The 7 Absolute Essentials for Selling a Business – The Full Story

So you want to sell your business. Usually people buy or start a business with the hope of selling it somewhere down the road for a profit. And you never know when that time will come.
It all comes down to prior planning and preparation.

With this in mind, what are the essentials for Selling a Business?

I have outlined 7 absolute essential things you need to do to be prepared to sell your business.

I guess you will never fully be prepared but you can come close. You need to ask yourself: What will the end-buyer want to see?  Here are 7 essential items that you will need to think about:

 

1.  Paperwork:  Below is not an all-inclusive list but a list that will help get you thinking in the right direction:

  • Three Years of Tax Returns
  • Three Years of Profit and Lost Statement
  • Most Current Balance Sheet
  • Equipment List and Estimate of Values
  • Inventory Estimate
  • List of Employees (including yourself/owner), job titles (w/certifications), and pay rates or salaries.
  • If you own land, most recent appraisal – updated if possible.
  • List of Add-Backs – Meaning: Are there items that you take out for expenses that a new owner will not have and that we could take out of the expense column? For example, car expenses, gas, travel, personal gifts, etc.
  • Cash In or Out that are not on P/L–can we document (see below for more detail).
  • Recent capital expenditures.
  • Narrative on Business:  year open, awards, reputation, growth.

2.  Clean up the Balance Sheet:  The goal is to have your balance sheet make sense and be easy to follow.  Pull your balance sheet periodically to see how it would read to a potential buyers.

  • Reduce or eliminate debt line items.
  • Reduce or eliminate erroneous line items off balance sheet.
  • Re-allocate or merger line items.
  • Eliminate outdated inventory.

3.  Begin Capital and Minor Improvements to Interior and Exterior:  I hate to say it but aesthetics matter.  They plan a role, perhaps not the key role, but a buyer consciously or unconsciously factors appearance into the equation.  A bad appearance to a buyer may cause them to question if the owner really took care of other elements of the business.

  • Do not wait until the last minute to start improving the aesthetics of the business.
  • Keep to small definable and achievable projects that will not disrupt your business activities or focus.
  • Have friends give you their impression of how the business looks to an outsider or customer.

4.  Document “Add-Back” and Cash Items:  The future buyer is going to want you to substantiate why the business maybe worth more than what the tax returns indicate.  Be prepared.

  • In the event that you have elements of your business that are cash and don’t run through the normal accounting system, be prepared to justify your claims and show documentation.
  • Have documentation that is easy to follow for non-reoccurring or personal expenses that the future buyer will most likely not experience.
5.  Run Business Efficiently:  It sound rather rudimentary but you need to start eliminating excess expenses.  It is one thing to say it to someone that certain expenses can be eliminated, but it is another to show them.
  • Get employee levels to where they should be in order to run the business.  At six months out, if not sooner, start eliminating or trimming the fat of your operations.
  • Review supplier, maintenance, and other contracts for excesses.
  • Review contracts for ability to handover contracts to a new owner.
6.  Review your Lease:  Plan ahead of time. If you lease the business space, don’t wait until the last minute to secure a strong lease.  A bad lease can kill a deal.
  • Review lease with owner ahead of time.
  • Attempt to secure 5 year options to contract.
  • Pay attention, if time, to the very fine print, so a future buyer is not distracted by it.
  • Always look at the contract as if a future buyer is going to review it.  If you are looking at it through their eyes, you will be amazed by what you may see.
7.  Sit Down with the “Team” Now:  Sit down with your CPA, attorney, and business broker will ahead of the time you want to sell.
  •  It may take a year or so to adjust elements of your corporate structure that your attorney deems necessary or prudent.
  • Accounting adjustments going into the new year may prove to be beneficial to you as the seller.
  • Getting with a business broker or professional in the selling arena make help direct your efforts (who to target and how to them) and decision as to when to sell.
As mentioned, this list is not an all-encompassing list.  It will, however, point you in the right direction and get you in the right frame of mind.  The key to making this transition easier and more profitable is to plan ahead of time and understand what is to be expected of you by the buyer.  Take the time now to get your books (literally and figuratively) in order, so the transition seems seamless.

{ 1 comment… read it below or add one }

Dan February 12, 2012 at 4:57 pm

Here is my comment…….

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