San Jose Business Lawyers Blog
Your company, like many companies in Silicon Valley, may suddenly find itself faced with a market window to sell and provide a liquid return for its owners. If you are an entrepreneur or other business owner, you are always on the lookout to reap the value of your business. Before you start planning the next phase of your life, however, you need to plan carefully how you will sell your company.
A company sale is typically a multi-year process, and the sooner you begin the better off you will be when a deal finally arrives. Although exceptions exist, particularly in the roulette world of high technology start-ups, a good rule of thumb is that it will take you between two to four years to sell an operating company. You should plan to begin the process no later than three years before you plan to close. Preferably you should start when you form the company.
Why so early? If you are an owner-operator, you will need to change your focus from maximizing the amount of cash and other compensation you generate from your company, to improving business valuation. A simple mathematical example drives home the point. Many companies are sold on a multiple based on earnings before interest, taxes, depreciation, and amortization (often referred to as “EBITDA”). If your business can be sold for five times EBITDA, that extra dollar in compensation will cost you five dollars in sale price.
Even if you are not an owner-operator, you need to start early to show a smooth history of revenue growth. Managing EBITDA to show constant year-over-year growth can go far in creating a perception of value, and of lower financial risk for the buyer.
Another reason to start early, regardless of whether you are a single owner or work with a number of investors, is that you will likely need to clean up a number of items. Of these, your financial statements are key. It is critical that your financial statements be expressed in generally accepted accounting principles, or GAAP, so that a buyer can compare your business with others and is comfortable that the financials have been prepared using standards acceptable to the accounting profession. Your legal documentation should also be tight. Your basic entity documentation, employment contracts, and materials agreements with key customers and vendors should be complete and fully executed. If you have a technology company, you will need a signed agreement from any person creating technology for your company assigning to the company any technology he or she has created.
Your ability to secure for yourself and your investors value for the company you have built may only occur once. Make sure you are prepared.