Selling a company can be desirable for entrepreneurs, startup founders, and long-time small business owners. The sale of a company can offer a fresh start, a pathway for new opportunities, or open the door to retirement and leisure. However, getting from a pipe dream to money in your bank might not be simple - even with high levels of an organization and never-ending due diligence.
Do you have questions like "How do I sell my business in Denver for the best price?" If you’ve never sold a business before, the preparation, and the process for selling a business itself, can be unfamiliar.
This blog post will explore how to sell a business in Colorado. If you are looking to sell now, soon, or in the future, Denver corporate business lawyers at Sequoia Legal can help you navigate the process. We can help position your company for the highest price sale, whether you are selling a small business to a direct competitor, a big company, or a group of investors.
1. Clean Up Your Financial Records and Legal Issues
The best way to sell a business is to start the process organized. As Colorado business lawyers, we have seen time and time again how accurate financial /accounting records and resolution of legal matters are two of the biggest factors in improving valuation:
- Financial Records: If you are selling a business, you must be able to provide potential buyers with a clear snapshot of your business’s financial situation. Your best strategy for preparing for sale is transparency. A buyer that feels like they can trust you will be more likely to want to finalize a business deal with you. Transparency in a business deal is closely linked to trust between parties.
- Legal Issues: If you have pending litigation or ongoing legal issues, these must be dealt with if you want to get the best price for your business. While you still will need to disclose the matter to your buyer, a resolution is much easier to accept than a looming potential judgment or settlement. Known future legal actions against a business are a risk factor that potential buyers cannot ignore.
Business valuation is a unique skill set. An experienced Colorado business lawyer can help you prepare your company for valuation and sale, and achieve the best possible outcome and price for your next chapter.
2. Determine the Value of Your Company
There are numerous formulas for valuing a business and investors understandably place a strong focus on a company’s ability to generate earnings. For example, a small business buyer will want to know if the current cash flow will allow them to pay themselves a desirable salary and also a return on investment?
Tools used to value a business can vary widely depending on the industry, the company’s capital structure, and the industry. A company’s value can generally be established through three methods - easily remembered by the AIM acronym:
- A - Asset Method: Simple math of calculating the difference between business assets and liabilities. This is sometimes called “book value.”
- I - Income Method: A more complicated mathematical formula using forecasted financial data adjusted for growth rates, taxes, cost structure, and other metrics, which are then discounted to a present value.
- M - Market Method: Most similar to real estate appraisals, this looks at what similar companies in size and revenue have sold for, and also the demand for the business. If you have multiple buyers that want your business, you may be able to sell it for a significantly higher price.
Whichever method you use, you should also have finance and business metrics and analytics that support your valuation, including customer acquisition costs (CAC), Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), and burn rate.
3. Prepare Your Exit Strategy in Advance
If you are preparing to sell a business in Colorado, the more time you have to prepare, the better. Preferably, preparations for eventual sale began the day you started your business. Business owners can’t assume that a dream buyer will magically appear, or that value creation will happen spontaneously when a prospect is interested.
Whether or not you have to solicit buyers, get the best value for your sale, focus on establishing value as your company grows. Opportunities may vary based on location and industry. In some industries, improvements in technology and automation may eventually render your company obsolete, which may give you a limited window of time to sell your business.
4. Increase Your Sales
If you have a hope or a plan to sell your business in the future, growing your business can boost its valuation at the time of sale. Taking on more clients, customers, or contracts, can be counterintuitive in situations where someone wants to retire and wind down business operations, or shift their efforts to other ventures.
Your plan to sell eventually or imminently may mean making calculated decisions based on available opportunities. Planning ahead and understanding the market can have an impact on your sales price. Successful business owners are deliberate and strategic, not reactive or impulsive.
5. Pre-Qualify Your Buyers
Did you know that as many as 90% of responses to a business advertisement may be from unqualified buyers? Before you even list your business for sale, consider your pre-screening / pre-qualification process. There are multiple reasons to pre-qualify your buyers:
- Your time is valuable and you don’t want to waste it.
- You will have to disclose financial records and confidential data before the sale is complete.
- You will eventually be handing over your existing clients to this buyer
- You may be continuing to work at this company, depending on the terms of the sale.
