The sale price of a business can be a direct reflection of the emphasis placed on planning for its sale. A business owner should begin planning for a sale at least one year in advance. It’s necessary to have all the business functions in order prior to a sale, and it is advisable to acquire in advance an independent valuation to make certain the owner is fully aware of where the business stands and how much the market may be willing to pay for it.
If a business owner takes the time and adheres to the following steps, it will promote a smoother transition and possibly result in a higher sale price.
- One of the most important tasks when preparing a business for sale is to get the financial statements in order. Ensure historical and current financials are accurate and properly stated. If feasible, have an audit conducted.
- Develop sound and supportable financial projections. Projected financial information should be at least one year in advance. If the structure of the business is solid and the economic and industry outlooks are reliable, additional years may be useful.
- Separate all personal expenses from the business. Begin to normalize any extraordinary expenses, such as the salaries and distributions to owner(s). Any excess cash or investments positions should be moved to levels required only to run the business.
- All customer relationships should be fully documented. Any “hand shake” agreements should be transitioned into contractual arrangements. If possible, renew any contracts that will expire in the coming months and around the projected sale date.
- As with the customers, all supplier relationships should be fully documented and renegotiated, if necessary.
- Review and account for all company assets. Take inventory of all assets and remove any assets not related to operations of the business.
- Be honest with your employees about the sale. Hearing about a pending sale from an outside party may make current employees wary. The current owner wants to ensure the business maintains the proper talent for any new owners.
- Review and, if necessary, restructure any leases. This includes both property and equipment.
- Record key policies and procedures. The more documented policies and procedures a business has, the easier the transition will be to a new owner and/or management team.
- The final key task for any business owner deciding to sell is to have an independent valuation expert prepare an estimate as to enterprise value of the business. Business owners often have a distorted view of what they believe their business is worth. It’s often difficult for a business owner, who has invested so much time and energy into starting and/or running a business, to be objective when considering what the business is really worth. Having an independent valuation performed allows an owner to have a more realistic expectation as to a true sale price of the business.
If a business owner begins preparing early enough and follows the list of steps above, the business will be in better shape when it’s time to search for potential suitors. With all the information that will be gathered through this process, the owner will also be much more confident in the process and will potentially receive a higher price on the date of sale.