Preparing Your Business to Sell: Ten Questions
By Loren Marc Schmerler, President and Founder of Bottom Line Management, Inc., an Atlanta-based business brokerage, M & A and consulting firm.
1. Do You WANT to Sell? Make sure you really “want” to sell. Ask yourself if you are bored, burned out, ill, have a new child, have aging parents that need your assistance, etc. Or are you simply unhappy with how much money you are making? If this is the case, you do not “need” to sell. All you need is some guidance getting back on the right track.
An experienced business consultant can help you refocus and see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But if you conclude that selling is what you want to do regardless of how much money you are making, then you need to proceed to the next step.
2. Does Your Business Have Curb Appeal? After you positive that you want to sell your business, I suggest that you drive up to your business and review it objectively. Are there any holes in your parking lot? Fix them before a buyer shows up. Is any of the shrubbery dead or out of control? Replace dead landscape plants, weed where appropriate and get shrubs properly trimmed.
Clean any dirty windows. If the building exterior is dirty, get it pressure-washed. Paint the building. Get a new roof or replace bad shingles. In brief, make sure the “curb appeal” of your business has no obvious and easily correctible issues.
3. Is the Interior Appealing? Examine the interior of your business from top to bottom, starting with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Get on a ladder and replace burned-out lights with new and shiny bulbs. Does any of the furniture look ratty? If so, either repair it or replace it.
Repaint the walls to hide scrape marks on the walls. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. How about the restrooms? If they’re an embarrassment, clean them up and keep them clean. Are they handicapped accessible? If not, make arrangements to bring them up to code. Look at your office with a keen eye. Remember that when the buyer tours your business, you want them to visualize becoming the owner and being proud to do so.
4. Job Descriptions Updated? Review your job descriptions, policies and procedures. First, draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed. Make certain you have someone proofread the job description and correct any grammar or spelling errors.
After you are satisfied with your job description, ask all your employees to do the same. This process has several benefits. First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete and typed, place them in a binder labeled “Job Descriptions.” Then you will move on to policies and procedures.
5. Policies and Procedures? Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions in which employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.
When asking a prospective employee to complete an application, stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of Hispanics, you will need to consult with a labor attorney to ensure you do not hire illegal immigrants which could result in severe penalties. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked.
6. Employee Evaluations? Employees are critical to the success of a business, so you must be current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom they have never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.
That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.
7. Are Financials Current? Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told you cannot say when they will become available. Talk about red flags. How can you run a business without current and accurate financial statements? The short answer is that you cannot do so. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.
When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow-moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.
8. Are Taxes Up-to-Date? Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes. It is absolutely critical that you are current with all these returns to instill confidence in the prospective purchaser. If you have not filed and paid all sales tax returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last three years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.
Speaking of taxes, you need to have a heart-to-heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bonafide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after-tax position.
9. Prepared for Due Diligence? What is due diligence, and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc. With financial records, the process starts with the tax returns, goes backwards to the financial statements, then to the general ledger, then to all source documents that include bank statements, deposit slips, check stubs, canceled checks, vendor invoices, client/customer statements, etc.
To prepare for the financial scrutiny that accompanies due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last three years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.
10. Are You a Legal Entity? There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings? If you have outstanding liens for debts that have been paid off, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.
Have you paid all payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales taxes that are due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?
An experienced business broker can guide you through answering all of these questions, which will help to speed the sale of your business.
Loren Marc Schmerler’s company, Bottom Line Management, Inc., (BLM) provides top quality, proven business brokerage services to buyers and sellers who want to control their own destiny and build future equity for themselves and their families. Since 1987, buyers and sellers have trusted Bottom Line Management, Inc., to provide ethical, professional and personalized business brokerage and consulting services based on the company’s in-depth knowledge of current market and industry conditions. BLM helps business owners successfully navigate one of the major financial business transactions of their lives, whether that transaction involves selling their own business or buying another business. The company’s headquarters are located in Atlanta, GA. Loren’s phone number is 470-990-0160
Determining the Right Time to Sell
Determining when it’s finally the right time to sell can be a tricky proposition. If you are thinking about selling your business, one of the best steps you can take is to contact a business broker. A good business broker will have years, or even decades, of proven experience under his or her belt. He or she will be able to guide you through the process of determining what you need to do in order to get your business ready to sell.
