Valuing Your Business: Strategies to Maximize the Sale Price

Entrepreneurs mulling over the sale of their businesses may find themselves overwhelmed by emotions associated with the loss of an entity they may have built from scratch, as well as by questions related to such matters as advance planning, preliminary negotiations, the sale process itself, terms of sale and even alternatives to selling. In addition to being a highly emotional undertaking, selling a business can be time-consuming and complicated.

The book, Valuing Your Business: Strategies to Maximize the Sale Price by Frederick D. Lipman, takes into account all of these issues, offering valuable guidelines for beginning the process of selling your business. A corporate attorney and former lecturer at the University of Pennsylvania’s renowned Wharton School of Business, Lipman has more than 40 years’ experience in mergers and acquisitions, sales of companies and IPOs (initial public offerings). His book offers proven strategies for managing valuation before selling a business. He carefully takes the reader through the process, outlining the necessary steps within each aspect of the sale that would make the process less arduous.

In Part I, the planning stage, Lipman stresses the importance of first understanding your motives for selling the business. This helps you attract a “harmonious” buyer, one who is right for the business, and avoid “seller’s remorse.” The next step is to assemble a professional team, which should include an attorney who specializes in mergers and acquisitions, a tax attorney, an accountant and an investment banker or business broker.

The chapter “Maximizing the Sale Price” provides the various methods used to determine the value of the business, a function that ultimately should be performed by an appraiser from an investment banker or a business broker with actual experience in selling businesses in your particular industry.

Lipman advises developing a marketing brochure. The most effective way to achieve this, he says, is to put yourself in the place of potential buyers and imagine the characteristics of the business that they would find appealing. He recommends preparing the brochure five years prior to the target date of your sale, a time frame that should allow you the opportunity to identify and eliminate the company’s weaknesses, grow the business and improve its strengths.

Lipman outlines other steps to follow during the planning stage in chapters entitled “Eliminating Deal Killers and Impediments,” such as employment-related and litigation liabilities, or federal, state and local tax liabilities; “Protecting Your Business,” by, say, maintaining confidentiality and closely guarding proprietary information; and “Personal Considerations,” which could include minimizing estate, death and income taxes.

Part II, “Preliminary Negotiations,” discusses due diligence procedures.

Here, Lipman states that while you want to display the best qualities of your company, any defects should not be hidden or neglected. “The buyer must at all times have confidence in your integrity,” he states. This section also discusses how to avoid negotiation traps and preparing letters of intent. Letters of intent should be processed thoughtfully and carefully to avoid any legal ramifications, he notes.

The actual sale process is outlined in Part III, beginning with the most common sale structures: sale of assets, sale of stock, mergers, consolidations and management agreements, licenses, leases and joint ventures. Lipman offers advice on handling your cash flow and taxable income resulting from the sale. Subsequent chapters deal with the options of selling to a public company, selling as a publicly held company, selling to your employees or, depending on the size of your payroll, offering an employee stock ownership plan (ESOP).

In Part IV, “Sale Terms,” Lipman assumes that the seller has covered all of the above areas and is ready to move forward with negotiations. Payment methods discussed in this section include “Deferred Purchase Price Payments: How to Become the Buyer’s Banker” and “Earnouts,” where payment to the seller is based on the performance of the business after the date of closing. The section also covers “Negotiating Employment and Consulting Agreements” and “Avoiding Traps in the Agreement of Sale.”

Lipman concludes with alternatives to selling your business in Part V. The section covers such topics as “Leveraged Recapitalization,” “Going Public” and “Valuing Internet Business.” The appendixes in Part VI contain valuable information on acquisition transactions and numerous sample letters. Scattered through the book are Warning boxes that provide useful information on potential legal traps and loopholes.

Selling your business is an exit strategy and a way to diversify your assets. Currently, however, only one in ten business sales is successful, Lipman says. The procedures outlined in his book are designed to increase that number.

Valuing Your Business: Strategies to Maximize the Sale Price
Author: Frederick D. Lipman
Publisher: John Wiley & Sons, Inc.
Pages: 327
Price: $39.95
ISBN: 0-471-71454-2

Reviewed by Patrice Toombs