It’s a great time to sell a business. The U.S. economy is in a good place having recovered from the 'Great Recession' of 2008 and we are seeing an increase in demand for small-to-medium sized businesses. It is certainly a seller’s market as buyers outnumber sellers by about 10 or 15-to-1. Having high demand for your business is great, but there are some things that sellers need to take into account prior to listing a business for sale. Below we go over the information needed to prepare a business for sale.
What Information Do You Need?
The transition in ownership can and should be a smooth process. Let’s take a look at some high-level items that can help get your business ready for market and attract top-quality buyers:
For most buyers, financial statements are the foundation of their due diligence process. So, make sure you get yours reviewed by a reputable accounting firm to ensure accuracy and clarity. This step seems logical and simple, yet in reality, the financial statements of a lot of businesses are unorganized. Here is a list of the information that most buyers will want to see:
1. Three years of Tax Returns
2. Three years of Profit & Loss Statements
3. Three years of Bank Statements
Recasting (or add-backs) is the process of reviewing each business expense and determining what items (fully or partially) could be considered either: a one-time expense that the future owner will not incur or; an expense that is optional in nature and not a vital, business-related expense.
5. Office Lease Agreement (if applicable)
6. Employee W2s/1099
7. Proof of Business Insurance
What Else You Need to Prepare a Business for Sale?
Determining the valuation
A big misconception when it comes to a valuation is that it needs to be an exact figure. Having an exact figure, however, can sometimes turn away a fair offer, or worse, limit the business to a strict price ceiling. Creating a range that includes an upper and lower limit, and then forming a listing price somewhere between the two, should be the goal.
Note: There are several methods of calculating valuations - none of which are better or more successful than the other. Multiple online tools exist that will give you a fairly accurate range on which to base your listing price. Another option is to go through your accounting firm or hire a valuation specialist to give you their opinion. Click here to access Tresle's Business Valuation Calculator.
Your listing price is only the beginning
At the end of the day, the price associated with the business is up to the market itself. You want to get started with an accurate approximation in order to attract buyers, but ultimately, the business is worth what people are willing to pay for it. Let's explore other important factors to consider when preparing your business for sale.
Understand your organization’s wellness
As we mentioned, being prepared for a sale goes far beyond financials. Having the company itself organized is another very important step. This means reviewing articles of incorporation, licensing agreements, leases, permits, client and vendor contracts, the company’s legal condition, customer disputes, negative reviews, testimonials, among other things. Double-check you have all these points available, up-to-date, and in order upon request of the prospective buyer.
Know your story
In the end, you are trying to sell. So, you need to make your story convincing. Explain to the prospective buyer(s) why you started the business, your vision, the opportunities that exist, and the journey it has taken you on up to this point. It is important to describe to them why you are deciding to sell and how they will fit into the picture moving forward.
Be sure to tell a good story, but avoid distorting reality- overselling is easy to detect and will turn a lot of people off.
Prepare your team
Your employees make your company what it is. Without them, it would be impossible to achieve the things you have up to this point. For that reason, it is important to respect them and properly communicate your intentions with them.
Let’s pause here to place an emphasis on ‘properly communicate’; this doesn’t mean you need to tell every employee your plans to sell. However, the ones who you consider to be a vital part of the organization should know certain details. This is not to say you should make the sale totally public. If you do, you run the risk of losing employees and clients.
It is important to only share the important points with your top team and to inform them that you don’t want the information to be public knowledge. Communicating your reasons for selling, your plan, their job security, and your post-sale involvement are all important points to mention. This can certainly be a tricky process because it is a balance between not making them panic for their jobs and showing them respect by giving them a heads up.
Note: Having key employees commit to staying onboard long-term post-sale can increase your business’s value tremendously.
Decide how long you'd like to stay on board
In order to keep employees, customers, and vendors at ease, most sellers remain on-staff for a set period of time after the deal has closed. This helps ensure a smooth transition and keeps everyone in touch with a familiar face. In addition, the fact that you are willing to assist post-sale gives the new owner assurance as well as some time to learn the ropes by shadowing.
Having your business truly ready for market, paired with a solid plan post-sale only increases your business’s value; and this makes sense if you think about it. From the buyer’s perspective, they are looking for something with low risk and a solid return.
Seeing a seller that has put the effort in to have everything organized and ready for the future owner makes the deal far more transparent and attractive. Following these steps will help you get your business ready for the right buyer and make the transition as seamless and stress-free as possible.