Selling Your Business: Getting from Here to There

Legal Corner logoLegal expert and NARI member Bryant H. Byrnes, Esq. continues his column on tips and techniques to prepare your business for sale at retirement.

In my last article, I discussed the need to have a viable business to place on the market for sale.

Shining It Up. Like the sale of a home, first impressions are critical. I have heard that when selling a house, $5,000 spent in interior cosmetic improvements and landscaping before it goes on the market will sometimes net $50,000 additional value on the sale.

I think the same thing applies to the sale of a business. This point was driven    home by a recent conference held at a contractor’s shop. What a dump! It could have been a movie set showing a failing business. I was waiting for Willy Loman from “The Death of a Salesman” to show up at any moment.

116593,1205925955,1The cleanup of the physical appearance of a business should not just be the actual physical plant, but also include the employees. That could include a grooming/appearance code and having company shirts.

Allow me another example of what doesn’t impress. Across the street from my office, a restaurant is being renovated. The contractor’s crew looks like they are straight out of a homeless shelter. I have heard several people say that having seen the kind of persons doing the repair; they will not patronize the place.

Records. Any clean-up includes the company records. Of course, the potential purchaser is going to want to see the books of the business. That means that the books not only must be accessible but in good order so they are legible to the prospective buyer.

And I think it goes without saying you would want a confidentiality agreement signed by whoever is engaged in the inspection of your records. These agreements are what they sound like and are standard fare.

Who is the Buyer? I am assuming that the majority of the businesses for sale will be corporations – although there will also be a number of sole proprietorships and perhaps even partnerships. The three groups that are most likely wish to purchase the business are an outside party, key employees, or all of the employees.

The Outside Party. While I have seen many such purchases work out well, I have also seen several that have been just absolute train-wrecks. Many of the businesses being sold are small – thus the personality of the owner(s) is key. The sale to an outsider that seems to work best has a buyer who not only is familiar with the business but also has the personality and a business model somewhat close to the existing company. The sales that did not work out well were situations where it was clear early in the process that the outside buyer was not a good fit for either the company or the client base.

One important question in all sales of a business is whether you stay on as an employee or consultant during a period of transition. On the whole, this often seems to be a requirement – and from what I have seen, it seems to work relatively well.

All Employees as Buyers/ESPP/ESOP. There are some sales where the company is sold to all of the employees.   (While this certainly sounds splendidly progressive, I am uncertain how ultimately successful they have been.)

An employee stock purchase plan (ESPP) is a means of how employees can purchase the corporation’s stock, sometimes at a discount – generally through payroll deductions. See http://thefinancebuff.com/employee-stock-purchase-plan-espp-is.html for more specific information.

An employee stock ownership plan (ESOP) is a method that provides a company‘s workforce with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at no up-front cost to the employees. ESOP shares, however, are part of employees’ remuneration for work performed. See http://www.esop.org/.

  • 98636,1202646465,1The Difference? ESPPs are plans where employees can purchase shares of an incorporated business. ESOPs are plans where employees can earn shares.

Key Employee(s) As Buyer . This is the model I have seen work most successfully. It has the obvious advantage of transferring the business on to somebody who knows the business, knows the employees, and knows the clients. The amount of disruption during the transfer seems to be the least with this as a condition of the sale.

Timing. Is there really a good time to sell the company? Objectively, of course. But one cannot time these things perfectly, just as one cannot time the perfect point to buy stocks.

There is also the issue of subjective timing. By that, I mean are you the seller ready to do something else with your life once the sale is complete? Do you have hobbies? Do you have groups you belong to/participate in? Do you have grandchildren? Surprisingly (or perhaps not), this is a big consideration. I know some people that have not retired simply because they don’t have any real outside interests and don’t know how they are going to spend their free time after.

Bryant crop 2(587x640)Bryant H. Byrnes, Esq. practices construction law in the San Francisco Bay Area and is counsel to the San Francisco Bay Area NARI Board of Directors. He can be reached at Bryant@bryantbyrnes.com. You can also read additional articles by him on the SFBA NARI website, http://www.sfbnari.org. “For the Trade.”

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