The complexity of preparing a business for sale can be overwhelming. But advance preparation by the owner likely will lead to more interested buyers, an increased sale price and fewer transaction costs.
After all, buyers are attracted to profitable businesses that are easy to evaluate and operate. For this reason, spending time and resources on completing the following seven steps is worthwhile for most owners:
Get financials in order. Up-to-date, accurate financial statements including balance sheets, income statements, cash flow statements and tax returns should be readily available for buyers to review. Historical financial statements and tax returns also should be ready for disclosure, and a seller should have explanations for any past or present issues. Buyers tend to request this type of information first and will likely evaluate it fully before spending any time looking at other components of the business. Many buyers walk away from deals at this stage because of poor record-keeping, questionable tax practices or lack of information.
Audit contracts and agreements. All written contracts should be reviewed to determine when they expire, whether they are affected by a sale of the business or if they remain to accurately reflect current business dealings and economics.
Verbal agreements and other non-written special arrangements should be memorialized in writing. Many buyers will require such documentation. Further, savvy buyers will quantify the negative impact of the contract provisions (or lack of written contracts with key vendors or customers) and reduce the purchase price as a result.
Identify assets. Inventory must be counted and accurate. Obsolete items should be sold. Premises should be clean, and equipment must be in good working order and in compliance with regulatory requirements.
I once witnessed a potential buyer being escorted by the seller to a basement where the inventory and equipment for a used sporting goods store was located, and none of the items had been counted, cleaned or organized. The seller admitted that “he had no idea what was there.” The potential buyer completely discounted the inventory when making an offer and further subtracted from the offer the cost he would incur for counting, organizing and removing obsolete inventory.
In addition to tangible inventory, all copyrights, trademarks, patents, domain names and software should be audited to ensure the business properly owns or holds a license to use such property. Upgrades should also be considered if equipment or software does not meet industry standards.
Scrutinize interrelated transactions. Many small businesses, in some manner, have entered into transactions with its owners, directors, managers or their related family members. Potential buyers, however, will likely be suspicious of such transactions and relationships.
Therefore, a seller should be prepared to disclose and explain the business value of such arrangements to the buyer; or, in the alternative, terminate arrangements that are not economically or otherwise prudent for the business. For instance, if an owner’s non-employee spouse has been provided a company car, it may be advisable to restructure that benefit before marketing the business.
Start the transition. An owner should start preparing the business for his or her eventual departure. Training key employees and managers to operate the business in the owner’s absence is critical. The owner also should begin the transition of customer and vendor relationships to others within the organization so that the impact of the owner’s departure on the business is minimized.
Key employees should also be required to sign agreements protecting the trade secrets, patents, customers and intellectual property of the business to prevent buyers from fearing that the property of the business is susceptible to misappropriation or disclosure.
Confirm ownership. Although seemingly obvious, the ownership records of the business should clearly identify owners and ownership interests. Any verbal transfer of ownership interests or owner departures that have not been documented may be called into question by potential buyers. In addition, it will likely be easier to get departed owners to sign off on their ownership status before an offer from a third party has been received.
Resolve problems. Any pending or threatened litigation, customer complaints or similar issues that may decrease the value of the business must be resolved. An advisory team can assist in formulating a strategy to disclose and address any issues that cannot be resolved prior to the sale.
Completing these seven steps and assembling an experienced team of advisers will maximize the sale price of a small business and help to avoid hassles. With detailed planning, the sale of a business can be a satisfying conclusion to years of hard work.