Change is a mainstay in business, particularly when it comes to small and medium-sized entrepreneurial companies that depend heavily on the individual who founded them. Changes in an owner/entrepreneur's life may lead to changes for the business that necessitate an exit strategy—often accomplished by the sale of the company. While you may not be ready to walk away just yet, it is wise to begin thinking about a plan to transition your business to your children, to existing employees or to another buyer—even if you expect that day may be three, five or 10 years away.

Business owners who work with experienced professional investors that require a growth and exit plan have probably taken certain steps to prepare for the eventual sale of their company. Others, however, may have concentrated more on improving the health of the business: nurturing relationships with customers, vendors and employees; working to create and realize long-term growth opportunities; and addressing the short-term crises that challenge almost every company. While these priorities are vital to the success of any business, they may not be enough to prepare for the eventual transition of your largest asset: your company.

It Pays to Think Ahead

Regardless of the circumstances, you should give regular thought to how your company is perceived by others, as well as its value and what steps would be required to realize that value in cash, if need be. There are many factors to consider, but a short list follows:

1. Get your advisors involved early. With more time to prepare, you'll be able to put your best foot forward and may also develop transaction alternatives that you had not thought of on your own. A full team of advisors often includes a law firm, an accounting firm, a personal or family wealth manager, and a company financial advisor.
    
2. Implement best practices. Taking this step now will enhance the perceived value of your company for potential buyers down the road. As an added bonus, best practices can help you run your business with insight into expected future revenues and earnings and, ideally, help generate more profit long before you are ready to sell.
    
3. Consider personal issues. Look beyond your business concerns and think about what you want to accomplish for yourself. What do you want to do with the proceeds of a sale? How will your transaction—including the money you receive and any changes in your time commitment to the business—affect you and the rest of your family? If you live modestly today and your transaction would produce substantial wealth, do you have young children or teenagers who may not understand what that means or how to react if news of the transaction becomes public? Be sure to discuss your personal concerns with your advisors and ask for their ideas and input.
    
4. Consider taxation and estate planning. Thinking carefully about these issues before jumping into negotiations can help you pursue a deal structure that is more likely to accomplish your objectives. Early attention to taxation and estate planning can be especially important for a fast-growing company, for a company with international operations or for a company that anticipates interest from a buyer in a foreign country.
    
5. Begin with the end in mind. Who is most likely to want to buy your business? If there are large companies in your industry that grow through acquisition (so-called "strategic acquirers"), what do you know about them? What can you do to make your company more compelling to a strategic acquirer? Can you develop or refine a product that plugs a hole in that company's existing line? Can you sign the desired strategic acquirer as a distributor, thus allowing you to demonstrate the full value of your team, your products and access to your customer base? Other possible buyers include private equity funds, your existing management team, family offices, and your current and future employees (possibly through an ESOP). Think about what your target buyer will consider valuable. Is it growth? Stability? Your management team? Strategic synergies?
    
6. Know yourself. Long before beginning negotiations, make sure you thoroughly understand your company, its current situation and what kind of buyer or strategic partner will be attracted to it. Ask your advisors for help in understanding recent comparable transactions and what to expect from a legal and process perspective. When it comes to money, how much is enough? What will you require up front and how much can be paid over time? Will you allow any significant portion of the sales price to be adjusted, clawed back or held back? Ask your advisors what is customary for a business like yours. Would you consider accepting stock in another company or a revenue-sharing or royalty arrangement as a part of your deal; if so, how would that be taxed?
    
7. Be cautious and take it slowly. Never sign or respond to a term sheet, letter of intent, indication of interest or exclusivity arrangement—even if the document indicates it is not binding—without involving your advisors. Generally speaking, you can buy yourself some time simply by mentioning that you would like to discuss a proposal with your advisors. Keep in mind that even simple documents can have complex, unstated implications. What is missing might be as important as what is included, and even non-binding documents create a fairly durable starting point for negotiations. It can be much harder to get something you want if you give it up in the beginning, even unknowingly, in a non-binding document.
    
8. Prepare for lots of due diligence questions. Due diligence—an exhaustive review of all business documents and records in an effort to assess the health and viability of your business—often happens both before and during negotiations. Even if you are well prepared, the process can wear you down, so dedicate attention to due diligence before you are asked by a potential buyer and be ready to back up your answers with documents. Having a well-organized due diligence "data room" ready and waiting can accelerate negotiations, put you in greater control of the process, and make potential buyers or strategic partners more comfortable with how carefully you run the company. In some instances, thorough preparation can actually reduce the amount of due diligence requested of you.
    
9. Think through the change in control. As you consider transitioning economic ownership to family, management or employees, also think about whether (and when) you want to transition actual control of the company. This is important whether or not you transfer a majority of the future economic benefit of the business to other parties. There are many possibilities, including negative control provisions (so-called "veto rights") to block a voting majority from taking specified actions.
    
10. Consider sharing the risk of personal guarantees. Are you being asked for a personal guarantee, either in the ordinary course of business or in connection with a transaction? If you have agreed to a personal guarantee for any reason, do the terms prevent you from being released from related financial obligations after a transition, even though you will no longer run the company? Determine whether personal guarantee insurance may be available to reduce your risk.

There are, of course, many other factors to consider as you prepare for the eventual transition of your company. Start by working with your advisors to develop and document a plan that takes into account these and other issues. It is also wise to collaborate with your advisors on an annual review process for your business. But don't rely solely on outside resources. The more personal knowledge you have about your company and its operations, the better equipped you will be to make smart choices that will serve you well down the road. Finally, whether you are pleasantly surprised by an offer to buy your business or ambushed by an urgent need to sell it, try to relax and remember that you have taken the necessary steps to maximize the value of your largest asset.