sale of your business

Make Sure You Get the Best Value for the Sale of Your Business

sale of your businessYou have worked very hard on your business.  You plan to sell your business, either because you are a serial entrepreneur, or you are ready to retire and your heirs are not interested in running the business.  No matter the reason for the sale of your business, you want to ensure that you get the right value when you sell.  There are steps you can take that will put you in the best position with potential buyers.  Start taking steps well in advance of the time you plan the sale of your business.  Some of the steps you should take are set forth below, but you should engage a team to assist you with the sale of your business.

Position Your Business for Sale

You need to take action to make your business attractive to potential buyers.  Some of the steps you can take include the following:

  • Establish policies and procedures for each of the responsibilities of your employees. Policies and procedures should also cover how the business is operated.  For example, how are leads handled?   How are customer complaints handled?  Create step-by-step procedures so that your business operates like a well-oiled machine.  The policies and procedures should enable the business to operate smoothly if any employee is replaced.  Hire smart employees so that the success of the business is not dependent on you.  A business that has the ability to operate with an absentee owner will be attractive to potential buyers.  A potential buyer wants to feel comfortable that they can expect the same income the business achieved while you owned it.  Therefore, if the business can be operated successfully in your absence, it is much more likely that the business will achieve the same or better results when it is sold.  If the business is dependent on you for its success, it is not ready for sale.  Very detailed policies and procedures will help the business run more efficiently and will also allow other persons to step in at the time of the sale of your business and the transition after the sale of your business will be seamless.
  • Look at your client or customer base. It needs to be diversified. A business that has a large percentage of its revenue coming from one potential customer or client could fail if that client or customer were to disappear.  Market your business so that you have a wide client/customer base.
  • Find ways to differentiate your business from its competitors. Your goal should be to establish your company as the market leader in its space.  Think about what you can offer to your clients/customers that bring them more value than your competitors.  Depending upon the business, it can be some additional item that you offer with your product or service that is not offered by your competitors.  Although your competitor may copy your idea, being the first to offer a value-added item will put you in a better position and you will be viewed as an industry leader.  This translates into a greater valuation for your business.
  • It pretty much goes without saying that you should operate your business so that you always provide excellence in the delivery of  your service or your product. This affects the reputation of your business and will lead to referrals. Referrals increase revenue, which translates to a better business valuation.

Be Prepared for the Due Diligence Process

Potential buyers are going to look very carefully at every aspect of your business.  They want to ensure there are no potential unknown risks that the business is facing.  Potential buyers also use the due diligence process to calculate what they believe the business is worth.

Financial Statements:  The financial statements of your business should be in order and should be prepared by a certified public accountant.  The same applies to the tax returns of the business.  Everything in the financial statements and tax returns of the business should be transparent.  You need to be able to answer any question potential buyers have with respect to any line item in your financial statements and tax returns.

Contracts:   Every contract between the business and a third party should be organized and ready for potential buyers to review.   This should include any loans, guarantees, etc.

Intellectual Property:  Depending upon the type of business you have, you will want to ensure that all intellectual property is owned by the company.  If trademarks, service marks or patents are required to be registered, be prepared to show the potential buyer documentation of such registration.  Depending upon the nature of the business, most employees should have signed a confidentiality and proprietary rights agreement. This will ensure the intellectual property of the business is protected and belongs to the business and not the employee.

Employee Information:  Prepare all information regarding employees, such as date of employment, salary, employee handbook, any information regarding employee benefits, employment agreements, and any written performance reviews.

Real Estate:  Have all information regarding real estate, including deeds, mortgages, leases, property taxes in the case of owned real property, certificates of occupancy and other diligence materials that may be required in the event the business is the owner of the real estate.  If the business has a commercial lease, think in advance about the length of the term of the lease and whether the lease can be transferred to a buyer.  Many times, the buyer will have to negotiate with the landlord regarding the terms of the lease if it is to be transferred.

Information Regarding Clients or Customers:  All contracts, sales revenue, percent of the total revenue of the business that comes from each client or customer.  Any threat of termination of the contract by a client or customer?

Vendors:  All contracts with vendors, any vendor that accounts for 5% or more of the purchases of the company, any threat of termination of the contract by a vendor?

List of Assets:  Be prepared to disclose the condition of any equipment and date of probable required replacement, as well as the cost of replacement.

There will be various other items potential buyers will want to review when they conduct their due diligence of your business.  The important thing is to have all records organized and if there are any potential issues that can be handled before the sales process starts, do what you can to tie up loose ends  Examples could be threatened litigation, the absence of signed agreements, etc.

Engage a Team of Professionals to Assist With the Sale of Your Business

The first thing a business owner should do when they have decided to sell their business is to get the team of professionals on board that will guide them through the process.  The team of professionals that are absolutely necessary is a certified public accountant with experience in the sales/acquisitions of businesses, as well as valuation of businesses and a business lawyer that is very experienced in business sales and acquisitions.  Depending upon the size of the business, it may be wise to engage the services of a broker.  The broker can create a sales document for the business.  A broker may also provide several potential buyers that are interested in the business, which can create a bidding situation.  This can increase the price that you get for the sale of your business.  While brokers do charge a fee, the amount can often be negotiated. The broker’s fee may more than pay for itself if the broker provides a bidding environment that increases the purchase price.

For legal assistance with the sale of your business, contact KHNETIC Legal at khyneman@khneticlegal.com or 610-524-3250.

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