Preparing Your Business For Sale
WITH A LITTLE WORK, every business can be prepared and improved prior to its sale. A well-prepared business gets more offers, and usually better offers, than does a less-prepared one. A well-pre- pared business also advances the sale more quickly. Due diligence (See : “From the Buyer’s Perspective”) is less time-consuming, as there are fewer questions and more credibility in the eyes of the buyer.
Chances are your business can be improved in ways that enhance a buyer’s confidence. The more comfort and trust the buyer has in you and your business, the fewer opportunities a buyer has to question various aspects of the business and negotiate a lower price.
In most cases, you should begin preparing your business for sale the day you buy it or open it. Since that day has passed, let’s talk about what to do now to prepare for a future sale.
A Good Reason to Sell
As mentioned in the Introduction, one of your key responsibilities is to have a good reason to sell. The possibility of completing the sale
of a business will be better if you are properly motivated.
What is a good reason to sell? The typical reasons that drive the sell- ing process through to closing include:
� Ill health
� Too rapid growth
� Lack of interested heirs
� Major or dramatic industry changes
Conflict within you can arise if you really want to keep the business but feel as though you’re trapped into selling it. A good M&A advisor will press a little and offer solutions that may not involve selling.
For example:One young owner wanted out. He was spending sunrise to sunset running his business. A buyer stepped forward and was ready to write a check. The seller asked us what we thought. We told him, don’t sell. You’re too young.
He was surprised. So we talked about some ideas that would allow him to spend less time at work. We made significant changes that led to a solution other than selling. He did- n’t know what his business was “supposed to” look like as it grows. So we worked on bookkeeping and general management. We helped him empower his employees to do more.
Today, he works 50 hours a week. He takes vacations. His business is growing and thriving. He has more than doubled revenues. He can sell his business in several years, when it’s worth more money and he’s more comfortable letting it go. And in the meantime, he’s working on estate and financial planning to get ready.
Having a good reason for selling your company is the beginning of your preparation process. A thorough understanding of your motivation for selling will support an efficient and effective selling process and a more lucrative outcome for you.
Preparing your business for sale also means preparing yourself for life after the sale. This topic is so important and so commonly ignored in the M&A industry that we devoted an entire chapter to it (See: “After the Sale: What Then? Successful Retirement Requires Planning).
Rare is the person who sells his or her business and easily parts with it. Begin now to prepare yourself: When you sign on the dotted line, be ready.
Generally speaking, you will need to spend time considering the fol- lowing questions:
� What is your business worth?
� How much is your real estate worth?
� How do you go about selling your business?
� What is the best way to define your business
to position it for sale?
� What are the legal and accounting ramifications
of the sale?
� What are the tax implications of the sale? How are you
going to allocate the purchase price and how much does
that mean you owe in federal and state income taxes?
� After you’ve paid taxes and your advisors,
what’s left for you?
� Is this really the time to sell?
� If it’s not worth what you hoped it was, what should you do?
As you can see from these questions, preparing your business for sale is more than dusting the drill press and aligning the financials. Most of these questions, in a direct way, will affect your life during the selling process and long afterward.
When Should You Sell?
Now that you have a good reason to sell and you think you’re well on your way to being prepared, it’s time to ask when is the best time to sell? Should you sell now or wait for some life-changing event? As you begin to consider all the ramifications of selling now or later, you’ll find yourself revisiting your personal preparation. Here’s what we mean.
You will need to consult with your CPA, your family and especially your spouse about the timing of the sale. Your spouse will have strong feelings one way or another about the sale. In fact, often the spouse will need to attend the closing in order to sign certain legal documents.
Also, your life after the sale will affect your spouse. Your spouse may be thinking about long-term financial security and will have questions concerning that. The questions will raise important matters to discuss. A financial planner may be just the answer to such considerations.
These are difficult issues that affect your decision of when to sell the business. In addition to your CPA, your spouse and a financial planner, your M&A advisor is experienced in bringing together the professionals you may need to help you decide when to sell.
What Parts of the Business Need Prepping?
Finally, you’re prepared to sell the business and you’ve decided on the timing. You are ready to dive into the process now. So let’s start prepar- ing the business for the sale.
Every business can use some preparation for its sale. By preparation we mean bringing crisp and well-defined order to your finan- cial statements, updating employee training, clarifying procedures and physically sprucing up the facility. The specifics on what needs to be done depend on an objective assessment of your business and its uniqueness.
Financials: Clean Up the Financial Statements
To put it succinctly: clean financial records are a must. Any discrepancies or sloppiness in your financial statements reflect on the overall quality of the business and its operations. Get the financials in the best condition possible.
Simplify and clean up expenses. Keep costs directly related to the business. Anything unusual that shows up on the financials and is unnecessary to the operation of the business creates doubt in the mind of the buyer. This doubt, whether real or not, may detract from the value of the business.
