5 Steps For Preparing Your Business To Sell
Operating and expanding a business is a challenging endeavor that comes with significant personal and professional risks. It's a rare achievement for business owners to reach a point where their company becomes attractive to potential buyers. However, many successful business owners fail to dedicate the necessary time, effort, and resources to adequately prepare their company for sale.
This oversight can result in substantial losses in terms of deal value and the likelihood of successfully completing a sale. In this article, we will provide you with a fundamental framework for effectively preparing your business for a future sale, even if that sale is still years away.
What is your motivation for selling your business? Each small business owner will have a unique response to this inquiry, but understanding your desired outcomes from the sale is crucial for a successful transaction. Common objectives include maximizing profits from the business sale, ensuring the well-being of your employees, facilitating a swift and seamless transaction, and securing a lasting legacy for your business. Take the time to list your goals and prioritize them accordingly.
While it may present a challenge, it is crucial to ascertain which goal carries the highest significance for you. It may not always be feasible to attain all of your objectives, but by clearly defining your priorities, you enhance the chances of successfully achieving the ones that hold the greatest importance to you.
When the time comes to sell your business, maximizing the sale price is crucial. However, equally important is finding the ideal buyer. This is where a business broker plays a vital role. A business broker assists in locating the perfect buyer for your business and ensures you receive the most favorable price. With an extensive network of contacts, business brokers excel at pairing buyers and sellers. Their expertise lies in negotiating deals, and their lack of emotional attachment allows them to provide unbiased advice and guidance.
In certain instances, business brokers have the potential to enhance the worth of your small business prior to its sale by proposing enhancements. Additionally, they possess a deeper understanding of the overall market through market research, enabling them to predict trends and assist you in optimizing the timing of your sale.
Business brokers are capable of evaluating potential buyers and distinguishing serious buyers from those who are merely wasting your time. They meticulously screen out individuals who are just "looking around" or whose budget does not align with your asking price. Furthermore, business brokers can maintain confidentiality throughout the sale process by having potential buyers sign non-disclosure agreements.
To properly gauge the value of your business and attract potential buyers, it is crucial to obtain a comprehensive business valuation.. This assessment not only provides an accurate estimation of your business's worth but also offers insights into its standing within the market, financial stability, and areas of strength and improvement. A business broker with local expertise, will be able to accurately execute the process of how to determine the value of a business, using local market knowledge and the relevant information provided by the Seller.
This business valuation process is crucial in determining what your business is worth. Moreover, the broker should have existing relationships with lenders to verify the accuracy of the business valuation report and pre-approve the business for lending. Professional business valuation services, often offered by brokers for small business, ensure the accuracy and credibility of the valuation. Armed with this information, you can confidently navigate negotiations and make informed decisions about successfully selling your business.
The documents needed for a business valuation can differ based on factors such as your business's nature, industry, and the purpose of the valuation. However, there are standard documents and information that are usually required to carry out a comprehensive business valuation. Below is a general compilation of the documents you might be requested to provide:
- Financial Statements:
- Income Statements (Profit and Loss Statements): Typically covering the last 3-5 years.
- Balance Sheets: Providing a snapshot of the company's financial position.
- Owner Discretionary Sending: It is very important to identify expenses or purchases made that are specific to the owners use that an employee of the business would be unable to take advantage of….such as: car payments, auto expenses, cell phones, owners insurance, owners salaries, travel costs, dining out, misc supplies, etc. Keep in mind that Owner Discretionary Spending (ODS) is a common practice as very few small business owners wish to show large profits at the end of the year and pay taxes on funds they don’t actually pay themselves. The sum of the ODS is added back to the bottom-line Net Profit, which increases the value of the business.
- Another item to identify are any major one-time expenses, such as major equipment or building enhancements. The lenders base their qualification of the business on the on going expenses and will sometimes allow these one-time expenses to be considered as an “add back” which again, increases the value of the business.
- Tax Returns:
- Corporate Tax Returns: For the past 3-5 years.
- Cash Flow Statements:
- Cash Flow Statements: Detailing how changes in balance sheet accounts and income affect cash and cash equivalents.
- List of Assets:
- Asset Inventory: Including both tangible assets (equipment, property) and intangible assets (patents, trademarks).
- Liabilities and Debt Information:
- List of Liabilities: Including loans, mortgages, and other debts.
- Customer and Supplier Contracts:
- Customer Contracts: Highlighting any long-term or significant contracts.
- Supplier Contracts: Indicating important supplier relationships.
- Employee Information:
- Employee Contracts: Including key employment terms.
- Organizational Chart: Showing the structure of the company.
- Intellectual Property Documentation:
- Patents, Trademarks, and Copyrights: Documentation and registration information.
- Lease Agreements:
- Real Estate Leases: If applicable.
- Equipment Leases: If applicable.
- Operational Documents:
- Standard Operating Procedures (SOPs): Documenting key processes.
- Business Plans: Providing insights into future plans and strategies.
- Customer and Sales Information:
- Customer Lists: Including the concentration of sales among key customers.
- Sales and Revenue Breakdown: By product, service, or geographic region.
- Market and Industry Information:
- Market Research: Highlighting industry trends and market conditions.
- Competitor Analysis: Understanding your competitive landscape.
- Insurance Policies:
- Insurance Policies: Providing information on coverage and terms.
- Legal Documents:
- Legal Agreements: Such as partnership agreements, shareholder agreements, and any pending legal issues.
- Regulatory Compliance: Ensuring the business complies with relevant laws and regulations.
- Management and Ownership Information:
- Ownership Structure: Detailing the ownership distribution.
- Management Profiles: Describing key management personnel.
- Projections and Forecasts:
- Financial Projections: If available, especially for future revenue and expenses.
- Customer Feedback and Reviews:
- Customer Feedback: Positive reviews or testimonials can provide additional insights into the business's reputation.
- Industry Certifications and Accreditations:
- Certifications: If your business holds industry-specific certifications.
It is essential to have precise and thorough information when determining the value of your business and getting it ready for sale. Collaborating with seasoned experts like business appraisers or financial analysts can provide valuable guidance throughout this process, guaranteeing that all relevant paperwork is taken into account.
Once you have resolved all internal matters, it's time to strategically sell your business and attract potential buyers. There are numerous avenues at your disposal to achieve this goal. Your Business Broker, especially one who is also a licensed Real Estate Broker, has the tools to best navigate the market on your behalf. Their numerous on-line listing services, existing data base of qualified Buyers, and established clientele streamline the process significantly. Though the majority of business for sale prefer a “Confidential Listing” some sellers choose to tap into your existing network, or spread the word through word-of-mouth strategies.
Contact Momentum Companies
At Momentum Companies, we understand that selling your business can be a complex process. That's why our team of dedicated local brokers with decades of experience are here to assist you every step of the way. From valuing your business to negotiating with potential buyers, we have the expertise to ensure a smooth and successful sale.
