Selling a Professional Service Business
Selling a professional service business is much more complicated than selling a regular business, in no small part because it often indicates you are ready to retire or move into another venture.
Selling a professional service business is much more complicated than selling a regular business, in no small part because it often indicates you are ready to retire or move into another venture.
Selling a professional service company often comes with a long and drawn-out process. Even with a good exit strategy in place, you will face many hurdles, lots of paperwork, and potential setbacks.
If you are a business owner located in California with a business that generates at least $2 million in gross revenue and is ready to sell within 6 to 12 months, click on the send free inquiry button.
As a Business Broker specializing in selling a professional service company in California, potential clients often ask how my company can maintain confidentiality while selling a business and what security procedures we have to protect our clients. After all, employees, landlords, vendors, and others want to know what’s happening in case any change affects them.
With an incredible number of professional service companies exiting business ownership for retirement, sellers must make their businesses stand out from others on the market. This article will discuss getting the best price for your professional service company.
What is your motivation for selling? Selling a professional service business requires significant time, effort, and emotional commitment. Ask yourself, “Am I positive I want to sell, or am I just thinking about the idea?” Does your spouse support selling now?
A Structured Sale enables the Seller to defer up to 100% of the purchase price in the year it sells. The Seller can defer taxes for a few months and up to several years.
If you have questions or would like more information about a particular Industry Sector, call us today at (916) 570-2674 or click the link on the below to contact us.
When preparing a professional service business for sale, you need to start by thinking like a buyer.
Your business is great, but how would an outsider see it? Imagine you’re buying a company and trying to do your due diligence. What would you look for? What might be a red flag?
If you can adopt this mindset, you can rectify factors that may turn off strategic buyers and prevent setbacks.
One of the first things a strategic Buyer will want to see is your documents. Getting these documents in order can take a while, so it’s best to start gathering and organizing long before you put your business on the market.
Some of the paperwork you will need includes:
This list is by no means exhaustive. You’ll need to prepare more before putting your business on the market. Once you find potential buyers, they may request other types of documentation, especially during due diligence.
Many professional services business owners have trouble delegating tasks and do much of the work themselves. While no one knows your company the way you do, ensuring your staff can continue with most of your business’s functions when you are not there is essential.
Here are some critical tips on selling your business in the professional services industry.
If you know only how to do a large part of the business, you may turn off buyers. Most professional services buyers want a turnkey business, not an investment in which they will spend hours training employees or taking over the bulk of the work. Training your employees ensures that the business can function as you transition out.
Many business owners in the professional services industry have a system of running their business that is entirely in their heads. You know the ins and outs of your business, and you are the one who keeps everything running. While this may work as long as you are with the company, a potential Buyer will want to know what processes are in place.
Therefore, you need to create an operations manual for each process. Please work with your employees to develop this manual by getting everyone to detail what they do. Potential buyers will be impressed with a company ready to go as soon as the change of ownership happens, and your purchase price potential will be more significant. As a bonus, if your employees are trained to do what you do, your business will do just fine, even if you have to be out for an extended period or if an employee leaves your company.
If you have neglected cleaning and organizing your facility, it’s time to get it in order. Go over everything, from machinery to inventory to paperwork. Get rid of anything you do not need and clean up everything else. Paperwork should be organized, and the office should be clean. Depending on what niche you focus on, it may not be possible to get everything perfectly orderly, but make your best attempt (or hire someone to).
If your California business in the professional services industry isn’t following local and federal laws, most buyers will turn away immediately. Read the laws and go through every step of your process to ensure you comply. Also, make sure that all relevant employees understand the law.
Go through your records and ensure everything is up-to-date and completely accurate. A Buyer will undoubtedly do their due diligence, and if it looks like you’re not entirely truthful, they’ll head elsewhere.
Go through your profits and losses records and ensure they align with what’s stated on your tax return. If your records and tax returns do not match, do not try to fix this issue yourself. You will need a CPA to reconcile the two, and you will also need a reasonable explanation for why there was an incongruence in the first place.
A Buyer does not want a business with many unresolved financial transactions. Ensure everything regarding money is current, as no Buyer wants to take on a business with many pre-existing obligations.
If you have any accounts you have not paid, take care of them as quickly as possible. If clients owe you, work to get their accounts current. If you owe anything in taxes, make sure to pay it. Also, check to see if your business has any liens in place. When you hand over your business, your finances should be clear and ready to go.
Once you gather and organize all of your financial documents, it’s a good idea to review everything with your CPA/Tax Advisor. Your CPA can make sure you’re current and tax-compliant, and advise you on any problems that may come up during due diligence.