In addition to keeping clean financial records, work hard to demon- strate steady growth, profitability and improving margins. This is referred to as the trend factor.
The Management Team: Key Hires
Another way to prepare your business for sale is to build an effective man- agement team. Make sure that key people in your organization are as fully trained as possible to perform those important roles. Key employees include: CEO, COO, CFO and your sales management team.
Buyers want to see a good management team in place. That might include hiring someone to take your place in the daily operations of the business. The more experienced the team and the longer they’ve been together, the more valuable they are and the more likely they become an asset supporting the sale.
To mold your management team into a supporting asset, begin transferring duties and responsibilities to them. Transfer professional contacts and customer relationships. Show the buyer that your presence in the office is not necessary to the growth and profitability of your business. The buyer wants to be able to step in, replace you and continue to grow the business without interruption. To this end, it is common for a buyer to ask the current owner to remain for a set amount of time — six months to a year is typical.
The better your management team can run the business, the less time you will likely have to remain to support the buyer through the transition. The more thoroughly prepared they are to run the business, the more confidence a buyer will have in them and the sooner you can walk away from the business after selling it.
One of the first things a buyer asks about is the people. People, their experience, their responsibilities and their productivity are critical to the deal and the business’ sustained profitability.
Poorly trained employees may be a hindrance to maximizing the value of your business; they provide the buyer with reasons to negotiate a lower price. On the other hand, investing in employees’ professional development can improve productivity, increase profitability and increase the price a buyer is willing to pay for your business.
The better your employees are trained and prepared, the more valuable they are to a buyer and the more secure their positions will be with the new owner.
Systems and Procedures
Make sure a system exists for every- thing that happens in your business.
And then be sure your employees are trained to follow them. Clarify pro- cedures. Systematize tasks. Print manuals describing functions and operations. To the extent possible, write down everything that occurs in the operation of the business.
Well-defined and documented systems and procedures have multiple benefits for a business. They make operations run more efficiently and force better organization of the business. Well-defined safety systems and procedures typically lower insurance costs and cre- ate safer work environments and more productive employees.
Finally, document clearly what benefits employees receive. Help the buyer avoid potential pitfalls or confrontations; make sure the buyer knows all details and employee expectations upfront.
The better the buyer understands the “rules,” the easier it will be to transition into a leadership role and manage the employees, and the easier it will be for you to walk away.
The buyer likes to see systems and procedures because they foster a better sense of how the business runs. They’re reassuring, evoking a sense that fewer uncontrolled events and fewer surprises will occur. This comfort, or level of confidence, may result in a higher value for your business.
Also, well before the active search for a buyer begins, it is advisable to assess the status of your real estate. If it is owned, you will want to have title work completed. A title update is necessary to ensure that there are no glitches, such as inaccurate legal descriptions. Also, an up-to-date survey will be required.
In the process of selling one particular business, it was discovered during the title search that the legal description of the owned property was confusing. Further research revealed that the entire section, including the business’ real estate, had been inaccurately surveyed by two feet, resulting in a long delay in the selling process.
Investigate and clear any possible liens on the title, including mort- gages, mechanics liens and any old or unresolved claims. If the title is transferred by a contract for deed, confirm that the contract has been filed and satisfied.
Whether you own or lease the real estate, order a Phase I Environmental Assessment. If the assessment shows any potential prob- lems, you may be required to do further testing and even pay for any cleanup of waste, whether or not you caused the problem. We recom- mend consulting with your attorney on such matters.
Preparation Stage of the Selling Process:
A seller did not want to do a Phase I Environmental Assessment until after a buyer was found. The result was a six- month delay in the closing because the study, once it eventually was completed, found several environmental issues, including: underground tanks, construction waste that had been dumped on the adjoining property and overflowed onto the seller’s property, lead from the property’s use by the local law enforcement agency as a firing range and the existence of some Indian burial grounds on the property. This land and business had been in the same family for decades and no one remembered all of the events that affected the property over the years. The deal could have been closed much more quickly if the seller had prepared the environmental study at the beginning of the selling process.
Cosmetic upgrades help the business appear well cared for. Clean, shine and paint old equipment. Mow the lawn! Clip the shrubs. Paint the building, foundation, shutters and trim.
Sell or throw out old equipment. If it no longer is a direct part of creating your products or running the business, then remove it from the facility and from the list of assets.
Preparing your business for sale is a process of decisions and action steps. These action steps are the first and the most immediate steps you can take in selling your business. The items discussed in this chapter establish a base from which you can determine an approximate valuation for your business.
To review, preparing your business for sale is a future-focused attempt to create the necessary trends that maximize the value of your business. Preparing your business for sale also encourages you to make a serious assessment of your financial statements and other legal documents, your management team and employees, and your systems, procedures and the status of your physical facility.
With proper motivation and planning, it will be possible to sell your business at its greatest value.
Contact us at Faelon Partners for more information.