At some point you will know that you are ready to sell your business. At that time, the question will no longer be whether or not you are ready to sell your business but it will be whether or not your business is ready to be sold.
More than 70% of privately held businesses have no succession plan to transfer their business to new owners. If you don’t transfer or sell your business to family members, partners, management or employees, it is likely that someday you will want to sell your business to a third party. That day might come sooner than you think, and you should be prepared.
Many times business owners are forced to exit a business earlier than expected. Just because you are not currently ready to retire doesn’t mean you have plenty of time to prepare for an orderly business sale. Retirement is NOT the primary reason why businesses sell. Other more common reasons include:
- burn-out (the number one reason for selling)
- health issues
- personal financial/risk diversification
- divorce/partner disputes
- business growing too fast required additional capital
- second generation not up to the task
- losing market share, financials in decline
Many business owners neglect their most valuable asset: their business’ future. They don’t groom someone to continue the business in their absence, and they do not keep the business in salable shape while they operate it. They get bogged down in daily operations without planning for an impending event that they perceive won’t occur until sometime in the distant future; selling the business. Fate sometimes dictates circumstances beyond your control, and tough decisions must be made. If your business isn’t ready to sell when the time comes, what are your alternatives?
Liquidation may be a solution, but it generally is a last resort that usually returns little to the business owner. The underlying assets (except for real estate) may be outdated and of little use to anyone. At auction, assets will bring only what the attending bidders are willing to pay and may be sold to liquidators (for scrap) for pennies on the dollar. Liquidation of often occurs when the owners have become ill or disabled, or need to retire and have not planned their exit.
Closing the business?
Shutting the doors of your business also is an unattractive alternative. Business owners find themselves in this situation when they “put off” liquidating the underlying assets in hope that someone will come along to buy this business. This does not often happen, and as a business owner, you are much better off having a plan in place before closing the business is the only feasible option.
Build Wealth Now By Planning Your Business Sale
To maximize your business wealth, you should be begin right away in planning for an eventual exit. This allows you time to properly safeguard your valuable business asset. Benefits of planning today include a better chance of:
- meeting your goals and objectives on your timetable
- reaching out to identified potential buyers early in the process
- creating an attractive acquisition candidate
- viewing your business from a buyer’s perspective
- understanding why a buyer may want to buy
- learning why buyers might not want to buy— what risks and uncertainties are evident in your business— and be able to fix the problems
- realizing the worth of your business now, and learning how to increase the value even more as part of your retirement planning
Business Value Checklist
1. Record All Sales
As a private business owner, you likely manage your business to minimize reportable earnings, thereby minimizing taxes. But the IRS can become your best friend when it comes to documenting your historic results and selling your business. Income taxes are a great investment in the years immediately preceding an anticipated sale of the business. Paying taxes proves to the buyer and his banker (or other financing sources) that your business operations have been profitable. The profits are documented with IRS returns
2. Eliminate co-mingling of business and non business assets
A common practice among closely held companies is to co-mingle non business assets and expenses with business assets and expenses. Businesses sometimes own motor coaches, boats and airplanes; all reported as business assets. The costs of maintaining and operating these assets are expensed as regular business operating expenses to reduce earnings. It’s true that these businesses (if not audited by the IRS) are saving a certain amount of income tax, and providing an extra “fringe” benefit for the owners of the company. But this strategy may backfire when you try to maximize your selling price.
Wise business owners should endeavor to separate non business assets from the business in the three to five years immediately preceding a planned sale of the company. Doing this makes it easier to accurately measure and reflect the true earning power of the business, as it will be unfettered by the capital investment in non business assets and their associated costs.
Buyers of your business are generally purchasing future income streams that will be produced by your business. The leaner and more productive your business is today—the more it is worth.
3. Think Like a Buyer: Do your own due diligence
Some executives of both public and private firms get annual physical check-ups. Many of these same executives get their personal investments reviewed at annually, too. Yet, these same executives never consider giving their company an annual physical, unless they are required to by company rules, banks, or some other compelling reason.
Anyone interested in purchasing your business will perform “due diligence” procedures on your business before closing on the purchase. These are detailed, complex investigations that look at all sorts of business minutia. All too often, sellers are surprised at the skeletons that purchasers find in the seller’s closet. These skeletons usually reduce the value of your company, as they increase uncertainty and risk in the buyer’s mind; in some cases, they kill any chance at closing a sale. What skeletons do you have?
You should give your business a regular physical by doing your own periodic due diligence. Treat your business as if someone else owned it—and you were the potential purchaser. What problems do you uncover that might cause you to reduce or withdraw your offer? Spending the time and money to discover and fix your company’s problems now will pay huge dividends today – in terms of enhanced profitability—and it will increase long term company value, which is exactly what you want when it’s time to sell.
Keep your business records up-to-date and readily available.
You never know when opportunity might knock at your door. If and when it does, are you ready to respond? How many times have you heard someone say “I’d sell my business for the right price?” Maybe you’ve said it yourself. But do you know what documents a serious buyer will need in order to pursue the purchase? When a qualified buyer is ready to begin serious due diligence, they will need a variety of company documents. And they’ll need them fast. Following is a partial list of things a buyer will ask for:
- three to five years income tax returns
- copies of one to three years quarterly payroll reports
- three to five years CPA prepared financial statements – reviewed or audited
- current year to date financial statements
- detailed depreciation schedules listing each fixed asset owned by your company
- corporate minute book with updated minutes
- recent aged accounts receivable trial balance
- recent aged accounts payable trial balance
- company organization chart
- copy of the summary of insurance coverage (provided by your carrier)
- information about employee benefits provided by the company
- information about employee retirement plans
- copies of labor contracts
- copies of other contracts to which the company is a party
- copies of licenses
- assessment of and registration documentation for all intellectual property (patents, copyrights, trademarks, trade secrets, etc.)
These records are extremely important to speed the sales process along. Few companies maintain these records in complete and up-to-date form. This situation can dramatically affect a potential sale.
Sell Your Business When You are Ready
You can increase your wealth by following a few simple ground rules for successfully selling your business. Like other owners of closely-held businesses, you know how to operate your business on a day to day, month to month and year to year basis. But your experience in running the business has not prepared you to know how to sell your business.