A CPA can also help you create records that show the true potential of your business. In most cases, the tax records of your business are set up to prevent paying a lot back in taxes. However, once it is time to put your business up for sale, you will want records to show your business’s potential for profits. It is important to let a CPA restructure these records instead of doing it yourself.
Additionally, you need to consider the taxes you will pay after the sale. A CPA can help you go over the terms and help you figure out how much profit you will have left after paying taxes. It is especially important to see how much you will actually get if you are retiring, as you’ll want to ensure you have enough to maintain your current quality of life.
The steps to creating an exit strategy and selling your business in the professional services industry are arduous and complicated. It can take you many hours to get everything in order. If you are still working full-time running your business, you simply may not have the time to do both.
If this situation applies to you, you may want to hire a California-certified service business intermediary. A broker knows exactly what to get your professional service business ready for sale. They can guide you through each step of the process, help you avoid any errors, make your business more attractive to buyers, and ultimately help you get a better price.
Types of Professional Services Companies
There are many California professional service businesses for sale.
The Business Services sector is incredibly varied, and a cornucopia of different businesses falls under the umbrella of Business Services. Are you unsure whether or not your business is considered a service business? Read on as we provide a comprehensive list of Business Services businesses.
Employment Services
Employment services make up most service businesses, driving nearly 40% of the revenue in the category. Employment services break down into three main categories:
At an Employment Services agency, the agency works to place employees from their pool of qualified talent in permanent positions with a customer company or client. Temporary help services serve a similar function, but the workers they place are hired temporarily, typically replacing a long-term employee on leave or during periods of high demand.
PEOs typically contract a customer to provide employees to serve specific functions, most of which relate to human resources.
Preparing a staffing agency for sale is typically one of the more manageable tasks when selling a service business. The evergreen demand for these services and top agencies’ desire to grow through acquisitions make them easier to sell than other business services.
Building Services
Another major category within business services is building services, including landscaping, carpet and upholstery cleaning, janitorial services, and more. These service businesses can be incredibly lucrative, as recurring maintenance or ongoing service is standard among building service companies. However, they can be challenging to sell in California as the business owner may need a specific license to own and operate the business, and some of these licenses take time and experience to qualify.
Waste Management Services
Waste management services include all businesses related to collecting, treating, recycling, or disposing garbage. While it’s common for a waste management company to provide every phase of service, more specialized companies deal with a particular facet of waste management, such as environmental remediation.
A dumpster rental or a recycling business in California is typically a good investment, as lucrative service contracts are standard in this sector.
Security Services
Commercial security companies provide various security-related services, including installing and servicing alarm and monitoring systems. Many companies also provide security personnel and vehicles for on-site security needs.
Travel Agents
Travel Agents are a small and specialized business service, usually retained only by large corporations whose employees travel frequently. Businesses with travel budgets above $1 million will work with a travel arrangement provider who will broker the best deals for travel services and accommodations with airlines, hotels, and rental car agencies.
Professional Services
Another large sector of business services is professional services, which cover a wide range of different businesses. As many other services fall under this category, finding a professional service business for sale is expected.
Professional services include accounting, law offices, IT, consulting, and more. Here are the common types of professional services businesses you’re likely to see in the market:
Again, knowing where your business falls in among these categories can help you coordinate your buying and selling checklist and see the market size of businesses in the services sector.
Most business owners are experts in running their businesses, but that doesn’t make them experts in selling them. Selling a business is a nuanced and challenging process involving carefully considering laws and regulations. The more complex a company is, the more involved the sale process will become.
This is where a business intermediary comes in. Business Brokers work with California companies for sale and provide fully managed service from when you decide to sell your company until the deal is complete.
A business intermediary is also an expert source for complex businesses with tricky valuations. A Business Broker will carefully consider your company’s competitive advantages and intellectual property and ensure that your valuation accounts for what makes your business different.
Buyer Analysis – Qualifying Potential Buyers
Selling a business is unique, and potential buyers can include everyone from your competition to current employees, Private Equity Groups, strategic, synergistic, or corporate investors. Business brokers can work with any combination of potential buyers to deliver a sale that benefits all parties.
One of the many challenges facing business owners when selling their businesses is understanding and qualifying their prospects. Often, owners divulge proprietary information to competitors as a show of good faith, only for the deal to fall through. When negotiating with former or current employees, owners often let their familiarity and fondness for that person cloud their negotiating strategy.
Each potential Buyer brings negotiation challenges, which means challenges when managing California businesses for sale. Business Intermediaries help shield ownership from potential negotiating problems and serve as trusted advisors as they help you sell your business for the best price possible.
