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Selling your business? Preparation is a must to get the highest price

Excerpt from The Business Sale System: Insider Secrets To Selling Any Small Business

Getting your company ready to sell means sprucing up operations as well as making sure your financial statements, budgets and business plans are ready to be scrutinized by potential buyers. Although this preparation is time consuming, many business owners find that preparing the business for sale improves management practices and greatly increases the value of the company. And should a great offer come through soon after the business is put on the market, the preparation will put you in better position to close a deal quickly.

In order to understand what’s necessary to get the business ready for sale, we must first look at what information buyers want to see.

There are two basic types of buyers, financial and strategic. Financial buyers look for businesses they can buy in which they can finance 50% to 75% of the price, and that have sufficient cash flow to repay that debt. With few exceptions they value a business by using a multiple of three to six times earnings before interest and taxes (after making adjustments for expenses that would not continue for a new owner – they rely on what are called “recast” financial data, which is discussed in an article in the Valuation section). They deduct from the price any interest-bearing debt that they will assume. In terms of preparation, there are disadvantages to selling to a financial buyer: since financial buyers don’t care about synergies or other intangibles, they tend to scrutinize financials to the max. Because they typically borrow money for a significant part of the purchase price, they are under pressure to increase the cash flow.

Strategic buyers expect synergies with their other businesses (in other words, they think it is a great fit with the other parts of their business). On one hand, they sometimes are willing to pay a premium but on the other hand, they may not need to because they already know the market. This also makes them trickier to deal with, because they could be able to use confidential information that you provide to compete against you. The ideal strategic buyer is not a direct competitor. If you would like to remain involved after the sale, be aware that strategic buyers may have plans for the company that differ greatly from yours.

In most cases, the business needs to be prepared for both types of buyers, unless it is being marketed on a very limited basis to a short, hand-picked list of potential strategic buyers or sold aggressively to financial buyers only.

Financial statements

Financial statements are the best indicator of the future performance of the business. Since the buyer will be relying heavily on the statements, one of the first questions they will ask is whether you have audited financial statements.

Audited statements are where a CPA firm verifies much of the financial information – they might be closely involved in taking a physical inventory, or they will carefully trace supporting invoices and checks rather than relying on the business owner’s General Ledger. Audited statements are reassuring to a buyer – and to the bankers who are financing a purchase – but they are very costly to prepare. The accounting firm may end up getting sued for providing incorrect information in audited statements, so they charge an arm and a leg. Generally speaking, most small businesses don’t require audited statements to operate and a buyer who insists on them is being unreasonable. If you don’t have audited statements, ask the insistent buyer if they would be willing to pay to have them done – that usually puts an end to the issue.

The advantage of audited statements is that they may strengthen your hand in the negotiations and allow you to demand better terms since the financial information is considered very trustworthy. But in most cases, financials compiled or reviewed by a reputable accounting firm are adequate.

In any event, make sure some kind of formal financial statements are available for at least the past three years, and even better, for five years. Tax returns for the same years should also be available, since they support (at least they should – the buyer will check this!) the data on the financial statements. Review the financials in detail and be ready to answer questions about sales, profits, expenses depreciation, inventory valuation and every other aspect of the financials. Also, buyers like to see data showing gross profit (and return on assets) by activity or product line, so be sure that financial data is broken out in this way.

Management and personnel

A business that is excessively dependent on the owner and/or key employees increases risk in the eyes of a prospective buyer. Appointing a second-in-command and department managers enhances a company's value by alleviating that risk. For key employees, it is possible to establish a bonus program that rewards the key employee for staying with the new owner for some period, for instance a bonus of $5,000 or $10,000 at the end of one or two years. Carefully outline your role in the business and be ready to explain how it will run smoothly and profitably without you.

Eliminate weak areas

Focus on the strengths of your business. For example, a buyer will discount inventory carried for weak product lines – chances are you’ll receive less than full value, so it’s often better to eliminate the product line if it is weak or not profitable. Buyers don't favor diversified businesses; they want to see assets concentrated in your strongest activities. Are there other assets in the business (such as land) that are not contributing to earning power? Your price will probably be higher if you improve your overall financial ratios and sell those assets before preparing financials for prospective buyers.

If your company carries inventory, update it by weeding out obsolete and outdated items. If buyers start questioning the value of some inventory items, they often overreact and discount the entire inventory unfairly.

Real estate is an important asset, and who owns it should be considered. In some cases, it is advantageous for the seller (or another corporation owned by the seller) to own the real estate. For example, let’s say the business is a manufacturing concern that the buyer plans on relocating. The real estate won’t be worth much to the buyer and will likely be discounted in the price, so if you keep it you will have a significant asset that the buyer didn’t want anyway.

