While it’s easy to focus on the outcomes associated with selling your business, the secret to getting a deal closed is understanding how to prepare your business for sale before going to market.
Keep in mind that – just like starting a business – when you’re selling you are trying to beat the odds. The complex task of selling a small business comes with a very low rate of success: Only about 20% to 30% of businesses taken to market actually sell.
Given those odds, you’ll want to do everything possible to stack the deck in your favor.
There are a couple of truisms in the merger and acquisition (M&A) industry that explain two big reasons why deals fall apart:
- Surprises kill deals, and
- Time kills deals
Given that every small business broker and M&A advisor on the planet will attest to this, it’s clearly in the business owner’s best interest to do the following in advance of a sale:
- Eliminate potential surprises, and
- Streamline things on your end as much as possible
In this article, we’ll discuss how to prepare your business for sale like an expert and prevent common deal-killers. We’ll highlight the things buyers tend to focus on first, as well as the things that all buyers tend to request. We’ll also offer some quick tips on how and why to prepare each area.
#1: Enlist the Help of a Business Broker (Early!)
There’s no such thing as consulting a business broker or M&A advisor too early in the sale process. In fact, this should probably be the first phone call you make as soon as you ask yourself: Should I sell my business?
Most owners aren’t well-versed in how buyers evaluate a business they’re interested in acquiring. A seasoned business broker knows how potential buyers will look at your business: How they will analyze the financial statements, what questions and concerns they may have about your business, and what information they are sure to request.
The quickest and easiest way to prepare your business for sale is to have a business broker or M&A advisor help you make a list, and set priorities for what needs to be addressed first.
Tip: Rely on the business broker’s experience to guide your pre-sale preparation efforts. They know how real-world buyers think and act.
#2. Make Sure Financial Reporting Is Buyer-Ready
The financial statements of your business will be the foundation of a sale. They dictate price, terms, and almost every other point of negotiation when you sell your business. As a result, you will want your books to be rock solid before going to market.
At a minimum, buyers will ask for:
- Year-end financials (Profit & Loss Statement, Balance Sheet, Cash Flow Statement) for the past three years, on both a cash and accrual basis
- Reporting for specific time periods, with comparisons to prior periods (e.g., P&L for the last 12 months, with comparison to year prior)
- Interim reporting (e.g., current year-to-date P&L and Balance Sheet)
- Sales by customer
- Sales by product or service
- Accounts receivable aging
- Last three years’ state and federal tax returns for the business
- Any amended tax returns
- Depreciation schedule
- General ledger
- Payroll expenses
- Bank statements
This is just a start. Once you enter the due diligence phase of a deal you will be asked to provide information and reporting of all kinds. Your goal before going to market is to make sure you have all the basics that every buyer asks for on hand, as well as the capabilities to respond quickly to additional reporting requests. If others will be helping you pull financial reporting – like your CPA or internal bookkeeper – make sure they’re up to the task as well.
Tip: Go ahead and start building a virtual data room (a secure, online repository used to gather and share information during due diligence) now. Start with the items listed here, and make sure you have the ability to respond quickly to buyer requests.
#3. Clean Up the Books
By “clean up” we’re not suggesting that you hide anything or “cook” the books in any way. On the contrary. Your goal here is to make sure everything an outsider needs to know about the way your business makes money is crystal clear.
Cleaning up the books typically means adding or subtracting where it makes sense. For instance, we see a lot of P&L’s that would benefit from adding more detailed accounts under Operating Income and Cost of Goods Sold.
Likewise, the Balance Sheet often has extraneous items sitting on it that could be removed. Examples include assets and liabilities that won’t transfer to a new owner, like a personal auto, excess cash from retained earnings, and loans to shareholders.
You’ll also want to look at three years’ worth of financial statements side by side and identify any inconsistencies or odd-looking entries. When you compare several years all at once – like buyers do – you tend to notice inconsistencies that can easily be corrected. Better to fix cosmetic issues now and prevent buyers from asking unnecessary questions later.
This is also the time to not only identify add-backs or adjustments to EBITDA (earnings before interest, taxes, depreciation and amortization), but also gather any documentation needed to support them.
Tip: Make your books tell the story of your business – emphasizing how it generates pre-tax earnings from operations – clearly. The fewer questions buyers have to ask about the books, the better.
#4. Gather and Review All Documentation
This may seem like a real chore, but an ounce of prevention is worth a pound of cure. You don’t want to delay due diligence – or any part of negotiations with a serious buyer – by having to scramble to put your hands on that lease or insurance policy. Even worse is not being able to find something, or realizing that some piece of documentation has errors or issues that you wish you’d resolved beforehand.
Documentation can be almost anything associated with owning and operating your business, but here are a few basic items to have at the ready:
- Equipment and real estate leases
- Operating agreements
- By-laws and annual meeting minutes
- Proof of ownership
- Insurance policies
- Customer contracts
- Supplier contracts
- Maintenance contracts
- Intellectual property filings
- Organization chart
- Employee performance reviews
- Employee handbook
- Process and procedure manuals
Anticipate anything that a buyer will ask for in due diligence, locate it, and review it for accuracy. You may want your attorney to review contracts to ensure that they are transferable. Also, make sure that all documentation is current and update it if necessary.
