1. Start Preparing Financial Statements for Selling Purposes - Recast the Numbers. We are not advocating an illicit set of books. However, financials prepared for tax purposes are designed to show income as low as possible within
the confines of IRS regulations. Large corporations typically prepare a set of financials for the IRS and another for in-house analysis. You should begin this practice too and you should begin far in advance
of the sale. It is much more effective than having to prepare a so-called restructured set or "normalized" set of financial reports years after the fact. It is more effective if you have done it on
a regular basis for several years.
In valuing a business, some typical financial adjustments may include the following:
- Excessive management salaries.
- Salaries paid to individuals who can be replaced at much lower salaries.
- Retirement and health plans that provide better benefits than the plans of other companies in the industry.
- Excessive perks, such as company cars, trips and club memberships.
- Beneficial leases.
2. Personnel Changes. In an industry not noted for its depth of management, buyers are
afraid that key employees might leave after they take over the company. If they are prepared to remain with the company through the transition, fine. If employees are thinking of leaving, it is better that
they leave sooner than later. This will allow ample time to train replacements who will remain with the company through a transition. In any event, have all employees sign a noncompete agreement and keep it
on file. This way a prospective new owner will have a higher level of confidence that the employees are more apt to remain with the business.
3. Talk to Key Employees. If you haven’t discussed your plans with key employees, do so now.
They will hear of your plans anyway, so it is better that they learn from you and get the straight story. Also, you will need their support in assuring prospective buyers that the transition will be a smooth
4. Examine Contracts. Many owners have contracts with customers and telcos. Take a close
look at these. Those that would be beneficial to a new owner should be kept and extended if possible. However, if there are contracts that you are renewing because of habit, or for other reasons that are not
financially prudent, now is the time to do something about them.
Contracts that are harmful to a buyer will certainly lower the value of your company.
5. Review your Real Estate Lease. If yours is the type of business that depends on location, make sure that you can assure a buyer that he/she will be able to stay in that location
for a reasonable period of time. Above all, make sure that your lease isn’t set to expire and be re-negotiated while you are actively selling your company. Negotiating a lease when you are all set to sell is
like negotiating with a gun to your head.
Likewise, if your location might be inappropriate for a buyer, consider moving now.
Renewal options are generally better than long commitments because they give the buyer maximum flexibility to stay put or to move. At the very
least, make sure you have a consent clause in your lease that permits you to assign your lease to a new owner without being reasonably withheld.
6. Examine Equipment Leases. If your are leasing equipment and the lease will remain in place
after the sale, look at the rationale of the lease(s) from a buyer's perspective. If a lease will have the effect of saddling the buyer with an interest rate well above prevailing rates and any tax
advantages have already accrued to you, the lease may hurt your company’s value.
7. Formalize Your Records. Suppose your policy is to give customers terms of net 30 days.
Suppose you’re like most owners and make exceptions to most policies. Perhaps your brother's wife and your college roommate are allowed to wait as long as they need to pay. The person who buys your company
is not going to want to hear about preferential treatment for your brother's wife or your college roommate, nor will he/she want to be the one to have to cancel the exceptions. It is better to enforce policy
now to make the transition smoother. If that’s not possible, at least document the exceptions so the buyer is not hit with surprises.
8. Systemize Operations. Many businesses rely on a mix of clearly documented procedures and
procedures that exist only in the owner’s head. Your company will be more salable if procedures are clearly systematized and documented so that a competent manager or new owner can take over with minimal
training. Get it out of your head and into a procedure manual. Make sure the procedures are tested and refined before the sale.
9. Separate Real Estate. It sometimes makes sense to own real estate as a company asset. But
when it comes time to sell, including it as part of a business sale can increase the complexity of the sale and make a business less attractive. Sophisticated buyers like to transact real estate separately
from the business itself. Also, if real estate is separate, you can start showing rental to the real estate owner as a regular line item expense for the company, making it more clear and acceptable for a
buyer to assume the expense.
10. Ownership Structure. If you are operating as a sole proprietorship or a partnership, now
may be a good time to incorporate for two reasons.
First, it is better to have the corporation liable for payables and other debts. Otherwise you might find yourself responsible for the new
owner’s liabilities or liabilities that he agreed to take over. Make the change now because it takes time for creditors to revise their own records. Incorporating just before a sale to distance one’s self
from obligations is not foolproof. In fact, if you wait too long you may have difficulty meeting IRS filing requirements and other bureaucratic requirements that are notorious for taking too long.
Secondly, a corporation provides a clean vehicle for transferring a company in part rather than a whole. A buyer could purchase the proportion
of the firm’s stock (at the agreed price) that would give him the agreed proportion of the company. If this sounds complicated, it is. I suggest you check with a good tax specialist.
11. Documentation. Entrepreneurs are not known for their fastidiousness in keeping
records and documentation. In preparing to sell a business, you first must gather documentation. Audited statements prepared by a reputable accountant will help establish your business credentials. Tax
returns also offer proof of business performance. Generally, three years of financial records will serve to establish where the business has been and its profitability. Among the items you’ll need to gather
- Income statements
- Balance sheets and income tax returns from the last three to five years.
- Records of accounts receivable and payable.
- Bank and Income Tax statements.
- Copies of any notes or mortgages owed.
- Existing contracts with employees, customers or suppliers.
- Detail ESOP, 401K and any other retirement plans in place.
- Present or current lease.
- List of equipment owned or leased and any maintenance contracts or other obligations associated with such assets.
- Corporate books (if incorporated) or partnership agreement (if a partnership).
12. Banking Connections. Bankers don’t like surprises. It is a good idea to tell your banker
that you plan to sell the company in the near future. Don’t be afraid to ask him about the possibility of financing a buyout, or partly financing it through receivables, but don’t expect a firm commitment.
13. Review Terms and Structure of Sale. Terms are as important as the price. Decide the range of owner financing that you’ll consider and the degree of security you’ll demand. Remain
flexible though, so as not to limit your options. A buyer may present you with a reasonable but unexpected financing package. There are as many ways to structure financing, as there are businesses for sale.
Also, all buyers are not equal. You may be happy to finance one buyer for 50% of the sale price, while another you might not trust for 5%.
In evaluating prospective offers, sellers should investigate the prospective buyer’s (1) credentials and track record, (2) creditworthiness,
especially if a portion of the purchase price is deferred or is paid in notes or stock, (3) management style, and (4) integrity.
Selling a business is not and should not be a simple transaction. For example, you can sell all of the business or part of the business. You
might sell your interest in a corporation to another corporation or an individual. Or, your corporation may sell its assets. It is not unusual for a business owner to sell the business but retain ownership
of the receivables for the purposes of security. There are even instances where a business is essentially leased with an option to purchase.