Selling your Business for Top Dollar – the Basics Preparation
Success is most often related to preparation.
In order to get Top Dollar when you Sell your Business you should:
1) Understand how a potential buyer will see your business.
Take the time to step out of your shoes as the seller and put yourself in the buyer’s shoes. While being objective can be difficult, it is crucial in order to get top dollar for your business. The better you understand how the business is viewed by others the more likely you succeed.
Be objective do you see a “going concern”, an entity with solid customer, supplier, and employee relationships? Do you see a team that uses business processes and systems learned through years of “school of hard knocks” that generates income and enables profitability? You cannot expect a buyer to place a high value on your business if it becomes all about you and you are moving on. Take your ego out of the equation, use “the team”, “we”, and avoid the “I”. Stress the identity of the business, not your own.
2) Get your books in order.
Understand it will all come down to the numbers. Your financials must be correct and clearly presented. The more fully prepared and better put together this information is, the higher the multiple of SDE and/or EBITDA you can expect from the sale.
Financial documentation must be complete. It should include the last three years of tax returns, internal accounting records, and current financial statements no less than 3 months old. In addition, prepare data such as work in progress, A/R, and A/P. Be sure that any journal entries or account adjustments are documented and explained. Leave this information as is, this is not the time to be making adjustments to the books.
There is an extensive write-up on preparing a legitimate recast of SDE (seller’s discretionary earnings) and EBITDA (Earnings before interest, tax, depreciation and amortization) available on Choice Business Opportunities website at https://www.choicebizops.com/small-business-valuation/valuation-how-to. These calculations should be straight-forward and self-explanatory.
Do not deal in conjecture. Deal only with facts, as developing a buyer’s trust is crucial. It will maximize your return if you understate rather than overstate. Your role should not be to defend or explain the numbers because you felt compelled to revise them. This will only cause conflict with prospective buyers. Your CPA or CFO should handle specific accounting questions. Don’t wing it because you’re “pretty sure”. If you do not understand the question and why the buyer is asking, defer to your financial folks to get them specific answers.
3) Make an honest assessment of the business strengths and weaknesses.
Define what you believe are the businesses challenges and opportunities. Telling a buyer your business has no challenges will not ring true and can be a red flag for the buyer. Likewise, a potential buyer will view unusually optimistic forecasts with suspicion.
Remember to avoid overselling. If you bloviate about nothing but the upside possibilities the prospective buyer simply wonders why you haven’t already achieved these. Be direct and straightforward. Share the reality of your difficulties with employees, keeping up with competition, and juggling the demands of ownership. It is worth the effort, a buyer will likely view your challenges as opportunities.
Be prepared to share your experiences and what you’ve learned about maintaining profitability with the potential buyer. I. You want them to have the best chance to succeed. Buyers need to have their own image of how they will move the business forward. Having challenges they feel they can address successfully is a primary driver in maximizing the value of the business to them.
4) Focus on value of the going business not its tangible assets.
Don’t obsess over the value of the tangible assets (furniture, fixtures, vehicles, and equipment) included in the sale. While it may be reasonable to point out the investment on your balance sheet it is counterproductive to engage in a tit for tat over what a used desk, computer, forklift, or truck is worth. There is little upside if negotiations devolve into a disagreement over the perceived value of used equipment. A quick visit to the local craigslist site or an auction will confirm that used business assets retain little of their original value. Keep your attention on the value of the business don’t let negotiations focus on something like the value of a used office chair or PC.
The value of your business and the “going concern is not directly affected by a value assigned to these the assets; indirectly the amount of hard assets included will generally increase or decrease the multiple applied to SDE or EBITDA earnings. Updating, replacing, or acquiring new assets in preparation for sale may assist in increasing its appeal, without a direct and demonstrable increase in net earnings this will not increase the value of the business.
Worst yet, should a buyer accept a sellers represented substantial value of hard assets included in the sale and require an allocation to such in the contracts, you have generated a sizable depreciation recapture tax liability.
5) Clean up but don’t remodel.
Get rid on non-essential files, dispose of unused assets and out-of-date inventory. In general do a little clean-up of the business. That includes the traditional sense of the meaning to “clean”. You don’t want the buyer to be under the impression that half of your inventory is worthless because of a layer of dust.
This is not the time to invest in major changes. There is no need to paint or update systems. Leave your website, signage, and advertising programs as they are. Leave room for improvements – this is a selling point. The buyer will view this as an opportunity to increase the value of the business. Better to allow the buyer to use their capital for any remodel or refresh after they take over
6) Prepare for the due-diligence process.
Assemble all the data your buyer will need to make an informed decision in a timely fashion. Much, but not all, of the data below should be available to buyer prior to contract. The balance of detail can be made available once you have an agreement in place. Scrambling to put together details and/or discovering an issue once you are well into the process with a buyer will cost you and might well kill the deal. The time to discover any challenges and issues is before you have a buyer in the loop.
(a) Financial Data.
You will need to provide the detailed financial data (as noted earlier) for the last three years. This will include complete business tax returns including all schedules (1120, 1120S, 1065, or 1040 Schedule C), CPA or internally generated year-end statements, as well as, current year-to-date statements (P&L/Balance Sheets). Additionally, include current reports for receivables, payables, WIP, billing reports (in advance/in arrears), payroll, and inventory, as well as, bank statements.
(b) Prepare a detailed Asset List.
Include equipment, furniture, fixtures, and a description of major leasehold improvements. Include equipment, furniture and, fixtures, and a general description of major leasehold improvements. Depreciation schedules or lists used for insurance purposes are a good start, but frequently do not show all the “stuff” acquired over the years and may well contain items that have been disposed of. Take the time to note on the asset list any deficiencies or issues with any particular asses. This will help to avoid any issues over disclosure later. There is no reason to put any specific values on these items as covered earlier.
(c) Financing and Leasing Agreements.
Prepare a detailed summary of financing and leasing agreements related to assets. Verify assignability and establish what will be required to effect the transfer. Determine which will need to be satisfied out of the closing. Provide complete copies of real property leases, study the assignment requirements and restrictions some Landlords requirements for an assignment can become challenging. For real property owned, provide any environmental assessments or appraisals (even if outdated).
(d) Contractual Business Agreements.
Prepare summaries or provide copies of all contractual business arrangements. Include any license, franchise, dealership, supplier, or employment agreements you have entered into, as well as, examples of standard contracts you have with customers. Provide specifics on any special licenses or permits the company holds. Disclose all patents and copyrights essential to continued business operations.
(e) Insurance Policies.
Assemble and prepare summaries of all business insurance policies. Include general liability, property, vehicle, workers’ comp and product liability, if applicable. Also describe health/dental/life insurance benefit plans you provide.
Your employees are an important asset. List all your team members. Include short description of their responsibilities/duties, their tenure, pay rate, structure of any commissions received and detail of their benefits package. Prepare copies of your employee manual and current workman’s compensation experience rating report.
(f) Prepare copies of your marketing material, brochures, web addresses, etc.
Next Edition Selling your Business for Top Dollar — the Basics – Going to Market