Preparing Your Company For Sale
Whether you are considering selling your business now or sometime in the future, the most important thing you can do to ensure a successful and profitable sale is to take steps to properly prepare your business for the sale. There are hundreds of reasons why a company is difficult to sell or offers are not as expected, most of which can be attributed to a lack of planning.
Selling a business is like selling a house. The better and more salable you make it look, the faster it sells and at a more favorable price. Whatever your reason for selling, I strongly suggest that you start preparing your business two years before your desired time of sale. All too often, owners come to us wanting to sell their business “yesterday,” yet they have done nothing to position themselves or the company for a sale. Recently, a company failed to sell because the lease had less than one year remaining and the building’s owner would not renew the lease. The buyer would have incurred several hundred thousand dollars to move the operation, which made the sale unattractive. There was also an owner who made every decision himself and did not want to remain with the company one day after the sale. A new owner would be lost for months without assistance from a key employee or secondary manager.
The goal of pre-sale positioning is to deal with any negative aspects that might hinder or prevent a sale, as well as to show the business in its best light. While each situation is unique and there are often many solutions to any one situation, following are some of the major issues an owner must deal with in positioning the business for sale. (Note: A negative situation for one company may be a positive situation for another.)
Making the decision to sell
If a subsidiary of a larger company is being divested, the decision is generally economic or strategic with little emotion. If you are the owner the decision to sell becomes very emotional.
Some questions to consider include: Why do you want to sell? For some, this may be easy, while for others it may reflect such things as family pressure or business problems. What do you plan to do after the sale…retire, travel, buy another business, or remain after the sale? If you have other partners or stockholders, be sure that everyone agrees to a sale.
Do you have secondary management in place that can run the company for an absentee owner or perhaps a division of another company? Do you have excessive management or supervisory personnel or excessive bonus programs that negatively affect the profitability of the company? Do you have employment agreements or contracts? Will key employees remain after the sale?
Are existing facilities adequate for future growth, is the building owned by shareholders, is the lease at a favorable or market rate, is the building in good repair clean and organized? Are there options to renew the lease? Is the facility in compliance with regulatory requirements? Environmental issues are very important today.
Are all assets properly reflected? You must have tight controls on your receivables and payables. Buyers will not pay for receivables over 90 days and will often discount receivables over 60 days because of poor chances for collection.
Are there assets owned by the owners that should be assets of the company? Make sure inventory is current and accurate. Excess or unused capital assets should be disposed of. You should attempt to remove all personal guarantees from company notes or leases.
Are all sales recorded, and are they recorded properly? Are any items being expensed that should be capitalized? Are there non-recurring income or expenses that should be explained?
Recasting financial statements
Recasting the income statement is probably the most important tool to show real income. A balance sheet that shows book values and market values is often used to reflect the real value of the assets.
Is the business in compliance with corporate formalities, do you have contingent liabilities, unresolved tax problems, audits or lawsuits. Compliance with all local, state and federal laws is a must as owners will be asked to represent and warrant that they are in compliance. Also, determine if regulatory approval is required for the sale of the company.
Many owners will have a huge capital gains tax upon selling the company. Owners need to plan very carefully to reduce their tax liability and plan how the money should be used to meet financial goals. You need to discuss your situation and options with an experienced and qualified tax accountant before you sell the company.
Do you have a realistic expectation of a fair sale price for your business? Has a third party given at least an opinion of its value? There can be hundreds of items to take into consideration when positioning your company for sale, but the effort and expense are well worth the reward. These considerations apply to all sizes of companies.