It’s the dream of many entrepreneurs. You’re run your business for many years and you’ve had some success. Now you’re ready to move on. Perhaps retirement, perhaps to another career – another challenge. If the company is still generating revenue and profits, however, you have something of value. It makes little sense to just shut the company down. This may be the time to consider selling the company.
There’s a very difficult challenge you will likely face when deciding to go down this path. If you’ve done well, you’re probably an expert at your business. If you’re a widget manufacturer, you know everything there is to know about manufacturing widgets. You’re a subject matter expert about widgets. What you are not, however, is an expert at determining the value of your business and what is needed to present your company in the best light, to get the most value for it. The purpose of this checklist is to help you understand the topics that need attention when considering how to sell your company for the most money.
1. Reason for the sale.
This is often one of the first questions you will be asked by a potential buyer. The one answer they do not want to hear is that the company is not profitable. You should have an answer ready to provide and it should be compelling and convincing; one that the buyer will be comfortable with and show that the company is on solid ground – that it’s you who want to move on for reasons other than the company isn’t doing well. Two common reasons are retirement and a loss of passion for the business. Both support that the company is and can continue to be successful with a new owner.
2. Make sure your accounting records and books are professional.
This goes beyond making sure you have the right documents. It also includes presenting your records in the "right" manner, in a way that not only accurately represents the P&L, balance sheet and cash flow, but does so in a professional manner.
Buyers of a business need to be able to tell what your business would look like if they owned it. Do you drive a company car which has a personal automobile lease? Do you reimburse mileage expenses to yourself? It’s possible your buyer won’t have those accounting entries. If you’ve booked these as generic travel expenses, it’s impossible for a buyer to know how to carve those expenses out to determine what their P&L will reflect. Or you may have infrequent expenses you had incurred during the past three years that should be excluded in a buyer's analysis of recurring cash flow. There may be moving expenses if you've moved to a larger facility or unusual legal expenses.
Go through your records for the last three years, including year to date (a buyer will need to know that your company’s financials remain consistent through the current year); including financial statements, and review your tax returns as well. Better yet, hire an accountant to review your books. They will be more likely to see something out of the ordinary than you are.
Identify the parts of your business financials that need attention and "fixing" before you offer your company for sale and make journal entries that will help a buyer identify these topics.
3. Consult your financial advisor.
While you are working on No. 2 above it’s also a good time to speak to your tax advisor for help planning for your post-sale financial future. Understanding your personal and corporate tax circumstances may also help you understand your options with regard to the deal structure for a sale.
4. Organize your legal paperwork.
At some point during the selling process the buyer will start conducting serious due diligence. Included in this step is reviewing as many, if not every, legal document related to your business. These include the original incorporation papers, all employee and independent contractor agreements, customer agreements, vendor contracts, your lease, benefit plans you may have set up and whatever other documents you have signed with other parties. Even for a small business this could run into the thousands of pages, which can be a time-consuming task. The earlier you start, the easier it is to fix any issues, find any missing documents and be prepared to deliver your due diligence documentation to a buyer in a timely fashion.
5. Get a business valuation.
This is trickier than you might think. Common sense tells us that getting a professional valuation will help us establish a price to ask for our business. There are several common ways of obtaining an estimate of the value of your company. Professionals will look at your industry, your target market, your position in the market, your operations, revenue, expenses, cash flow and the strengths and weaknesses of your company compared to competitors. Typical professionals who perform business valuations are accountants, business brokers and for larger companies, investment bankers.
Often determining the value of your company will take into account your annual profits for the last several years, as an average, and then use some multiplier to determine a value. This is a tried and true method that has been around for decades and is likely a good place to start.
However, there is one critical concept that many entrepreneurs and even some valuation professionals overlook. Selling your company for the most money doesn’t mean that there is a specific number that your company "should" sell for as a maximum. This is because the value of your company could be drastically different depending on who is buying it. Let's say you decide to use a multiple of 3X times net as your target selling price and this seems to be the going rate for your type of business in your industry. Along comes a company that is in an adjacent industry and wants to enter your industry to complement their business. They could build a new company in your industry but that might take years and cost a fortune. A better way to enter the market could be to buy an existing company – your company. It provides a quick entry and enables the company to start maximizing efficiencies between the new combined offering. This company, anxious to enter the market to take advantage of these efficiencies, could well be ready to pay a premium above what someone "just" wanting to start a business in your industry would pay. Your company doesn’t have a static value; it could vary greatly depending on what potential buyers believe they can do with your company.
Related: Business Valuation Methods
6. Make a good first impression.
Identify and correct the parts of your business that may be in need of a pre-sale improvement. Will a buyer visiting your location for the first time, whether an office, a manufacturing plant or a storefront, see order or chaos? Buyers look for companies that show well, as an orderly business is often an indication of an orderly management team and back-room operations. Some things to consider include "dressing up" a tired looking store and updating outdated operating systems. Perhaps ramping up marketing to boost sales; get rid of bloated inventories. If you are retail store brighten up the location with some new design work and review your sales staff – this may be the time to make that change regarding an unpleasant employee you’ve been thinking of.
7. Spend your time with buyers wisely.
A major reason deals fall apart is due to a buyer not being able to secure financing. Pre-qualify your buyers. Do they have financing in place? If not ask them to provide specific details regarding what their financing plans are. Just as a buyer will want to conduct due diligence, you should do the same when it comes to the buyer’s ability to close the deal.
8. Keep your plans to sell quiet and private.
Share you plans with as few people as possible, only as necessary and only when the news is communicated under a non-disclosure or confidentiality agreement. Key staff will need to know earlier than others but should only be consulted when true progress has been made with a potential buyer. If word gets out that you plan to sell your business you risk creating uncertainty and discomfort among employees, customers and suppliers - all of which could contribute to a devaluation of your business at the time you need to most increase its value, resulting in either a lost sale or a buyer offering a reduced price.
9. Last, keep your eye on the ball.
Don’t let all the tasks discussed above distract you so much that your business performance takes a fall. This also will give any buyer additional negotiating power to come in with lower offers. Getting your company ready to sell is not the time to reduce your needed hours and attention to the success of the business. In fact it’s a demanding period of time and you are likely to have to put in extra hours to get everything that’s needed done, while continuing to lead the company. The result could be a transformational change in your life, and that will be worth the extra time and effort.