Selling a business requires quite a bit of preparation.
Now that you have decided to sell your business, whether it is immediately or in the upcoming years, there are steps you should be taking to prepare for the sale. Preparation takes many forms.
When you decide to consult with a business broker about selling your business, make sure that you have the following records in order. These are Formal documents representing the transactions of a business, individual or other organization. Financial records maintained by most businesses include a statement of retained earnings and cash flow, income statements and the company’s balance sheet and tax returns. Keeping financial records organized is a key element in a successful business.
• Last three years of tax returns
• Last three years of profit and loss statements
• Balance sheet
These are the statements that the business broker will use to value your business. The tax returns will be central to the valuation and to obtain bank financing. Most business owners have a tendency to minimize their tax liability, but as you get ready to sell your business, your top priority should be to make sure that the tax returns reflect the health and profitability of your business. You should, of course, consult with your accountant as this process will led to a higher tax liability but it will be well worth it if now is the right time to sell your business.
Part of this process should be minimizing discretionary expenses or as we refer to them “add-backs”. Add-backs are personal expenses that are run through the business. Sometimes, add-backs can be muddy and not clearly delineated in whether the expenses are purely personal or business related. When an expense is not sufficiently separated from the business, the expense will most likely not be an add-back and will therefore not be reflected in the cash flow of your business which will ultimately affect the value.
The outcome of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset, like a building, is rent. An example of value derived from an intangible asset, like an idea, is a royalty. The effort involved in “harvesting” this value is what constitutes business operations cycles.
When you are preparing for the sale of your business, you should distill the operations of your business and create an operation manual. The procedures that you use in the business should be adequately documented. Having the operations of your business documented in writing will allow for a much smoother transition and will also help you organize your thoughts when you speak to your business broker or a potential buyer in the future.
The customer base is the group of customers who repeatedly purchase the goods or services of a business. These customers are a main source of revenue for a company. The customer base may be considered the business’s target market, where customer behaviors are well understood through market research or past experience. Relying on a customer base can make growth and innovation difficult.
Know where the revenues of the business come from. You should determine whether there is any customer concentration. Is there a customer that accounts for 10%, 20% or more of your revenues? Customer concentration will likely lower the value of the business and will make potential buyers wary of the business. However, knowing the details of your relationship with the customer and the breakdown of revenues will help alleviate some concerns. If you don’t anticipate selling your business for a few years, you should utilize the time to minimize customer concentration.
Organization of the business
A business organization is an individual or group of people that collaborate to achieve certain commercial goals. Some business organizations are formed to earn income for owners. Other business organizations, called nonprofits, are formed for public purposes.
Depending on the type of business you have, there are probably equipment, inventory and a real estate space that are associated with the business. If you have owned the business for a number of years, it can be easy to lose track of equipment and inventory because you have the information stored away mentally. When you decide to sell, you want to carefully document the equipment and inventory that is present in the business, including selling or discarding any inoperable equipment and writing down any obsolete inventory. This will improve the value of the business and will also be useful when potential buyers ask – and they will – for the information. Additionally, take some time to ensure that the actual space the business is located in is clean and orderly. When the time comes for potential buyers to take a tour of the business, the neatness of the business will be just one factor that drives them to make an offer.
People to talk to and not talk to
Deciding to sell your business is an exciting and emotional decision and at times, you may want to speak about it with others. However, you should limit sharing your plans to sell as much as possible. Do not speak to your employees, customers, vendors or bankers about selling the business. Doing so might eventually result in an erosion of the profitability of your business.
On the other hand, there are other people you should be consulting about selling your business. You should speak with your business broker, attorney, accountant and wealth manager. Consulting with these professionals will clarify your goals and help you determine how to maximize the value while reducing your tax liability upon the sale of the business.
Mental and emotional preparation
You should be prepared mentally and emotionally for the sale of your business. You need to consider the value of your business objectively and remember that the value can only reflect what your business is and not what it can be. Additionally, when you get to the point that you are speaking with potential buyers, you should be prepared to speak in such a manner that slightly expresses your enthusiasm for the business while not allowing the buyer to get the idea that you are the business which could essentially turn away the buyer.
Be prepared to spend 1 to 3 months in the valuation and market preparation stage with your business broker. After that, it could take 9 to 12 months to sell your business. Setting this timeline in your head will reduce certain frustrations in the process. Also, start planning for what you are going to do after the sale of the business. This will help you be more motivated to sell and give you something to look forward to. Being aware of the above given advice will help frame your expectations and goals. Preparation will ensure fewer hiccups in the process and make the process more efficient.