What are some of the things I can do to prepare my business for sale in the next 5 years?
The completion of a sale can take over a year, so keep that in mind as you plan your exit strategy. Here are several basic steps you should take to ensure that your business is ready:
1. Get a business valuation. One of the first things you should do is obtain a realistic idea of what your business is worth from an objective, outside source. A professional valuation will give you a basis for gauging buyer offers and will give you an idea of what you can expect to net from the sale. It will also tell you the business’s market position, financial situation, strengths and weaknesses (which you can hopefully correct prior to putting it on the market). Murphy offers several levels of business valuations. A Brokers Opinion of Value (BOV) is the most basic valuation.
Valuations can be obtained from a number of sources, ranging from local accounting firms to regional business brokers and investment banking firms. Murphy offers 5 levels of business valuations to choose from depending on your circumstances and the size of the business. As a rule, you should make sure the company performing your valuation has access to the most current national data regarding privately held transactions in your industry. Experience in selling firms of your type is obviously helpful as well.
2. Get your books in order. Buyers and bankers evaluating your business generally require at least three years’ worth of financial information. The more formal your statements (accountant-reviewed or -prepared vs. internally generated statements), the better the impression you’ll make-and the easier the due diligence for a buyer. The information you provide to the potential buyer will also be used to obtain a loan. When you are selling your business, it helps to think like a buyer and a banker. In most cases sellers supply the broker with 3 years of tax returns. The broker will recast your financial according to SBA’s guidelines, making a great presentation to commercial lenders which helps the buyer acquire a business loan.
3. Understand the true profitability of your business. Most privately held businesses claim a variety of nonoperational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal automobile lease. The financial recast that is performed by your business broker will show any potential buyer the true cash flow they can expect as a new owner.
In addition, there may be infrequent expenses you have incurred during the past three years that should be excluded in a buyer’s analysis of recurring cash flow. There may be moving expenses if you’ve moved to a larger facility or unusual legal expenses. Your broker will know how to handle these situations in the financial recast which can make a substantial impact on the business value.
4. Consult your financial adviser. It’s wise to speak to your tax adviser for help planning your financial future. Understanding your personal and corporate tax situation may also help you determine your options with regard to deal structure. If you are selling a sizable business the tax implications can be substantial. There are a number of ways to minimize your tax liability which requires the knowledge of a professional that stays on top of the constant tax changes that occur over time. Some of these strategies require certain actions prior to the sale. Murphy Business Advisers has consultants that can provide you with different sales scenarios and show you how each scenario will impact your net proceeds from the sale after taxes. We suggest taking a proactive approach so you and your broker can navigate through the negotiation process knowing the impact on your bottom after the tax liability. These consulting reports not only help the seller but also show a buyer how structuring the sale may bring benefits to them as well.
5. Make a good first impression. Will a buyer visiting your business for the first time see order or chaos? Make a great first impression. Buyers want to own companies that show well. How the business appears to operate at first glance is often a key indication of the management team, the records and the overall business operations.
6. Organize your paperwork. Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, equipment lists, maintenance agreements and other pertinent information for the continued success of the business. Buyers and their bankers need to know that the business will continue and there is no hidden skeletons in the closet. Make sure you have everything readily available, current and in order. Being proactive and a quick to response to a buyer’s request with information gives a sense of confidence. On the other hand, a delay in responding to a buyers request for information can create uncertainty and doubt.
7. Consider management succession. If you’re absolutely vital to your business, who is going to run the business for the new owner when you exit? Many small business owners ARE the business. Systems, controls, procedures and especially key personnel make it easier for a new operator to take over your business. You should have a succession plan in place before going to market. A business that can operate without the presence of the business owner normally commands a higher value and attracts a greater scope of buyers.
8. Know your reason for selling. Buyers are always curious as to why a seller wants to exit a business. Any savvy buyer will think “If this business is so great, why are you leaving?” Be prepared to articulate your reasons. “I am so tired of dealing with my demanding customers and vendors” would not be the best reason to give for selling. Most buyer purchase a business with plans for improving the business. Your business does not have to be absolutely perfect. What has been a burden to you as an owner over the years may be an opportunity in the eyes of a new buyer.
9. Get your advisory team in place. Do you have an attorney and an accountant who are proficient in mergers and acquisitions? Your broker will have a list of qualified individuals who they can suggest. When you sell or buy a business there is a lot of very detailed legal work that goes in to the final closing. These agreements normally include the final contract, non-compete, inventory adjustments, promissory note, bill of sale, warranties and other critical documents. A UCC search will be performed by the broker just prior to the closing to insure there are no liens filed against the assets being transferred.
Murphy Business Advisers has been selling businesses since 1994 and has created a process with experienced business transaction attorneys who produces these final documents on behalf of the buyer and seller. Unless negotiated differently, the buyer and seller each pay half of these fees. Basic business closing documents can be created for a $1500 fee (buyer pays $750 and seller pays $750). These documents are drafted from a neutral perspective which creates agreements that are fair to both parties. Once these documents are created the buyer and seller are encouraged to have their legal counsel review them. Structuring the legal documents using this method gives protection to both buyer and seller. This approach can save both parties money in legal fees.
10. Keep your eye on the ball. Don’t let your business performance decline because you’re too focused on the sale of your business. This will only give buyers additional negotiating power to lower their offers. Using a broker allows you to stay focuses and insure confidentiality of the sale.