Maybe it isn’t time yet

Take a hard look at the financial statements and compare the numbers to what you expect (or require, or desire) to be paid for the business. If the financials and your expectations don’t match, one or the other needs to be adjusted. I was once involved with a fast-growing business in which the owners wanted at least $1 million, but annual sales were less than one-half that. The owners felt that the growth was a “sure thing,” but potential buyers wouldn’t have paid anywhere near the asking price. The owners waited 18 months, and as they expected, sales more than doubled. They marketed the business using the Business Sale Center System and sold it for well over $1 million. It may take several months (or even a year or two) to whip the business into selling shape to get the maximum price.

Prepare a selling memorandum

A “selling memorandum” is a booklet (or book in some cases) that describes the company for sale and contains the information needed for a buyer to determine whether they are interested or not in pursuing a purchase. If the buyer is interested, they will then ask for more detailed information.

The selling memorandum is extremely important – it must be a seamless combination of salesmanship and utter truthfulness. See the article on “How to prepare a selling memorandum” in the Qualifying Buyers page. Many brokers and business advisors prepare the selling memorandum (sometimes called "selling book") but we advise that the owner play a major role in preparing it.

Projections and business plan

Financial projections and business plans are of primary interest to buyers, but small business owners rarely are comfortable in preparing them. Their business plans and projections are often less formal than buyers would like to see. Although many small business owners don't like making projections, a business plan reflects well on a company's management and provides comfort for the buyer.

Curb appeal is important

How does your business look to an outsider pulling into the parking lot and walking in the door for the first time? Many sellers (especially of businesses that don’t routinely have customers come to their place of business) are so busy with daily operations that they forget about “curb appeal.” But this first impression can turn off (or turn on) buyers when they visit for the first time and add or detract value from the business. Spruce up the business – clean, paint, reorganize – anything that will make it more appealing to visitors. A neat, clean, organized place of business tells buyers the company is well run.

Respect the buyer

As you prepare your business for sale and assemble the information that you will be showing to buyers, remember this fact: You will NOT fool a savvy buyer. If you are less than forthright in your initial information, and the buyer becomes interested and looks deeper, they will uncover the truth, your credibility will be destroyed and you will lose a buyer. Think of it this way – in order to afford your asking price and payment terms, a person will need to have some serious cash, and people with serious cash tend to be pretty sharp. You can certainly dream about it, but don’t count on having the dim-witted nephew of a rich, recently deceased uncle as your business buyer.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business ($19.95, First American Publishing) Click here to find out how to order the book.

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Know Your Reason For Selling

Excerpt from The Business Sale System: Insider Secrets To Selling Any Small Business

Part of preparing your business for sale is getting ready to deal with buyers and their questions.

One of the first – and one of the most important – questions you’ll answer for every potential buyer: Why do you want to sell? The answer sets the tone for all future dealings with that buyer, so how you answer is extremely critical.

The first thing you should do is answer the question for yourself. Why are you thinking of selling? Owners sell for a lot of different reasons: a family crisis, divorce, poor health of themselves or a family member, poor business performance, lack of operating capital, retirement, conflict with a co-owner, burnout and many other reasons.

Now, imagine explaining your reason for selling to an imaginary buyer. Put yourself in their place – how does your reason sound? A good reason for selling should ring sincere and true and not be contradicted by facts the buyer learns later. Most important is that the reason not create an image of desperation or of a “fire sale.”

Those classified ads that say, “Must Sell! Owner is Ill!” are amateurish and attract no one but bottom fishers – not quality buyers. You don’t need an urgent reason for selling – in fact, it’s much better that your reason not be too urgent.

No matter what your reason is for selling, you must (if at all possible) put it into terms that do not sound desperate. There are some situations, like a serious illness, that make this very difficult. And, I'm not suggesting that conditions like that be hidden from the buyer, who will almost certainly become aware of them later in the selling process. But even in these cases, the buyer should be led to believe there is an alternative to the owner selling…a nephew who can take over the business, or some other positive course of action the owner can take if the sale doesn’t happen.

Don’t be afraid to admit that you are burned out and just don’t have the enthusiasm to run the business any longer. Most qualified buyers are seasoned business people and they can relate to the feeling.

Unfortunately, there is no “standard” answer that will satisfy every buyer, and many buyers will spend the rest of the selling process searching for the “real reason” you’re selling.

The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing)

Click here to find out how to buy the book.