Around the Web: A Week in Summary
A recent article from Business Sale Report entitled “Almost a quarter launch businesses with a sale in mind” summarizes the results of a new study which asked nearly 1,000 entrepreneurs about their start-up history and their motivation for launching businesses. The study found that 23% of those starting their own business have their exit as a primary goal, with 83% of those claiming that selling at a profit is their main incentive.
The top 2 answers for why they started their business were that “It was a passion of mine” and “I knew it would eventually sell well and had exit in mind.” All of the study participants said that they wished they had an exact way to know the value of their business and more than half said they had no real way of knowing the value of their business.
If you are starting a business with a main goal of selling the business for profit, it is essential to know your valuation so that you get a fair price.
A recent article posted by WilmingtonBiz Insights entitled “How Does Exit Planning Protect Business Value?” explains the importance of exit planning in retaining and growing business value.
The article gives an example of two similar businesses, both valued at $5 million, who take different strategies towards increasing their companies’ values before selling. The first company invests in more equipment and hiring more employees, but does not work with any advisors besides their CPA at tax time. The second company works with their CPA, an exit planning advisor and a tax specialist. They build a strong management team, cut the owner’s work week in half, and convert the company to an S corporation. They also work with a business broker to buy two smaller competitors which broadens their market.
When the Great Recession of 2008 hits, both companies are affected but in very different ways. The first company has to lay off all the new employees they hired and their new equipment sits unused. They end up selling their business for less than what it was valued at. The second company has minimal layoffs and has extra money saved from strategic tax planning. Their business is valued at $15 million because of the two businesses they bought, and they are able to exit their business with $10 million profit. No matter what unforeseen circumstances may occur, the right planning can make a huge difference.
A recent article posted on Divestopedia entitled “What Is a Letter of Intent and Why Do You Need One?” explains the importance of having a letter of intent before you sell your company. A letter of intent is a non-binding document that is essentially a preliminary agreement between a buyer and seller, outlining key business terms which will later become part of the Definitive Purchase Agreement and other documents used in the sale of the business. The letter of intent should contain major deal points, deliverables, timelines and contingencies.
The LOI minimizes the waste of time and money by both parties involved because if they cannot agree on the terms and conditions in the letter, then there is little chance that they will come to agreements when negotiating other aspects of the deal. The LOI should address three main factors: the parties to and type of transaction, employment, and transaction contingencies and conditions.
Having a letter of intent and following this process helps to increase the probability of a successful sale and decrease the likelihood of misunderstandings and renegotiations between the parties.