As advocates for business owners, we recommend having a lawyer or other third-party screen buyers for you. An attorney who prescreens buyers before you enter negotiations can make the process to sell your business in Colorado much smoother.
6. Get Contracts and Lawyers Involved
Your business sale will involve some legal contracts depending on the nature of the deal. If the sale of your business is complex, the contracts associated with them will also be complex. Having an experienced corporate business lawyer in Colorado and other professionals review your contracts is critical to protect your legal interests and draft a contract that protects you. Your sales contract will need to disclose:
- Assets and Liabilities Included In the Sale: Your contract will disclose real estate property, lease contracts, office equipment, vehicles, and intellectual property. What loans and financial obligations is the new buyer taking on?
- Conditions of the Sale: A sales contract should disclose limitations or restraints on the buyers’ operations. Does the buyer need to acquire licenses or permissions to run the business? Does the seller need to be involved in any aspect of operations following the sale?
Many people are surprised to learn that oral contracts are enforceable in Colorado. However, when pressed, it is much easier to prove a written contract, which makes written contracts much more secure. Because of this, it is an industry best practice to put contracts in writing and put all communications in writing.
7. Keep Emotions Out of The Deal
It’s easy to take questions about how you run your business personally. If you are selling your business to a competitor or someone that you know, emotions can run even higher. During negotiations, inspections, and other stressful moments in the sales process, emotions may flare-up in the form of reactive statements or rude responses. Reduce the stress of emotions in a business deal in the following ways:
- Focus on numbers: Look at analytics and metrics and let your business’s numbers speak for themselves.
- Don’t escalate: Your first instinct reaction may not be one you want to share. If you receive a text, email, or other communication that you react negatively, step away for an hour or two before you draft a response. Have a neutral third party (or your attorney) review your draft response.
- Remember your end goal: Keeping your desired result in mind can make it easier to control emotional reactions during negotiations.
After you’ve put so much proverbial (or literal) "blood, sweat, and tears" into starting and running a business, it’s understandable that you may have a lot of emotions about the decision to sell. Walking away from your business is a major life event. If the sale of your business feels heavy for you, for your own well-being, have a plan to process emotions from your sale separately. A life coach or therapist can be beneficial during this major transition.
8. Know What Is Going to Happen with Your Employees
M&A activities can have complex HR effects. As an entrepreneur, you may have built deep relationships with your senior employees and want to give them the opportunity to stay on board after the deal is over. This may or may not be possible. If your business will continue operating normally after the sale, there may be relatively little upheaval for employees. However, if your sale is an asset sale, you may be tasked with terminating your employee and handling termination and severance prior to changing hands. This can be extremely stressful.
9. Timing Matters
Timing the sale of a business is critical - and sellers understandably want to sell when the market is hot. However, other factors involved, such as family or personal reasons, may trump holding out for the best timing.
Mergers and acquisitions go through cycles of expansion and recession along with the stock market. It will be harder to find a buyer for your business when layoffs are high and the stock market is down.
Once you have a buyer, a business sale has some parallels to a much-desired pregnancy - it is exciting but uncertain, especially in the early stages. There is hesitation to share the news. And there is the risk that even when it feels certain, something can go wrong. It is advisable to share information with clients and others in the industry on a need-to-know basis only once the deal is certain.
10. How You Sell Matters
It is critical to understand the federal and state tax implications of the sale of your business. Talking to a business lawyer, tax attorney, or CPA, ahead of negotiations can allow you to prepare a strategy prior to negotiations. Your business sale can go several different ways:
- You sell your company’s stock
- You sell your company’s assets
- Your company merges with another entity.
The method in which you sell your company can have capital gains implications. Entrepreneurs must consider the impact of taxes as they may be significant and impact how to sell a company. If your business is a C corporation, an asset sale can trigger double taxation. S-corporations are pass-through entities and do not have entity-level tax.
Selling a Business? Denver Business Attorneys Can Help Streamline the Process and Maximize Your Company’s Value
Need an exit strategy advisor or looking for advice on how to sell a business in Colorado? If you’d like more information about selling a business in Colorado, Sequoia Legal is here to provide information, resources, and professional representation. Call us at (303) 529-6738 or contact our Colorado corporate law firm online to schedule a free consultation.