planning process and who can facilitate a collaborative discussion among the partners to ensure everyone is on the same page.