How Business Owners Can Prepare to Sell Their Business
17 Sep 2020
By Aaron O’Connor, CPA, Managing Director
Coming to the conclusion that you want to sell your business is never an easy decision. Your business is something that you spent years and countless hours building into a success. Now, when you are ready to realize the value that you have worked to create, it is important to take an honest assessment of your business to get it ready to sell for top dollar.
There are some important areas that business owners should pay attention to prior to listing their business for sale. Not unlike selling your house, where you clean up excess clutter and make those home repairs that were always on next weekend’s to do list, there are some areas of your business that warrant some pre-sale care and attention.
Are your financial statements audited? Potential buyers will have an easier time verifying your statements about the business’s performance when there are audited financial statements. Are there some non-GAAP items that have been carried forward from year to year? Buyers will often uncover these items in due diligence. It is best to correct these items now, and at a minimum, know how those items will impact the financial statements.
It’s ok if you haven’t had an audit before, but it may be time to get one done even if it’s only a balance sheet audit. In addition, tell your auditor that you are interested in selling your business because your auditor might know others that are looking to acquire a business like yours.
Are your tax filings up to date with all the relevant authorities? Being behind on your tax filings is a red flag to potential buyers and one that will definitely impact the purchase price negatively. Getting current may take a little time, but the time and energy to resolve any potential tax matters is well worth it.
Another tax area to evaluate is how certain expenses which might be more personal in nature were treated. While these expenses may be allowed by the IRS, by lowering your business income now, you lower the net income that a potential buyer (and the lender that will finance their purchase) sees as well. Purchase price is usually a multiple of earnings, so that lost business income will have a negative impact on the purchase price and how much a lender is willing to finance for your buyer. Have your tax advisor develop a schedule that a potential buyer can easily see and utilize in their due diligence.
Finally, your tax advisor can help you understand the tax implications to you of selling your business.
Document the How’s
Are there documented processes in place for how things happen in your business or does that knowledge walk out the door each day in the minds of you and your employees? Without written documented procedures in place, a potential buyer will have a harder time understanding how the business will be able to continue to operate providing the same level of products and services to clients once they take control. Documented processes strengthen the ability of your business to continue to succeed and makes it more valuable.
Are there older accounts receivables, inventory that hasn’t moved, or service offerings that are not generating the returns you targeted? Develop plans to eliminate these stale balance sheet items and poor performing services before listing your business to sell. Contact those that owe you money and offer to settle for less than the full amount owed. Conduct an auction on the inventory to move it off your books.
Evaluate why the service offerings are struggling and either make plans to improve or eliminate the service. A potential buyer will never value these items as much as you do. They view these items with great caution since they figure if the current owner can’t monetize these items why will they.
Are you able to appropriately determine your sales price? Determining the price at which to list your business is crucial. Too high of a price won’t attract potential qualified buyers and your sale will take much longer. Too low of a price and you leave money on the table. Working with a business valuation expert can help you better understand the current market trends and how your business will be evaluated by potential buyers. Valuation experts can also provide insights into your business and how you can best prepare the business to position it to sell at a higher price.
Structuring Your Transaction
Are you aware of the different structures that a business sale may take? When selling your business, the transaction can be accomplished as either an asset sale or a stock sale.
In an asset sale, as the name implies, the buyer purchases only those assets and assumes only those liabilities that are specifically listed in the sales documents. The remaining assets and liabilities remain with the current owner.
In a stock sale, the buyer acquires the outstanding stock of the selling owner and then owns that proportion of the business if 100% of the stock is not purchased.
There are pros and cons to each structure and it is important to understand your unique situation and the net impact each type of sale has on you as the seller.
If you have any questions or need any assistance selling your business, please do not hesitate to reach out to your PKF Advisory team or contact Aaron O’Connor, CPA, Managing Director at 847.717.8338 or by email to [email protected].