Planning and Preparation for a Business Sale
Deciding When to Sell
Deciding when to sell may be an arbitrary decision. If you are like most business owners, the idea of selling your business pops in and out of your mind, the idea highly attractive at times, only to be put at the back of your mind as a rush of new orders need to be fulfilled.
The reasons for selling are numerous, and it may be surprising to you that a business owner’s motivation for selling is one of the first things a prospective purchaser will ask about. Retirement, relocation, a change in career, are common motivations for selling. Some business owners will sell when operations become too large to manage personally, or they lack the ability to provide capital necessary for expansion.
It is important to make plans for a transition before the signs of burn-out and apathy show up on your financial statements. Businesses that show downward sales and profit trends tend to scare purchasers away and/or erode the optimum value you might receive for your business. If you know that retirement or a change in career is immanent, start making plans to find the right successor to your business. The optimum time to sell your business is just prior to its peak. At that point you are most likely to sell in a timely fashion, and achieve the best compensation package for your business.
Allow yourself ample time to find the right purchaser. It often takes three months to a year to find the right party, and another sixty days to complete the transaction.
Cutting The Umbilical Cord
When your customers call, are they calling for you, or is it your company name they identify with? Could any one of your qualified employees handle their needs? Are you the key technologist, the only one qualified to provide the service or product your customers demand? Can you take a two week vacation, and feel satisfied that your business will continue to run smoothly?
A prospective purchaser will want to be assured that the bulk of your customers will make it through a change of ownership, and that the products and services your company delivers can continue to evolve. The transferability of a company and its customers directly affects a company’s perceived value.
If you are indispensable at your company, and would like to sell your business within the next few years, making efforts to share your customer relationships and operations duties with key employees can help accomplish a successful transition.
Knowing Your Company
Once you have decided to sell your business, you, your business broker or other representative will assemble an Offering Memorandum, which will contain comprehensive information about your company. Since knowledge can help eliminate risk, the more information you are able to provide on your company, the higher the chances for a successful sale.
- Track your sales in detail: By product and service, by method (repeat sales, through advertisements, specials, etc.)
- Know your market: Keep copies of articles about your industry, your competitors, and customers.
- Understand your operation: Be ready to explain changes in sales, cost of goods, etc., as well as unusual one-time expense items.
- Keep track of all your compensation: Be able to itemize your salary, benefits, profit sharing, and other perks you take out of your company.
In preparing to sell a business, or for that matter preparing to value a business, you must first gather documentation. Your business broker or other professional will use this information to help establish a value that purchasers in today’s market would be willing to pay.
Although you will provide this information to those assisting you in the sale process, it is important to realize that certain confidential records, contracts and statements will not usually be disclosed to a purchaser until an acceptable offer or letter of intent has been signed by both parties.
Information needed includes:
- Income Statements and Balance Sheets for the past three years
- Current YTD Income Statement
- 3 years Tax Returns
- Records of Accounts Receivable And Payable
- Copies of any notes or mortgages owed
- Copies of any facilities and equipment leases
- Existing contracts with employees, customers, or suppliers
- Any patents, trademarks, or copyrights
Once you have gathered this information, you are ready to begin the process of selling your business.