Prepare Your Business To Sell
Either you have decided to sell your company or, you have decided to begin preparing your company for an eventual sale. You can prepare your business to make it more marketable, prepare books and records, prepare your inventory, prepare your equipment. Without letting your employees know, you can even begin preparing them for the transition. What can you do to help make this process less stressful and how can you increase the chances of a successful sale? In this article, I will address these questions and more. I will break these down into three categories:
- Business Valuation
- Prepare Your Business For Listing
- Long Term Preparation
The Business Valuation
A business valuation is a valuable tool to help decide when to sell your company. It allows you to realistically place a dollar value, and know how much a bank will loan. The Enterprise Group will do a free business valuation for you. Our business valuations have been proven time and time again to be quite accurate. That being said, published statistics show when a company has an independent third party appraisal, selling success goes up substantially. The sale success rate goes from approximately 20-30% to almost 80%. This is when using a business broker. The success rates are much lower when a business owner attempts to sell the business on his own.
Independent Third Party Appraisal
Because of this, The Enterprise Group works with one of the best Certified Business appraisers in the country. This firm performs appraisals all over the United States and is highly regarded in the industry. There is a good chance the lender your buyer chooses will already have this firm on their list of approved appraisers.
There are many benefits of having an independent third party appraisal.
1. You as a business owner know for sure what the business is worth
2. You now have an independent third party supporting the purchase price. You the seller are in a much stronger position at the negotiating table.
3. Banks are significantly more comfortable loaning the requested amount when they have the documented proof of a third-party appraisal
4. Even though the bank will still have to have their own appraisal, it becomes very difficult for another appraiser to come back with a lower value.
What is needed for the Valuation
When you make the decision to sell your company, you will decide the sales price. The business valuation is the first step in determining this figure. For our company to perform the business valuation we need a list of information. More information equals higher accuracy when completing the valuation. Here is a list of information The Enterprise Group will request in order to perform the valuation.
- A minimum of two but preferably three years of financials (P&Ls)
- Three years of tax returns
- A list and current value of furniture, fixtures & equipment (FFE)
- Current inventory along with the wholesale value
- Current balance sheet
- Accounts receivable total along with the percentage of aging or bad debt.
- List of outstanding loans with total debt and monthly payments
- If property is included, a description of the property and last appraisal
Two years of P&Ls, balance sheet, inventory total and property information are the minimum needed to do a preliminary valuation. Once the business is listed for sale, everything listed above will be required. This being said, the quicker you can get all of this together, the easier it will be for you.
Prepare Your Business For Listing
It’s no secret when you sell your car or your house, the best way to get top dollar is to make sure it is clean and in good order. The same thing applies to a company when listed for sale. A clean, neat, well maintained company shows much better than one that is not. A fresh coat of paint and all of the equipment serviced and properly working. What some may call a good “spring cleaning” will go a long way to attracting buyers.
Organize the company’s financials. Make sure all of your financials are up to date and ready to be looked at by buyers. Be prepared to give at least three years of financials, some banks are now requiring five years. (Profit and Loss statements, Balance Sheets and Tax Returns). Everything needed for the valuation is needed once the business is listed for sale.
Create a complete list of “FFE” (Furniture, Fixtures and Equipment). This is a complete list of everything that is going to go in the sale that is not considered inventory and is not nailed down. Estimate a current value of these things. Your balance sheet will have at least a partial list of these items that have not been depreciated off but realistically there will be a difference in value from the balance sheet to what is current market value.
Compile a complete and up to date inventory of products, parts and materials with the actual wholesale value. In most cases, this is added to the total price of the business. Sometimes it is used as a negotiation tool to agree upon a final selling price with the buyer.
More preparation for selling your business
Create a list of employees with their job description, annual salary or hourly wage; indicate full time or part time and whether they are considered management. Do not put their names, just use “Employee one, Employee two” etc.
Sit down and create a couple-page synopsis of the business. Tell about the company’s history, why it is a great company and give your opinion of the potential future growth. If you were buying your company what would you do to grow it to the next level? Why do you want to sell? Is it for retirement, do you want to start a new venture, or do you run multiple companies and want to start concentrating in another area? Buyers like to know if it is such a great business, why you are selling? This gives them a logical explanation which also gives them a level of comfort that they are looking at a truly great business to purchase.
Long Term Preparation
One of the big mistakes business owners make as they are building and developing their company is that they become the center, or hub of the business. In short, they ARE the business. One of the first questions I will ask a lot of business owners is, “if we take you out of the business, what’s left?” That is a good question, and it is a good question for multiple reasons.
For the purpose of selling the company, what would it take to replace you the owner and how much would you have to pay this person to run the company? I understand that a young company may not have the resources to put a manager in place to take over the responsibilities of the owner but ultimately this should be the goal of a business owner, to make himself or herself less vital to the daily workings of the company. This starts by properly training your employees to do their job and have the confidence in them not to have to oversee every little detail. I call this long-term planning because you cannot do these things overnight. You may have been running your company for years with your hand personally in every area of the business.
The journey begins with the first step
You don’t make changes like this quickly but you do need to start by defining what your employees do, making sure they are properly trained and then create a training manual with specific details of what to do and how to do it so that if someone else had to take that position, they would be able to step in and by using the training manual along with some guidance from management, they would be up and running quickly. Another great idea is to cross train your employees so that there is always more than one person trained to do each and every position within the company. This way if someone quit, was injured or even died, that position would not go unattended.
These things can give you great benefit in many ways by making your job as the business owner much less stressful. Your business will be significantly more marketable. This doesn’t necessarily make the business worth more than market value but it does help the business to be higher in the range of current market value and more importantly, it makes it more attractive to potential buyers.