How to Get Your House in Order When Selling a Business
If you could sell your business today, would you be ready? Don’t be fooled when it comes to selling your business, the process is not a quick one. Careful planning and preparation can start today even if you don’t plan to sell for years down the road. If you have ever sold a house, you probably spent time deep cleaning and maybe you added fresh paint to increase the curbside appeal. Just like selling a house, preparing to sell your business will be tedious and it’s never too early to begin.
Yesterday we streamed a live broadcast about how selling a business takes careful planning. Click here to watch: Practical Legal Insights-25 Selling A Business Doesn’t Happen Overnight
Could I Sell My Business Today?
Getting your “house in order” is an extensive process that goes beyond making sure your financials and legal documents are good. Ideally, you want to have any lingering neglected business matters cleaned up, have agreements in place with key employees, and start organizing the data and documents a buyer will need before you begin the formal sales process.
- Is your business profitable in a way that is attractive to a potential buyer?
- Can you show consistency and growth over several years?
- Are your costs in line with the industry?
- Do you have the operational systems in place to sustain the business?
- Are your practices and procedures documented?
- What’s the state of your customer relationships and contracts?
- How secure are your vendor and supply chain relationships?
- Management Team
- Do you have an effective team that will be able to make the transition smooth if the company is bought?
- Have you created a strong brand and reputation that is unique and valuable to the market?
How Much Due Diligence Should A Buyer Complete?
Before making a purchase decision a potential buyer needs to evaluate the business from every angle and dig deeper into the specific details of the business. This will help a buyer avoid a nasty surprise later. Due diligence is a crucial step because not all businesses are always transparent. Due diligence is tedious and may take several weeks to complete.
Part of the due diligence process should include spending time at the place of business, interviewing key employees, getting a feel for how the business is run, and the interactions between employees and customers.
Jean Murray in the Balanced Small Business says,“[t]he most important aspect of the due diligence process is taking note of discrepancies between what is reported and what is actually going on. Ask lots of questions. If you don’t get satisfactory answers, ask again and ask why. It’s sometimes necessary to prove the negative as well as the positive. Remember, if something doesn’t seem right, it probably isn’t.” Comb through your business records and transactions and pay particular attention to anything that may be a liability for a buyer as the new owner. Get your house in order by being prepared for a buyer’s difficult questions about your business.
What Documentation Will A Potential Buyer Request to Review?
On top of making sure the business is sound and profitable there are several documents, you will need to produce for due diligence and also for the attorneys to prepare the purchase documents. Here’s what you need to have readily available:
- Articles of Organization or Incorporation
- Company’s by-laws and shareholder’s agreement or an operating agreement
- Company record book that includes any meeting notes, consent forms, etc.
- An organization structure chart
- A current list of all owners with a list of the ownership percentage.
- A Certificate of Good Standing from the Secretary of State where your company does business
- Three years’ worth of financial information including audit reports, tax filings, profit and loss, balance sheets, accounts payable and receivable, general ledgers and credit reports, and projections including capital budgets and strategic plans.
- A current list of all physical assets and real property assets.
- A current list of intellectual property including domestic and foreign patents, trademarks and trademark names, copyrights, and descriptions of technical know-how.
- Employee handbook
- Written policies and procedures
- Active contracts with employees, vendors, suppliers, etc.
How To Come Up With A Selling Price?
When you sell a car or home you consult Kelly Blue Book or have your home appraised so you know the market value. The same is true for your business. Be realistic about the value of your business. It’s easy to believe your business is worth more than a buyer is willing to pay. Usually, a seller is discouraged because the selling price ends up much lower than expected. Keep in mind that at the end of the day the value is really whatever a buyer is willing to pay.
There are lots of ways to figure out a selling price. The first place to start would be consulting with your CPA. Your CPA can give you a good idea by looking at your revenues over the last three years, business assets and liabilities. It may be necessary to spend the money and hire a business appraiser. Just like a house appraiser, a business appraiser will look more deeply into the business financials to determine the value.
Neil Patel states in Forbes magazine, “Don’t be scared of getting an appraisal. Prospective buyers will either ask for one or order one, so you might as well have one to show them. You’ll gain credibility by doing so. What’s more, you’ll know personally if you’re in a good position to sell. If the prospect of selling looks financially abysmal, you can either lower your expectations or take a year or two to get the business into [a] better condition.”
Don’t Wait To Hire Professionals
If you don’t already have a CPA and an attorney on your board of advisors, then that’s actually the first place to begin. Both of these professionals are needed for the life of your business to ensure your finances are in order and your assets are protected against liabilities. If you regularly use a CPA and an attorney, then you will be better prepared for the day you actually put your business on the market.
How Will The Deal Be Structured?
Many buyers and sellers are shocked at the amount of legal work involved with the purchase of a business. Preparing the purchase agreement documents and negotiating the terms of the deal is complicated and cannot be done quickly. As such, legal fees can be expensive. Here are some things to consider when you decide to find a buyer:
- Should you sign a Letter of Intent?
- Will the sale be an “Asset” sale?
- Which assets will not be part of the sale?
- Will you carry back a loan to the buyer for all or part of the purchase price?
- What security will you require to carry back a loan?
- Are you willing to stay on as an employee or independent contractor? If so, how much do you want to get paid? For how long are you willing to work?
- What contracts (like a lease agreement) will need to be assigned with consent from the other party to each contract?
- Is there any “titled” property like equipment or vehicles?
- Are there any key employees who need to secure their employment with the new owner?
What To Expect With Legal Fees
Dana Ball, a Utah small business attorney, recommends finding an attorney who will charge a set fee instead of billing by the hour. Why? Because a set fee will save you money in the long run. It eliminates the surprise of getting a very large and unexpected bill after the sale has closed.
As a business owner, you may start your business with the intent to grow and sell it so you can move on to your next business adventure. Or out of the blue, a buyer may approach you with an offer you can’t refuse. Just like selling a car or home, there is prep work to be done before a sale can happen. Now is the time to get your “house in order” so you can get the maximum value for the business you built.