Preparing Your Business to Sell
Know your motivation
The most important part of preparing your business for sale is to understand why you want to sell. A sound reason that leads to a commitment to sell your business will go a long way to realizing your goal. This allows you to weather most of the challenges that are sure to arise during the process. You might want to also start planning your next chapter providing a clear picture to help keep you focused on running and contiuning to build your business. Making it even more attractive to potential buyers.
If you are ready to sell, then it’s time to determine how sellable your business is, what type of timeline will be best and how much you can reasonably expect to net from the sale.
Business Type
There are basically three types of businesses, only one of which can actually be sold as a business.
Lifestyle Businesses are actually set up to provide a particular lifestyle….no more, no less and are generally overly dependent on the owner’s skills, personality, energy and contacts. In essence, the owner is the business.
The types of businesses we are concerned with are thought of as Legitimate Small Businesses. They are formed to provide services and/or products and employ people in addition to the owner. To qualify as a business it needs be able to prove that it is either generating a profit or can prove it intends to.
Hobby and lifestyles businesses are often set up to defer or reduce tax liabilities and generally are not sellable.
Legitimate Small Businesses:
Simply put, business buyers are purchasing hard assets, cash flow and opportunity. A sellable business must have all three hopefully in equal portions.
Selling a business successfully relies on addressing these three areas more effectively than other businesses for sale.
1) Hard assets are referred to a FFE or Furniture, Fixtures and Equipment. They are not usually valued at the price reflected on your balance sheet. Most equipment is usually purchased new and depreciated over time using IRS guidelines. When being valued for the sale of a business you need to calculate replacement cost in like condition. Appraisers ofter use prices on eBay....a good place to start.
2) Cash flow is how much cash the business generates above expenses and debt service. Even if you don’t owe any money the buyer will most likely need to borrow money and want to pay it off rather quickly while stilling earning a living. Cash is king is an old saying that becomes cash flow is king when selling your business. This is true for the buyer and the lender.
3) Opportunity presents itself by either a business being at a point where it can easily be taken to the next level, by being in a growth industry or have a solid base that can be built on or offers some synergy for the buyer
One way to build the opportunity picture is to create a business plan that would include what the buyer could do with a fresh look and additional capital. AEGIS has experienced staff that can quickly analyze a business and the market it is in and see unrealized potential and will include some of those findings in the report that it prepares for potential buyers.
The more opportunity that can be created the larger the buyer pool will be and most likely higher price you receive for your business. If you are in a down market or one that has been flat for a while….this may present a challenge when trying to sell unless your cash flow is very strong.
Their lender will also need to verify that there will be enough cash to service their loan. They do this by requiring three years of income tax returns for the business being acquired and a signed IRS release form that allows them to verify your returns are the same ones you turned in to the IRS.
If your record keeping is lacking or you have not been reporting all of your income, you might need to delay selling your business until you have three years of accurate financial records reflecting increasing sales and profit each year or if they are flat that they are consistent and predicable.
What the Buyer Sees
Now it’s time to view your business through the buyer’s eyes. Look for obvious fixes to make your business more appealing to a potential buyer. Sometimes is just housekeeping sometimes it’s much more. There are very few buyers that want a business that requires fixing unless they are acquiring it at a greatly reduced price. The goal is to reduce what the new owners need to do so they can focus on running and growing the business after they buy it, not the cost and work required to fix it.
The buyer will probably be interested in infrastructure that is in place to run the business efficiently. That includes equipment, systems, job descriptions, policies and operating procedures. A successful business usually has all of this in place, just not committed to writing. If you haven't done this yet, now is the time. It will pay off in the long run.
A successful business operation is part of what the buyer is purchasing and has a value.
When you get a written offer it will include a due diligence period of somewhere between 5-10 business days. During this time you will be verifying everything the buyer has been told is accurate. If your records are not forthcoming, accurate and easy to understand, the buyer will generally withdraw their offer. Sometimes the buyer thinks this is the time to negotiate since they know so much more….we discourage that by requiring them to proceed as written or withdraw. This starts the process over again after a cooling off period.
We require the buyer to provide a list of items they want to view during due diligence. They often include bank statements, credit card processing statement, tax returns, depreciation schedules, list of FFE, filed state and federal forms, vendor statements, payroll records, lawsuits, etc. Delays or missing information often cause the buyer to withdraw their offer.
In summary, to prepare your business for sale, you want to make it as appealing as possible in appearance and operation and be ready to provide detailed accurate financial records.
Contact Richard Roberts at 479.689.4455 Ext 11 for details or Additional Information