Exit Plan
A Business Broker’s first step is developing the business exit strategy for a professional service company. This plan is a framework for navigating the process whenever California Main Street companies are for sale.
First, you will meet with your business intermediary to formulate a marketing strategy. This strategy will detail how you plan to promote the sale, the potential buyers you target, and what you will do to market the business.
Before starting any exit plan, you’ll also need to determine a firm valuation for your business. A qualified Business Broker can accurately approximate its value while setting proper expectations as you move through the sale process.
Once the business is on the market, your Business Broker will market it for sale and begin keeping a shortlist of interested buyers. Once there is a pool of interested parties, ownership, and the intermediary will rank potential buyers and engage with the potential suitors who can provide the best value for your business.
Deal Origination
Once you’ve amassed a pool of potential buyers, the deal origination process begins.
Deal origination, or deal sourcing, is marketing the sale of a professional service business to potential buyers. Qualified brokers with Main Street businesses for sale leverage their network of contacts and use various tools to promote a sale and begin the process of striking a deal.
Often, a broker’s best source of new leads is their cold outreach efforts within their network. Business intermediaries maintain a carefully curated contact list of former and current clients and send regular messages to keep them up to date with the various mid-market businesses they are brokering for sale.
These intermediaries also conduct business from their websites, and a quality website can serve as a dot connector between buyers and sellers. Those in the market to buy or sell a business have no doubt engaged in some due diligence to learn more about the area’s brokers as they search for a suitor that offers a strong fit for their needs.
Brokers also promote sales using M&A deal platforms. These platforms are essentially databases that provide a detailed list of available deals and the relevant information necessary to follow up with the appropriate parties.
With your Business Broker actively marketing your business for sale, it’s a matter of time before qualified offers begin. Your broker will continue to build and leverage relationships as you search for the most lucrative opportunity.
Once the offers are in, you’ll work with your Broker to perform a careful market analysis to determine which offer provides the best opportunity for your business. With the most lucrative opportunity identified, it’s time to begin negotiating the deal.
Negotiating the Deal
As the Buyer and Seller enter the negotiation process, the first step is to draft a Letter Of Intent (LOI) that outlines the points of the deal that are important to the Buyer and to negotiate with the Seller. The LOI protects both parties and clarifies the nature of the agreement (e.g., merger, partnership, sale).
Since an LOI precedes the negotiation process, a Letter Of Intent is almost always written as a non-binding agreement. However, it sets certain expectations and provides necessary protections for both parties. For example, an LOI typically includes a Non-Disclosure Agreement that protects both parties’ privacy as they begin the negotiations.
Once a Letter Of Intent is in place, the Buyer and Seller begin ironing out any sticking points, and the Buyer starts the due diligence process.
Buyer Due Diligence
Due diligence is critical in a financial agreement or any agreement between two parties to ensure the representations are acceptable to all parties.
For the Buyer, due diligence involves thorough research into every aspect of the company they are negotiating to acquire. In mergers and acquisitions, a Broker working on behalf of the Buyer will conduct hard and soft due diligence.
Complex due diligence involves studying a business’s costs, structure, assets, liabilities, and benefits. It consists in examining the hard numbers and legal implications of the sale.
Beyond the numbers behind a company, another less tangible driver of its success is the human capital that propels it forward. Auditing this aspect of the business is known as soft due diligence.
Soft due diligence studies a business’s corporate culture, employee relationships, and leadership. In many companies, the employees drive the business’s continued success. In other cases, a fractured culture and questionable leadership can be a significant red flag for an otherwise promising-looking deal.
Buyers should practice both forms of due diligence to ensure that all parties are fully aware of the acquisition’s terms and characteristics.
Due Diligence Checklist For Selling a Professional Service Business
While the Buyer is responsible for performing due diligence on the company they’re negotiating with, it’s in the Seller’s best interest to make this process as straightforward as possible. This helps avoid the appearance of impropriety and sets the stage for an open and mutually beneficial negotiation.
As the business owner, you should expect prospective buyers to have questions they’ll need answered before agreeing. This checklist covers the most critical documents and essential questions a Seller will have when evaluating California businesses for sale.
Warning Signs for the Buyer
Many red flags can arise during the negotiation process on both sides. These are the most common issues for Buyers that can signal that their negotiating partner is not operating in good faith.
Business intermediaries advocating for the Seller must eliminate these warning signs to facilitate a deal. One or more of these signs is common during negotiations. They typically indicate that the Seller has difficulty parting with something they’ve worked so hard to build, which is a normal response to a business’s sale.
