Key Steps in Preparing a Business for Sale
Change is inevitable in every business, though it can also be very difficult.
Making the decision to sell a company or to merge with another organization is often not an easy one. This is especially true when ownership or management either started the company or nurtured it through the growth cycle. Yet simply making the decision to sell is just the beginning. There are key issues that must be identified, considered and addressed during the process, including timing of the sale, tax planning, financial cleanup and business valuations. The purpose of these steps is to position the company in the best light possible to attract the most qualified buyers and highest dollar. To help clients, prospects and others understand the process of preparing a business for sale, Hanson Co has provided a summary of the common steps below.
Establish Timing – Selling a business for your optimal price doesn’t happen overnight. In fact, most business owners go through an extensive planning and a hand off period to ensure operations remain consistent during transition. Much like in residential real estate, timing is very important when selling a business and can be changed by any number of factors. It’s essential to understand both current industry and market trends to best position your organization.
Obtain a Business Valuation – Most business owners determine the selling price based on an earnings multiple. However, this is not necessarily the best way to arrive at the actual value of a company. Several variables, including business type, industry, revenue, profit and market conditions, will dictate what approach should be used to determine the actual value. To obtain an unbiased business value and arrive at a fair selling price, it’s important to work with an experienced valuation professional.
Organize Financials – The importance of well-organized and accurate financial data cannot be overstated. Potential buyers will spend considerable time reviewing these documents to ensure they are making the right move based on their goals. To be prepared, you should have at least the following items ready: past three years of profit and loss statements and balance sheets, current balance sheets, last three year’s tax returns, list of inventories, lease agreement(s) and related contracts. Having this information ready when asked will make it easier to move through the due diligence phase.
Review of Contracts – When selling a company, it’s important that all the key information essential to the operation of the organization are carefully reviewed. Start by reviewing key contracts with employees, vendors and creditors. Is all the information updated and clear? If there are situations where expired or no contracts exist with employees or vendors, it’s best to address that immediately. A prospective buyer will be much less interested in the company if these essentials are not in good order.
Create a Tax Plan – This is an area that is most often overlooked and has the biggest impact on the owner’s personal tax and financial situation post-transaction. Tax planning will ensure that the transaction is structured in the most favorable way possible for the exiting owner, ensuring that as little as possible is paid in federal capital gains, state and other income taxes.
Buyer Pre-Qualification – It’s essential to ensure that a buyer is qualified to purchase the company before investing time with them in the process. Beyond a standard confidentiality agreement, additional information should be requested, such as the name of the prospective buyer, previous employment and business ownership experience, funds available to invest, sources of financing, timeframe available to complete the transaction and their reason for interest in the business. This information can help you understand the buyer’s professional experience and ability to fund the transaction before considerable time is invested in the process.
Selling a company or negotiating a merger is a complex process that requires significant planning and careful consideration of both strategic and immediate issues. Proper planning will ensure that the company is sold to or merged with the best possible candidate and yields the highest return for both parties. If you are considering selling your company or a merger, Hanson Co can help. For additional information please call us at 303-388-1010, or click here to contact us. We look forward to speaking with you soon.