Preparing a Business for Sale

The decision to sell a business is a critically important financial and emotional decision for an entrepreneur. It is a life changing decision that should not be made lightly but with careful consideration and preparation.  Regardless of whether your plan is to transfer the business to a family member or sell the business in the distant future, it is never too soon to begin implementing improvements that will make the business more salable.

1. Keep current monthly (or at least quarterly) accrual financial statements. This is the first introduction a buyer will have to your business.  The buyer most often determines what he is willing to pay for the business based on the financial statements.  Income and expense line items should be easy to understand and explain. Statements should be clear and concise.  Many business owners produce financial statements only once a year and often on a cash basis.  This works well for filing state and federal taxes but is not very helpful in understanding trends and seasonality and the overall current profitability of the company. 

2. Review corporate minutes and records.  Make sure all required filings and corporate minutes are up to date.  Talk with your accountant about the corporate structure of your business and the tax implications in a sale.

3. Review contracts with customers, suppliers, and third parties.   Consider the transferability of desirable contracts.  When entering in to new contracts, analyze their value to a potential buyer.

4. Review employment contracts.  There are often advantages of having non-compete agreements with key employees.  Most buyers will think it extremely important that key employees stay on after the sale.  Since the enforceability of non-compete agreements varies from state to state, discuss this issue with an attorney first.

5. Review real estate and equipment leases.  Can the leases be transferred?  A buyer may or may not want to stay at the same location so it's normally best not to enter in to a long term lease just prior to selling the business.

6. Review your insurance coverage.  Liability insurance can be "occurrence based" or "claims made" with the latter providing more limited exposure for the insurance company and thus a lower premium.   If your policy is "claims made" this will subject the buyer to significantly more risk.  In this situation, the buyer may require you to purchase "tail insurance" for a period time after the sale or hold back a portion of the selling price to cover any potential liability.

7. Update policies and procedures.  Codify procedures that are unwritten rules.

8. Clean up your accounts receivable by collecting or writing off old balances. 

9. Clean out storage.  Keep records only as long as you must.  If you don't already have a plan to remove and destroy old records, put one in place.

10. Keep it a secret.  In most situations, it is best to keep this information from employees and clients until the sale is imminent.  Leaking this information too soon can damage the business and directly affect its value and profitability.  Don't be tempted to spill the beans.

When the time comes to sell the business, consult with a trusted advisor before making any major changes or purchases that could directly affect the value and desirability of the company.  Otherwise, continue to run your business as usual, keeping your eye on the ball. Having the affairs of the business in order will result in a smooth transition for both buyer and seller.