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Given a bit of time, the value of just about any business can be enhanced through some fairly easy steps, some of which are outlined below. Also by making these adjustments to prepare your company for sale, you will make the process go more quickly and smoothly.
If it is possible, start preparing your company for sale at least a year before putting it on the market. Here are some steps that you can take now to maximize the value of your company and assure a quick and successful sale.
Issues to Consider
Financial Issues
Start Preparing Financial Statements for Selling Purposes
No, we're not advocating an illicit set of books. However, financials prepared for tax purposes are designed to show income as low as is possible within the confines of IRS regulations. Large corporations typically prepare a set of financials for the IRS and another for in-house analysis. You should begin this practice too and you should begin far in advance of the sale. It is much more effective than having to prepare a so-called restructured set of financial reports years after the fact. It is very effective though if you have done it on a regular basis for several years.
Talk to your accountant about possible modifications in your accounting methods that may work to your advantage when it comes to selling your company.
Employee Issues
Personnel Changes
Buyers are afraid that key employees might leave after they take over the company. Now is the time to talk with key employees. If they are prepared to remain with the company through the transition, fine. If they are thinking of leaving, it is better that they leave sooner than later. This will allow ample time to train a replacement who will remain with the company through a transition.
Examine Retirement, Profit Sharing, and Pension Plans
Depending upon your age, your fiscal year, and the level of funding of your retirement and other compensation plans, it might be advantageous to change the characteristic or terminate the plan well before selling the company.
Similarly, if you are the trustee and or administrator of a pension or profit sharing plan, now is the time to consider turning these functions over to an outside administrator. consult your lawyer, or retirement plan advisor.
Talk to Key Employees
If you haven't discussed your plans with key employees, do so now. They will learn of your plans anyway, so it is better that they learn from you and get the straight story. Also, you will need their support in assuring prospective buyers that the transition will be a smooth one. Even employees who are not key but will be in a position to piece together what is going on should be apprised of the situation to avoid rumors that may be far worse than the truth.
Contractual Issues
Examine Contracts
Take a close look at any contracts you have with suppliers or customers. Those that would be beneficial to a new owner should be kept and extended if possible. However, if there are contracts that you are renewing because of habit, or for other reasons that are not financially prudent, now is the time to do something about them. Contracts that are harmful to a buyer will certainly lower the value of your company.
Review your Real Estate Lease(s)
If yours is the type of business that depends on location, make sure that you can assure a buyer that he will be able to stay in that location for a reasonable period of time. Above all, make sure that your lease isn't set to expire and be re-negotiated while you are actively selling the company. Negotiating a lease when you are all set to sell is like negotiating with a gun to your head.
Likewise, if your location might be inappropriate for a buyer, consider moving now.
Renewal options are generally better than long commitments because they give the buyer maximum flexibility to stay put or to move. If possible, get a lease that can be assigned to a buyer at your option.
Examine Equipment Leases
If you are leasing equipment and the lease will remain in place after the sale, look at the rationale of the lease(s) from a buyer's perceptive. If a lease will have the effect of saddling the buyer with an interest rate well above prevailing rates and any tax advantages have already accrued to you, the lease may hurt the firm's value. Your accountant can advise you here.
Structural Issues
Systematize Operations
Many small companies rely on a mix of clearly documented procedures and procedures that exist only in the owner's head. Your company will be more salable if procedures are clearly systematized and documented so that a competent manager can take over with minimal training. Get it out of your head and into a procedure manual. Make sure the procedures are tested and refined before the sale.
Separate Real Estate Divisions
It sometimes makes sense to own real estate as a company asset. But when it comes time to sell, including it as part of a business sale can increase the complexity of the sale and make a business less attractive. Sophisticated buyers like to transact real estate separately from the business itself. Also, if real estate is separate, you can start showing rental to the real estate owner as a regular line item expense for the company, making it more clear and acceptable for a buyer to assume the expense.
Ownership Structure
If you are operating as a sole proprietorship or a partnership now may be a good time to incorporate for two reasons.
First, it is better to have the corporation liable for payables and other debts. Otherwise you might find yourself responsible for the new owner's liabilities or liabilities that he agreed to take over. Make the change now because it takes time for creditors to change things over in their own records. Incorporating just before a sale to distance one's self from obligations is not foolproof. In fact, if you wait too long you may have difficulty meeting IRS filing requirements and other bureaucratic requirements that are notorious for taking too long.
Secondly, a corporation provides a clean vehicle for transferring a company in part rather than in whole. A buyer could purchase the proportion of the firm's stock (at the agreed price) that would give him the agreed proportion of the company. Discuss this with your lawyer and your accountant.
Documentation
Entrepreneurs are not known for their fastidiousness in keeping records and documentation. While updating corporate bylaws, minutes, and the like may be way down on your list of priorities, the buyer's lawyer will not be so casual about them. Talk to your lawyer about appropriate updates.
Review Terms and Structure of Sale
The terms are as important as the price. Decide the range of owner financing that you'll consider and the degree of security you'll demand. Remain flexible though, so as to not limit your options. A buyer may present you with a reasonable but unexpected financing package. There are as many ways to structure financing as there are businesses for sale. Also, all buyers are not equal. You may be happy to finance one buyer for 30% of the sale price, while another you might not trust for 3%.
Selling a business is not and should not be a simple transaction. For example, you can sell all of the business or part of the business. You might sell your interest in a corporation to another corporation or an individual. Or, your corporation may sell its assets. It is not unusual for a business owner to sell the business but retain ownership of the receivables for purposes of security. There are even instances where a business is essentially leased with an option to purchase.
The appropriate structure can help you get what you want from the deal, it can protect you legally and financially, and it can bring a deal to fruition that would otherwise never happen. Unless you have experience in structuring buy/sell deals, get the advice of someone who does.
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