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-1¹. 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.
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 most businesses are a hot mess. Here is a list of the information that buyers will want to see:
1. Three years of Tax Returns (2016, 2017, 2018)
Please click here for more information on filing and paying business taxes.
2. Three years of Profit & Loss Statements (2016, 2017, 2018)
"The profit and loss statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement and expense statement." (Source)
3. Three years of Bank Statements (2016, 2017, 2018)
A business bank statement is a summary of all transactions in your business bank account. Each transaction is listed individually, so you can see your income and spending. Each bank statement covers a certain amount of time, typically a month. Your financial institution will send you the statement at the end of each statement period.
4. Add-backs (2016, 2017, 2018)
Recasting (or add-backs) is the accepted accounting principle of going through each expense and determining exactly 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. Lease Agreement (if applicable)
"A Commercial Lease Agreement is a contract used when renting business property to or from another individual or company. It gives the tenant (also known as a lessor or renter) the right to use the property for business purposes during the term of the lease in exchange for payment to the landlord." (Source)
6. Employee W2s
The W2 form is the form that an employer must send to an employee and the Internal Revenue Service (IRS) at the end of the year. The W2 form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck.
7. Proof of Business Insurance
What Else Should You Prepare?
1. 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 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. There are also many ways you can attain your valuation range. Multiple online tools exist that will give you a fairly accurate range to base your listing price on. 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 very own Business Valuation Calculator.
2. 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:
3. 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.
4. Know your story
In the end, you are trying to sell. So, you need to make it 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. It is important to describe to them how they fit into the picture moving forward. Be sure to tell the story, but avoid distorting reality.
5. 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 longterm post-sale can increase your business’s value tremendously.
6. Decide how long you'd like to stay onboard
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 ready for market, paired with a solid plan to go along with it 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.
¹Tresle, Inc. Data & The Business Buyer Resource Center