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Selling Your Business Part 2

SELLING YOUR BUSINESS

“When is the right time? How do I do it? 

What will I do after I do it?”

or maybe, “Darn, what a mess you left me!”

PART #2

                            by Gerald Merfish, Silver Fox Advisors

Prelude – This article originally ran in our October 2023 Newsletter, and we have had many requests to rerun the article. This time around it will be run in two parts. Part 1 ran in our March 2025 Newsletter Edition, and this Part 2 is running in this April 2025 Edition.

What is the process to sell my company?

There are numerous ways to sell your company, and these are often determined by the company’s value.  The answer to this question substantially depends on the size of the company’s EBITDA, ROACE and the company’s business sector.  The setting up of something like an auction of the company will usually result in the highest price on the best terms.  Of course, a seller needs to be very sensitive to the buyer’s ability and reputation to consummate the transaction.  A high price on acceptable terms will not be realized if the buyer is incapable of consummating the transaction. 

$2,000,000 Minimum EBITDA

Companies of this size count Private Equity, Family Offices, Strategic Buyers, and even current management as potential buyers.  For companies of this size, an Investment Banking firm (IB) might be the best choice.  The IB will help develop the sales strategy which usually includes sending out a tickler to perhaps hundreds of entities they think might be buyers.  The tickler describes the company but does not name the company.  Interested parties reply with interest based on the tickler. The IB will then have the interested parties sign an NDA agreement that not only requires the interested parties not to divulge any information sent to them but also restricts the interested parties from hiring any of the selling company’s key employees.  The IB will develop a Confidential Information Memorandum (CIM) or Offering Memorandum (OM) that will identify the selling company and provide the base investment thesis—the CIM will often be as long as 30 pages. 

The company will need to prepare themselves for the sale by asking the IB if the company needs to have their financial statements audited and, if so, by what size CPA firm.  The IB might also suggest a Quality of Earnings (QoE) be prepared.  For a QoE, a CPA firm that is not usually the financial statement auditing entity will do an examination of the Income statement and share their insights as to its reliability.  The QoE will also generate an adjusted EBITDA, removing any special circumstances.  As an example, the owner of one of my client companies chooses to pay the COO in salary and bonus, 50% of the net earnings of the company, so upon a sale the COO compensation would be adjusted to market, and the difference counted as an add back to the adjusted EBITDA.  There are numerous other EBITDA adjustments that the QoE might discover.  A few other possible adjustments might include travel that is not really business-based, use of vehicles, family members on the payroll that are not necessary for the business, and higher payroll than required paid to employed family members.

The selling company may choose to commission a sales study so they can have some input into the sales study report.  Often if a reputable company performs the sales report, the buyer will agree to use the one commissioned by the selling company.

The IB will set a deadline for all interested parties to advise them of their proposed purchase price, terms, and how they plan to fund the purchase.  The IB will then make a recommendation to the owner and begin to work with the bidders to firm up their offers and encourage the bidders to increase their bidding price.

Once a bidder has been chosen as the likely buyer, documents will be prepared, and the buyer will begin to dig deeper into the affairs of the company during due diligence.  The cost of selling a business of this size is not inexpensive and often the IB will want a minimum fee regardless of the sales price.

 $1,000,000 to $2,000,000 EBITDA

In this range, the seller may choose a business broker to sell their company or a Silver Fox Advisor.  The process is not dis-similar to the higher EBITDA process described above, however, to hold down costs the process will be less intense and fewer studies will be commissioned.  Business brokers may charge fees for this size company from 7% to 10% of the final selling price.  The cost to sell a business will always be less if the seller can identify the buyer—maybe it is a key employee, or a relative or a friend.  This is true no matter what the value of the business is, and this can result in substantial savings in the costs of selling.  If the seller can identify the buyer, they can hire a member of the Silver Fox Advisors to help them through the sale at a much lower cost than a business broker.

Less than $1,000,000 EBITDA

Once again, a business broker or a Silver Fox Advisor might be chosen to help sell the company.  As the EBITDA declines, the percentage charged by the business broker increases while a Silver Fox Advisor might be charging by the hour or a flat fee.  A fee of 10% to 15% of the selling price might be charged. 

How will the sale be structured?

There are two approaches to a sale.  One is a stock transaction and the other is a sale of the assets. Certainly, an acceptable selling price is important, however another consideration of the seller is to minimize income taxes associated with the sale.  The seller seeks to take advantage of the Long-Term Capital Gains (LTCG) tax rate which is between 15% and 20% depending on one’s total income in the transaction year.  The buyer will likely prefer an asset purchase as they can then reset the asset values and benefit from tax deductible depreciation of those assets.  An asset sale could result in the tax rate being ordinary income, which can be taxed at as high as 37%.   Although some industries do not qualify, one option is to do a Section 338 (h) (10) election whereby the seller is taxed based on LTCG while the buyer can gain the ability to reset the value of the assets to achieve some tax shelter in the future as the assets are depreciated.

Another possibility is an Employee Stock Ownership Plan (ESOP).   ESOPs can be quite attractive as they allow employees of the company to own all or some of the company.  An ESOP can have some unique and substantial tax advantages.  ESOPs can be challenging to manage, and many employees will become aware of financial information they might not be adequately prepared to comprehend.

How will I be paid when I sell my company?

There are many options as to how a seller is paid that are negotiated during the sale process.  These options include in full in cash, part cash and/or part over time with interest when the seller is willing to help finance the sale, part cash and/or part seller retention of a percentage of their ownership, part cash and/or the seller receives stock in the buyer’s company, to name a few of the most common.    How a seller is paid may influence the price—for example, when a seller retains part of the company or accepts stock in the acquiring company, this is a plus to the buyer as the buyer has less cash to pay at closing, possibly resulting in a higher price versus if the transaction is all cash. 

What else might be required of the seller?

A seller can expect to be required to offer a set of representations and warranties, plus be willing to indemnify the buyer as to any unknown liabilities.  These are very common, and from my perspective, very fair.  The seller had the benefit of what occurred before the sale and therefore they should be responsible for any liabilities that occurred before the sale but were not accounted for during the sale process.  An example of how this may apply would likely include if the IRS did an audit on a period before the sale and found an irregularity.  The fine and the payment of the extra taxes should be the responsibility of the seller.

Recommendation & Summary

If a sale of your company is envisioned at some time in the future, it is never detrimental to begin managing the company in ready to be sold manner.  This way, when the right time comes to sell the business, one can not only save time, but they will also be set up to take advantage of the best timing.  Preparing your business to be sold, even before you are ready to go to market, can shorten the sale process by as many as 6 months.

Silver Fox Advisors includes several experienced business leaders that can help prepare the business for sale as well as a few Certified Exit Planning Advisors.  The Advisor can also counsel the seller on the process and act as a confidential sounding board during the process. 

Silver Fox Advisors includes members that have sold their companies, including some who have bought and sold multiple companies.  There are also members of Silver Fox Advisors that have experience successfully marketing companies for sale with fees lower than traditional business brokers.    One member of Silver Fox Advisors is extremely well versed on ESOPs as that person has been involved in over a dozen ESOP transactions.

One can find a snapshot of the business experience of individual Silver Fox Advisors at  www.silverfox.org