The Broker is responsible for acknowledging and working through pain points to keep negotiations moving in the right direction.
Negotiating the Deal – Buy-Sell Agreement
Buy-sell agreements are helpful documentation that can help guide a business through its sale if two or more partners own it. They can also help resolve potential disputes, especially if one owner wants to sell and the other does not.
Negotiating the Definitive Purchase Agreement
Offering middle-market businesses for sale involves several steps. The M&A Advisor works closely with you and your legal Advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it ultimately represents the legal wishes of each party.
A good M&A Definitive Agreement is the lynchpin of a good transaction. Both Seller and Buyer exchange a lot of information from different sources, often over many months of conversations. These exchanges are then condensed, with their interests, as best as possible into the Purchase Agreement.
Items a typical Definitive Purchase Agreement may include:
The Definitive Purchase Agreement can have potential pitfalls, so your qualified business intermediary needs to keep communication open with the Buyer, Deal Team, and the Seller and Deal team.
The M&A Definitive Purchase Agreement must also include details about tax obligations and consequences, especially if shareholders are involved.
Avoiding Pitfalls if you have a Buy-Sell Agreement
What if the Seller is two or more individuals?
Many businesses have multiple owners or shareholders. Getting an agreement from most shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not be interested in selling the business or want something specific; most buyers will not agree. If this is the case, hopefully, a buy-sell agreement will be in place as this will outline what each shareholder needs to do. A few years previously, I had a transaction with nine shareholders. One shareholder with a minority interest initially refused to sell. Eventually, they changed their mind, but it was stressful while this played out.
If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, deciding the future direction of the business may be challenging. This article provides additional information for an owner or shareholder on how to avoid buy-sell agreement pitfalls. To help their clients, the Business Broker should understand the importance of assuming liability so their buyers and sellers know who is responsible for any lingering claims.
The agreement also needs to have information about indemnity clauses regarding operations. For Business Services Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement.
Buy-sell agreements can be confusing, so learning how to understand buy-sell agreements and how a buy-sell agreement can save a business is helpful.
The Legal Intricacies of Buying and Selling a Business in California
California’s Main Street businesses are for sale, and the legal intricacies are far beyond the understanding of the Buyer and Seller negotiating the transaction. While a Broker or business intermediary is critical to the successful sale of a professional service business, it’s almost always in the best interests of all parties to retain attorneys.
When selling a services business in California, the legal implications extend far beyond the basics of who is selling what to whom. An attorney specializing in business sales can draft all necessary forms, including term sheets, Letters Of Intent, and Purchase Agreements.
An attorney will also help navigate other industry or location-specific requirements, such as licensing, escrow, and tax implications. Having an attorney also ensures thorough due diligence and lessens the likelihood of future litigation or state audits arising from misunderstandings with the sale.
Final Negotiations
With all due diligence completed and both parties eager to reach an agreement, they must engage in final negotiations. At this time, any additional sticking points will be part of the final version of the Definitive Purchase Agreement and negotiated until both parties can reach an acceptable solution.
Once all parties agree on any remaining concerns or stipulations, a formal contract is written and finalized, and the closing process begins.
Closing
With the terms successfully negotiated, it’s time to facilitate the transaction by signing off on any required contracts and beginning to transfer ownership of the business to the Buyer.
It’s common for the Seller to remain involved with the business in some capacity to ensure a smooth transition. Similarly, it’s common for a former owner to stay engaged with the company for several more years, usually in a higher-level advisory capacity. This arrangement helps ensure that business can continue unimpeded during the ownership transition.
Mistakes to Avoid When Selling a Professional Service Business in California
When it comes to California businesses for sale, a few common mistakes can dramatically affect the sale of your business.
You can successfully overcome these issues to sell your professional service business for the right price. However, controlling and remedying these issues is virtually impossible without a competent business intermediary.
As a Seller, working with a broker can help you avoid many of the pitfalls associated with a sale. They can also help remedy any issues preventing your business from achieving its total value in a deal.
When you sit down with a Broker, you can lay everything on the table and create a tailored plan that will help you address any issues that could prevent a sale or depress the value of your professional service business.
If you have questions or would like more information about a particular Industry Sector, call us today at (916) 570-2674 or click the link on the below to contact us.
Rogerson Business Services is a business brokerage service based in California.
If you are ready to sell your California business, let us know your questions. Whether you are selling a medical practice, an HVAC business, a landscaping business, or any other business with gross revenue greater than $2 million, contact us today to learn about our successfully selling your business program.
We’re happy to talk with you about the process of selling your business. Give us a call or contact us when you are ready.