Tip: Again, you’ll want to fill the data room with anything you know a buyer will want to see during due diligence. Anything headed for the data room should be reviewed first to make sure it’s ready for buyer scrutiny. You don’t want a buyer uncovering administrative issues that you should have been aware of.
#5. Create Any Missing or Needed Documentation
After you’ve gathered up all of the financials and documentation listed above, there may still be items that are missing. You’ll need to find, replace, or create these items.
An example of something you might need to create is an equipment list. You may not have one document that lists out every piece of equipment that will be included in a business sale, along with VIN or serial numbers, age, make, model, and current market value. Buyers will want to see this, so it’s best to anticipate the need and create the document now.
Tip: Anticipate what buyers will ask for and get it covered. This will streamline the due diligence process and ensure that you’re not the bottleneck.
#6. Get a Handle on Inventory
Now is the time for a bit of housekeeping. This could mean weeding out, selling, or disposing of old inventory. It could also mean organizing and counting it. You’ll also want to know the current value of inventory (at cost).
Tip: Everything at your business needs to be in ship-shape before buyers take a look. Knowing the value of inventory, with supporting documentation, can also help facilitate any negotiations that involve working capital levels in the business.
#7. Make Sure All Equipment Is in Good Working Order
Depending on the type of business you own, the age and condition of the equipment could be an important selling point. Getting all of the equipment buyer-ready may mean cleaning or repairs. It may even be worth making some improvements, like adding vehicle wraps, selling an old or unused piece of equipment, or buying something new (ask the business broker first).
Tip: Like every other part of your business, the equipment needs to be buyer-ready. Any short-term capital expense for the buyer could come directly off the purchase price during negotiations.
#8. Pull Website Analytics
Regardless of how closely you keep tabs on your digital marketing efforts, a buyer will want to know how your website and social media channels are performing. This may also be the time to make some improvements to your website and digital presence. One of the first things a prospective buyer will do when they’re considering buying your business is see how it looks online, then compare it to competitors.
Not every business lives and dies by their online presence. Regardless, buyers typically want some understanding of how customers find your business online, how long they spend on your website, and how well the site converts viewers into leads.
Tip: Add basic Google Analytics reporting for your website from the last three years, and year-to-date, to the data room. If there are specific reports that are meaningful for your business – like website purchases or paid advertising conversions – have that reporting ready as well.
#9. Spruce Up the Premises
Curb appeal does indeed play a role in selling your business. Paint those walls, deep clean the shop floor, and fix those sagging shelves. Whatever you’ve been putting off from a maintenance standpoint, take care of it before inviting buyers for a tour. They are looking to step into your business, and want reassurance that it is well taken care of from every angle.
Tip: You only get one chance to make a good first impression. When buyers see an area of your business that looks neglected, they wonder what else you’ve ignored.
#10. Talk to Stakeholders
One of the many surprises that can kill a deal is somebody deciding to express their true feelings about a sale at precisely the wrong moment. This is often a child or family member who would prefer that you keep the family business in the family.
Get everybody on the same page before going to market. You don’t want to be having personal disagreements about selling your business behind the scenes after you’ve signed a Letter of Intent with a buyer.
Tip: As the business owner, you are in control of the decision to sell. If there are people in your life with an opinion that you care about, have frank discussions with them before starting the sale process. During due diligence and leading up to closing are not the time for additional stress, debate, and drama.
#11. Estimate Fees and Taxes
While selling your business to an outside buyer typically comes with the highest purchase price, it can also be an expensive exit strategy in terms of fees and taxes. It’s not what you get when you sell your business, it’s what you keep.
Like #10 on this list, you don’t want to be surprised two weeks before closing by how much of the sale proceeds will be going to the IRS.
Talk to a small business broker about possible deal structure scenarios, and how those could affect the tax consequences of a business sale. Of course, you’ll want to include a CPA in this discussion, as well.
Tip: Deal structure can have a big impact on how a business sale is taxed. What’s good for the buyer from a tax standpoint is often bad for the seller, and vice versa. This is where having good advisors on your deal team – like an experienced small business broker and CPA – can pay off in terms of tax savings.
The More Preparation, The Better Your Odds of Success
Many businesses are taken to market with little to no preparation. Alas, this is why so many of them fail to complete a sale. Common wisdom says that you should spend about two years planning and preparing for the sale of your business.
Regardless of how much time you may or may not need, start planning well in advance. It will be well worth the time and cost if it helps you attract good buyers, avoid mid-deal surprises, sail through due diligence, and get the deal closed.
There are a number of reasons why deals don’t close, many of which can be anticipated and avoided with simple advanced planning.
Barbara Taylor is the co-founder of Allan Taylor & Co. You can connect with her on Twitter @ballantaylor and LinkedIn.