One major reason you should contact a business broker long before you think you might want to sell is that you never know when the right time to sell may arise. Market forces may change, unexpected events like a large competitor entering your area, or a range of other factors could all lead you to the conclusion that now, and not later, is the time to sell.
In a recent The Tokenist article, “When is the Best Time to Sell a Business?”, author Tim Fries covers a variety of factors in determining when is the best time to sell. At the top of Fries’ list is growth. If your company can demonstrate a consistent history of growth, that is a good thing. Or as Fries phrases it, “What never varies, however, is the fact that growth is a key component, buyers will look for.” Growth will be the shield by which you justify your price when you place your business on the market.
If your business is experiencing significant growth then you have a very strong indicator that now could be the time to sell. Fries points to a quote from Cerius Executives’, CEO, Pamela Wasley who states, “When your business has grown substantially, it might be time to consider selling it. Running a business is risky, and the bigger you get, the bigger the risks you have to face.” Again, growth is at the heart of determining whether or not you should sell.
Knowing the “lay of the land” is certainly a smart move. For example, have there been a variety of businesses similar to your own that have sold or were acquired recently? If the answer is “yes,” then that is another good indicator that there is substantial interest in your type of business.
Reviewing similar businesses to your own that have sold recently can help you determine how much buyers are paying for comparable businesses. This can help you spot potential trends. In short, you should be aware of market factors. As Fries points out, everything from relatively low taxes and low-interest rates to strength in the overall economy and an upward trend of sales prices can impact the optimal times for a sale.
Now, as in this exact moment, it might not be the right time for you to sell. Getting your business ready to sell takes time and preparation. Fries points out that smart sellers “look for a good time, not the perfect time” to sell a business. Working with a business broker is a great way to determine if now is the right time to sell your business and what steps you have to take in order to be prepared for when the time is right.
Learn more about selling a business in Georgia with our tutorial. Also, feel free to check out some of the frequently asked questions about selling a business.
Should You Sell Your Family Business?
When the complicating variable of family is added to the equation of selling a business, the situation can get rather messy. Family usually complicates everything and businesses are, of course, no exception. Ken McCracken, a family business advisor with KPMG in Ireland, recently explored the complexities so often associated with family businesses in an article for the Irish Times. In the article, “Family business: to sell or not to sell?” 6 questions to help you make the right decision,” McCracken notes that “There’s so much emphasis on the notion of a family business continuing for generations, that the idea of selling could be seen as a failure, which of course is not true.”
Here’s what he suggests family business owners consider.
Is now a good time to sell?
The market will determine whether it’s a good time to sell or not. Are members of the next generation interested in running the business? If not, maybe you could transition into a business owned by your family, but not run by family members. Can you harvest wealth from the business without selling it?
What’s my business worth?
Determining how much your business is worth is a key variable in any decision to sell. The best way to determine the worth of your business is to have an outside party, such as a business broker or a professional business valuation expert, evaluate your business. What you believe your business to be worth and what the market dictates could be, and often are, very different. You may discover that your business does not have the value that you hoped for. If this is the situation, then selling may not be an option.
What are my non-negotiables?
Do you want the new owner to keep all your employees? Must a new owner keep the company name? Is relocating the business off the table? These things are often part of the negotiations, but McCracken says: “Always remember to start out by identifying your best outcome.”
What’s next for me?
What will you and any family members who work for the business do after the sale goes through? You may discover that the sale could be very disruptive for you personally. All too often, people fail to recognize the emotional and mental stress that comes along with selling a business. Many owners begin the selling process only to discover that they are not emotionally ready to do so. While everyone wants to be unemotional in making their business decisions, this is not always the case.
