Top Ten Steps When Preparing Your Business For Sale

1. Develop a business growth plan

Historical and projected year-over-year growth is a great way to attract buyers and motivate them to buy your business. Buyers aren’t interested in maintaining the status quo; they are interested in growth opportunities. Studies show that businesses with a well developed growth plan and exit strategy will sell more than businesses that do not. Declining sales will have a negative impact on the sale. Buyers will perceive this as the new normal and will discount the price and/or change the terms. Decreasing sales are very difficult to validate as a reason for selling.

2. Remove yourself from the business

If your business can’t run without you, then it will be very difficult to sell. When it does sell it is likely that you will have to stay on for an extended period to “train” the buyer. Customers and suppliers need to see the value of signing on with the company not the owner.

3. Develop a strong management team

You can’t remove yourself from the business unless you develop a strong management team. A buyer will consider the quality and experience of your employees a valuable asset that will drive up the value of your business.

4. Consider replacing family members and reducing owner perks

Many business owners understandably consider their business a family asset. They hire spouses and children, lease cars and cell phones, and expense other owner perks through their business. Even if other family members add significant value, it is unlikely that a prospective buyer will be comfortable hiring a family member. Owner perks, although valid, reduce operating income and do not show your business in its best light. It is advisable to reduce owner perks in the year or two before sale (or at least show them as a specific, verifiable line item on your financial statements).

5. Sell or transfer non-core and unnecessary assets

Many owners keep obsolete or unnecessary assets that they no longer use. Similarly, many business owners keep non-core assets and real estate that are not required to run the business. Buyers are only interested in purchasing the assets that are necessary to operate the business. They will place a zero value on unnecessary assets. Non-core real estate assets may have negative tax consequences to the buyer on sale and should be transferred to a holding company.

6. Manage your working capital

Obsolete or excess inventory and stale accounts receivable are of no value to a buyer and may reflect badly on the quality of your business. It is prudent to reduce inventory levels, collect stale accounts receivable and write off obsolete inventory and uncollectable accounts prior to offering your business for sale. The Summit Group can help you determine your required working capital.

7. Diversify your customer base

Reliance on one or a few concentrated customers is a red flag for a prudent purchaser. It significantly increases the risk to the buyer and consequently reduces the price. A broad customer base will attract prospective buyers and also increase the earnings multiple and value. At a minimum, business owners should strive to “lock in” the core business relationships to written contracts.

8. Reduce debt

Whether buying shares or assets, most buyers will have to borrow against the unencumbered assets of your business to facilitate the purchase of your business. In addition, less debt means more equity for the owner.

9. Identify problems and deal with them

Nothing can destroy a sales transaction more than an unanticipated problem that only comes to the attention of the buyer during due diligence. The first reaction of a buyer is to wonder what other problems lay beneath the surface. It is important to know your businesses strengths AND weaknesses, and deal with all skeletons in the closet.

10. Obtain exit strategy tax advice

The time to get tax advice is not after you receive an offer from a buyer. At the end of the day, what is important to you as a business owner is how much cash is available to you after the transaction is closed. An experienced tax accountant or lawyer will have strategies and advice that will minimize the taxes payable on sale. However, those strategies may require action prior to offering the business for sale.