Planning To Sell
Planning For Sale of Business is Imperative

© Premier Sales, Inc.

As seen in The Business Journal - January 1995 - Cover Article

There are many intricacies to the process of selling a privately held business.  Oftentimes, business owners tend to fall in love with their businesses and develop strong emotional attachments.

Prospective buyers perceive business enterprises, more objectively, as cash producing assets with potential for increased cash flow and equity appreciation.

This gap of perception must be bridged before agreements can be reached.  it's vital to carefully review one's own business with critical objectivity to understand  the company's attributes and distinguish them from its negative aspects, which prospective buyers will certainly bring to your attention.

Buyers want to feel comfortable that there are no serious problems or surprises with their impending business acquisition.  They want to feel confident that the owner is being honest about the existing operation and realistic concerning future projections.  Therefore, it is important that owners address the following issues prior to marketing their businesses to maximize the potential for a smooth and successful sale to a qualified buyer.

Income and expenses -- Orderly financial books and records to prove and verify gross revenue, cost of sales/products, expenses and net income are necessary.  Income statements, balance sheets and other financial documents with substantiation are important to give buyers "snapshots" of financial history.

A line-by-line analysis of financial statements should be done with the assistance of an experienced accountant or "sales, merger and acquisition" intermediary to explain and recast the owner's discretionary cash flow and unusual or non-recurring expenses.  This analysis may affect the total economic picture of the company.

The more easily an owner can show a prospective buyer how revenue, expenses and income streams evolve, the easier it is to assuage buyer concerns about cash flow and earnings.

Legal -- Issues regarding liability, liens, licenses, leases, contractual obligations, government regulations, environmental issues and existing or contemplated lawsuits need to be reviewed and clearly explained to prospective buyers.  If possible, clear up unresolved legal matters with private parties or governmental authorities.

Accounting -- Accounts receivable and payables need to be evaluated regarding age, amounts, trends and the nature of creditors and debtors.

Inventory and equipment -- Quantity, cost, value, age and the salability of inventory needs to be reviewed.  Also, issues of age, condition, value and maintenance are important when evaluating equipment.

Personnel -- Will employees and key individual stay or leave when the business is sold?  Generally, the owner has a continuing financial interest subsequent to most closings, therefore, it is important to discuss the topic of smooth transition with key personnel at the appropriate time, prior to closing.

Image -- Does you facility and operation, in general, manifest a positive, professional and clean image?

Safeguards -- Are there contingency plans for unforeseeable events such as sick personnel, supplier problems, equipment downtime and other potential issues?

Price and Timing -- The most opportune time to sell a business is during an upward swing.  Hopefully, gross revenues/sales, earnings and/or discretionary cash flow will show a positive trend during the last two or more years.

A down year can seriously impact price and erode buyer confidence.  Establishing fair market value or price is, at best, an inexact science.  There are numerous valuation methods and many financial and non-financial criteria used to determine FMV or price.  Some methods are more applicable than others depending on the particular industry, kind of business, size of business and other variables specific to the subject business.

A question an owner should ask is whether the price and terms are reasonable with respect to the current marketplace, comparable companies, financial history, non-financial issues and the prognosis for the future.  Additionally, will the cash flow support seller or bank financing and afford the new owner a reasonable salary and return on his investment?

Merger and acquisition professionals, qualified business brokers, business appraisers and qualified CPA's often can be helpful in determining proper valuations for businesses.

Confidentiality is a major issue to consider when selling a business.  These agreements include guarantees that potential buyers will not disclose any information, financial data or communications that take place between the owner and prospective buyer.  Essentially, thee agreements notify the buyer of the serious nature of all written and verbal information including the fact that the business is for sale.  These agreements should be well-written to protect owners and should be executed in every potential transaction.

Sellers or their agents should prepare a written summary of the salient aspects of the business.  This is commonly known as a prospectus.  A prospectus should be given to the prospective buyer after they have signed confidentiality agreements.  Aspects pertaining to history, purpose, personnel, facility, equipments, marketplace, sales and financial information should be included in the prospectus and give a potential buyer a well-rounded understanding of the business operation.

Qualification of a buyer's financial ability to purchase the business and handle working capital requirements is vital.  You do not want to waste your time talking to someone who is not financially capable of closing the deal.

Financial creditworthiness may be confirmed by the seller's review and approval of a buyer's current financial statement.  Approval of the buyer's credit may be verified through credit bureaus.  Furthermore, the seller or his agent should question and evaluate the buyer's business experience as it relates to the business for sale.

Finally, a seller would be well advised to discuss these issues with a merger and acquisition professional or business broker.  A knowledgeable intermediary can help sellers establish price, maintain confidentiality, qualify buyers, offer national and local marketing expertise, provide negotiation advice with prospective buyers.  Diligent planning and preparation, as well as objective evaluation and analysis will provide the fundamental ground work for a successful business sale.