Have I done my Due Diligence?
Not only will prospective buyers investigate your business, you may want to vet prospective buyers ahead of time, which can save you a great deal of aggravation and wasted time. Working with a business broker is an excellent way to handle the due diligence process.
McCracken believes business owners should investigate how the prospective buyer handled previous acquisitions. How well did the prospective buyer honor previous commitments? Do you trust them?
Who will negotiate the sale?
Finally, McCraken believes it is essential to know who will oversee negotiations. Many deals that might otherwise have been successful, fall apart due to poor negotiations. A business broker is experienced in negotiating the sale of the business, with dozens, perhaps hundreds, of successful transactions.
“Whether or not to sell the family business is one of the most important decisions an owner will ever make,” McCracken says. These questions will guide you to make the right decision.
Copyright: Business Brokerage Press, Inc.
Read MoreThe Confidential Process of Marketing a Business
Selling a Business and the Role of a Business Broker
By Greg Younts, CMAI, GABB Broker
A unique challenge of selling your business is that you cannot advertise certain confidential details about the business, and yet you have to target and attract the attention of the right buyers. Specific details about the business such as business name, exact location and unique products or services offered typically cannot be revealed to the public. It could be disastrous if employees, customers, competitors or other third parties discovered the business is for sale. So, how do you confidentially market your business for sale and attract the attention of the right buyers? In an article for the Atlanta Small Business Network, Greg described several possible options for developing a successful confidential marketing plan for taking your business to market, and you develop a custom plan that will best fit your unique business.
Your marketing plan and associated marketing documents should highlight what is unique about your business without revealing so much information that you risk compromising confidentiality. Second, you identify who would be the most likely buyers and structure your marketing plan and message to get the attention of these buyers. The right buyer could be an individual, another business, Private Equity Group and/or other possible groups of investors. And third, you determine the best strategy to get in front of your potential buyers.
If an appropriate method for taking your business to market is to advertise to the public; using business listing websites, business trade journals, trade shows or any other appropriate advertising medium can be effective. Or, a more targeted marketing strategy might be best for your business. You may know specific buyers who would be interested in your business, and industry research can be performed to identify a list of potential buyers within your industry. In this targeted approach, the best strategy may be a proactive direct mail and phone campaign to contact this group of buyer prospects. It also might be appropriate to execute a broader strategy that includes both public advertising and targeting a select group of buyer prospects.
Regardless of the marketing strategy that is right for your business, key tools that could be used in this process are some form of public advertisement and/or business profile that is often referred to as the “blind profile”. The profile is blind because it does not reveal confidential information, but does provide key facts about the operations and financial performance of the business that buyers need to see. Multiple versions of the blind profile might be required for your business if different types of buyer prospects are contacted. A blind profile typically contains more information about your business than a public ad. It is often sent to a buyer after they respond to an ad and is sometimes included with a letter in a direct mail campaign.
The most widely used form of public advertising for businesses on the market are the business listing websites. The Georgia Association of Business Brokers maintains a website where its members list businesses for sale in Georgia, and other businesses for sale by GABB brokers. This site and others allow business owners the flexibility to provide a comprehensive profile of their business without disclosing confidential information. Buyers mau search for businesses by criteria such as type of industry, geographic location, sale price, annual revenue, cash flow, availability of owner financing, etc.. And, there is the option to search by keywords to find a very specific type of business.
An experienced business broker knows how to write a listing site ad that will best describe your business such that it will be found and read by the right buyers. Too often, business owners provide a very poor description of their business. In my experience, business buyers are often frustrated by how difficult it is to find businesses that are accurately described with the key information they need to see if it is a business they want to pursue. This is one of the major reasons why some businesses do not generate strong buyer interest or catch the attention of the right buyers on listing sites.
