Question: My business is getting to the size (and I’m getting to the age!) where I’m thinking about selling. I know a lot that goes into that, but what are the big things I need to be thinking about?
Answer: There are three pieces of paper that will largely determine how much you get, how much you keep, and how much you enjoy.
- The offer letter: how much you get
The offer letter (often called a letter of intent, or LOI) will largely determine how much you get for the sale of your company. And there is so much that goes into this document.
When you enter a negotiation with a buyer, you’re often dealing with a very experienced negotiator, and they’re often dealing with a rookie (you). You can balance the scales by surrounding yourself with a team of experts who have walked through this process before with other owners like you.
Among the significant stipulations you’ll face in the agreement are:
- What is being bought? Are you selling the company itself or the assets of the company? That will significantly affect how much you pay in taxes, so get your pencil sharp for that one. (Or have a good CPA on speed dial.)
- How long do they expect you to hang around? Many deals obligate you to stay on as an employee for a year or two. They want you there to make sure the transition runs as smoothly as possible.
- How much now and how much later? The price the acquirer agrees to pay isn’t the only important number. The offer letter may put $10,000,000 on the table for your company…but only $1,000,000 up front, with the remainder paid out to you over time (say, three years) if the company proves to be as profitable as they had hoped.
- What can (and will) you do next? Are you thinking of selling your company and using the proceeds to start another one just like it? It’s very likely the acquirer will ask you to sign a “non-compete” agreement, legally preventing you from working for a competitor (even one you start) for a year or two.
- The partnership agreement: how much you keep
The second piece of paper, your partnership agreement, determines how much of the sale price you keep. Do you own everything outright? Or are you in partnership with one or more partners?
I know of one situation where an owner took on a partner with deep pockets. The deep pockets demanded a 51% stake. The owner thought he had no other choice and didn’t think much of giving up 1%, so he signed the partnership agreement.
Things went amazingly well. The business quadrupled in about 18 months.
Then he got the notice that his deep-pocketed partner, the one with 51% ownership (and total control), would exercise their right to buy him out. He confided in me that he probably realized only 10% of the upside he might have gotten if he’d been allowed to stay in.
He felt robbed.
- The income plan: how much you enjoy
The final piece of paper is your income plan. It controls not what you get, or even what you keep. This one determines what you actually enjoy.
Once the dust settles, the deal closes, the taxes are paid, and a big check hits your bank account, you’ll come to a realization – “My paychecks just stopped. How am I going to pay myself?”
Sure, you can leave your money in the bank and spend “just a little” every month. But do you have a plan for making that money last as long as you do? And even if it does, did you give up a huge amount of upside you could have had with a smarter plan?
After running an efficient, profitable business all these years, you don’t want a big financial institution making a lot of money off your money solely because you didn’t have a plan for it.
The time to maximize the potential of your ultimate sale is now, before you begin the sales process.
To recap:
- Know what you want in the offer letter.
- Be clear with any partners about what the ultimate disposition of your company might look like.
- And make an income plan now, so you’ll be ready to enjoy what you took years to build.
Last word…most owners sell a business once in their lives. The buyer across the table has often done it many times. That’s a lopsided negotiation, and it’s why the planning needs to start well before the first offer shows up.
If you’re starting to think about selling your business, give us a call at Argent Advisors (318-251-5858). We’ll help you sort through all three pieces of paper before you sign anything. Walking owners through that transition is some of the most rewarding work we do.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Argent Advisors, Inc. (“Argent”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Argent. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Argent is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Argent’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.argentadvisors.com. Please Note: If you are a Argent client, please remember to contact Argent, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Argent shall continue to rely on the accuracy of information that you have provided. Please Note: IF you are a Argent client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
The information contained in this message is intended only for the personal and confidential use of the recipient(s) named above. If the reader of this message is not the intended recipient or an agent responsible for delivering it to the intended recipient, please notify us immediately, and delete the original message without any review/dissemination thereof. Please Note: There can be no assurance, nor should there be any expectation, that Argent Advisors, Inc. (“Argent”) shall review or act upon any email on the day it is received-please be guided accordingly. Please remember to contact Argent, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services. Argent shall continue to rely on the accuracy of information that you have provided. A copy of our current written disclosure Brochure and Form CRS discussing our advisory services and fees continues to remain available for your review upon request or at www.argentadvisors.com.
