Prepping Your Business to Sell

Small Businesses

Prepping Your Business to Sell

A business owner looking at selling their company in the upcoming years should be aware of some things they can be doing now in order to create the most rewarding and seamless sale possible. Some of these additional considerations may have large long-term impacts for a business owner, when the time eventually comes to transition out through a sale.

When selling a company, there are both qualitative and quantitative factors that will affect a prospective buyer’s decision on whether or not to buy a business, as well as determining what they will be willing to pay for that business. Most of the qualitative analysis includes factors around the company’s internal operations, corporate image, competition, competitive advantage, state of industry, etc. While these are all things that buyers evaluate during the potential purchase of a company, the most common qualitative concern that we see is how “turn-key” the current operations are. Having a strong management staff in place that can handle the majority of the day to day processes will open up the range of potential buyers, create more intrinsic value, and result in a quicker and more lucrative sale for the current owner. To help with this, it often helps to start grooming your staff in order for them to learn and assume higher-level roles and responsibilities in the company. So long that your business can assume any additional expenses this may induce, it may be a good idea to slowly start evolving your current operations to eventually absorb the majority of the owners daily tasks, and arrive at a point to where they are only needed for high-level strategic oversight/management. The practicality to how this strategy should be implemented will greatly depend on the size and type of business.

On the other side of the evaluation, the quantitative analysis for a prospective purchaser may include things such as profitability, annual sales growth, and marginal performance measures. While this can vary on the type of business, most often the largest quantitative factor for a buyer is, “How much money do they make?”. To answer this question, businesses are usually asked to show 3-5 years of sales and net income. In order to present your numbers in the most attractive way it is important to begin working on having clean company books that show as much profit as possible prior to a sale.

The most urgent implication when getting your corporate financials ready for a buyer is to limit as many personal/unnecessary expenses as possible. This will help show a greater profit at the end of each year, which will eventually lead to a higher sale price for the business. There are some items that can be “added-back” or credited to net income for a business such as owners salary, rent expense, depreciation, interest, taxes, etc. Business owners don’t need to worry as much on these costs, since most buyers, appraisers, and banks (SBA), consider these as valid expenses to add back to net income (to arrive at EBITDA, sellers cash flow, sellers discretionary earnings, etc.). Other expenses such as items related to an owner’s personal travel and entertainment, health insurance, automobile, telephone, or retirement contribution, will often be more difficult to get credit for even when they may not be expenses directly correlated to the operation of the business. The company may incur additional taxes in the short-term from not deducting these eligible expenses, but by limiting these personal costs, as well as finding other unnecessary expenses that you may be able to cut out (without reducing sales), it will help the business justify a higher sales price in the long-term, which almost always outweighs the additional short-term tax hits.

The other task that will help get your books ready for a sale involves organizing and gathering all the applicable items that will need to be in place or that will be requested from a prospective buyer during a sale. Buyers (and lenders) will often ask for things such as 3-5 years back of annual and monthly P&Ls, balance sheets, business and real estate tax returns, bank statements, sales breakdowns, vendor agreements, MSAs, equipment lists, depreciation schedules, AR/AP aging reports, etc. Having the proper accounting and operation software in place early will help you pull these applicable requests if/when they come. You can also start identifying personal property that you will exclude from a future sale, and start going through the legal process of placing these items in your personal name, and removing them from the company books. Note that these should be for personal assets only, that aren’t needed for normal business operations, and if an excessive amount of assets are removed from the company balance sheet, it may lower the value of the business.

While it is often advantageous to start these evaluations early in the process, every business is a case by case situation. Timing is everything when establishing the best time to sell, and when to start prepping for such. It is traditionally best to sell when a company is at it’s peak in sales/profit, but this decision will have to be carefully considered based on the owners personal situation as well as other external factors. It may be beneficial to consult with an advisor or broker to gain additional insight on how this process fits into each individual circumstance, and to help strategize on ensuring that your future sale yields the most success possible for you, your company, and your employees.

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