Experienced business brokers and M&A professionals can help you develop a marketing plan and the related documents. They know how best to describe your business in an advertisement and blind profile, and make sure it reaches the right buyer audience. They know what appeals to buyers and how to make your business standout as an exceptional acquisition opportunity. They know how to impress and capture the attention of C-level executives, Private Equity Groups and individual buyers. And, as buyers express interest in the business, brokers know how to engage with buyers to further determine if they are qualified in terms of background, skills, experience, interest level and financial profile.
Top business brokerage and M&A firms have marketing and industry research staff to support their brokers in developing the marketing plan, blind profile and other marketing documents that will be used for their clients. They have access to various sources of industry data sometimes needed for identifying a list of potential buyers for a business. These firms have also developed several third party relationships that give their clients the best and broadest possible exposure to top buyers in the marketplace. They have relationships and affiliations with various state, national and international Business Brokerage and M&A associations. And, they are in contact with thousands of Private Equity Groups, corporations and other possible sources of buyers.
The successful confidential sale of your business largely depends on developing and executing the right marketing plan for your unique business. Failure to take a business to market the right way has resulted in businesses not selling or businesses being sold well below market value. If you are selling your business and need expert guidance through the confidential process, you should consider the services of a business broker. The investment in the services of a business broker could result in recognizing an after-tax gain on the sale of your business that will easily justify the broker’s fee.
Greg Younts is a Certified M&A Intermediary and has more than 30 years of experience working for companies in sales, marketing, and management capacities. He started his career in the information technology field where he focused on the design and sales of strategic technology solutions to meet the needs of companies that range in size from small business to the Fortune 100. He has served companies in every major industry throughout North America.
Read MoreWhy You Should Focus on Proper Exit Planning
If you are like many business owners, you are primarily focusing on building your business. Unless you want to work until you drop, you should start thinking about what you’ll need to do to sell your business. Many businesses can take years to sell or even fail to sell all together. For this and many other reasons, it is important to invest some time and energy into thinking about proper exit planning and strategies.
In a recent Forbes article, “How Proper Exit Planning Benefits the Buyer and Seller,” author Walter Deibel discusses his interview with John H. Brown, author of Exit Planning: The Definitive Guide. Brown and Deibel both agreed that, when properly handled, exit planning can help both the seller and the buyer. Deibel is the author of “Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game.”
Exit planning can make a business more transferable. As Deibel points out, when buyers are evaluating businesses, transferability is a key factor.
“Once the current business owner leaves, are they taking a lot of specialized knowledge with them that the buyer will need to grow the business?” asked Deibel. A buyer must feel that he or she can walk into a business, take it over, keep it running effectively and even grow the business in the future.
A key aspect of being able to buy a business and having that business be successful is that all relationships from vendors to customers are transferable. A good management team, one that can help a new owner thrive, is a must. Building that team in advance is a savvy move for any business owner looking to sell their business. Concerns on any of these fronts can spell doom for a seller. If a buyer doesn’t feel that they can operate a business, then they probably shouldn’t be buying it.
Great exit planning definitely benefits the seller as well. When sellers engage in exit planning, they realize how much money they need in order to exit, Deibel notes. This forces sellers to become very focused and goal-oriented. Sellers will take proactive steps to ensure that their business is as appealing to a potential buyer as possible.
“Exit planning is not about squeezing every last drop of value from the business or taking all the growth opportunity off the table,” Deibel says. That “end gaming” approach to exit planning can discourage potential buyers.
Ultimately, proper exit planning is a win-win, one that benefits both buyer and seller. “When done correctly, exit planning gives the seller clarity, lowers the risk for the buyer and leaves the door open for future growth,” Deibel says.
Buying or selling a business is a multifaceted, and often quite complex, process. The sooner you begin working with a professional, like a business broker, the better off you’ll be in finding the right business for you and your particular needs. For most people, buying or selling a business is the financial decision of a lifetime. Having a proven trusted partner, one that knows the lay of the land, is simply invaluable.
Copyright: Business Brokerage Press, Inc.