Imagine this, if you will. You’re about to set out on the trip of a lifetime. You’ve planned for months, invested quite a bit of money and are eagerly anticipating the wonderful time that you’re sure to have. You hop into your car, and set off down the road, only to realize that you’ve forgotten your map. What do you do? Do you shrug your shoulders and keep driving, hoping to eventually end up in the correct spot? What do you think your odds are of arriving at the destination of your dreams without a map to steer you in the right direction?
Selling your business is very much like taking a road trip. Just like planning ahead and following a map will make sure that you have the vacation that you’ve envisioned, taking steps to make sure everything is in order well before you plan to sell will ensure that you have a smooth sale and maximize your financial reward.
But there’s no need to go it alone! I’m here to map out the path to a successful sale, whether that’s three, five or ten years down the road. Read on to discover the steps you need to take to prepare your business for sale.
Five to 10 years pre-sale
During this time you should review your corporate structure and its potential impact on the transaction. Most buyers are only willing to enter into asset purchase transactions for a multitude of reasons. Selling a C-Corp in this manner results in taxation at both the corporate and personal level. This means you could end up paying 15 to 20 percent more taxes when all is said and done.
In order to avoid this situation, businesses need to elect to transition to a more favorable tax structure. In most circumstances the Internal Revenue Service (IRS) requires this be completed five years or more before the business is sold, otherwise the transaction may not receive the more advantageous tax treatment. Your certified public accountant (CPA) or tax adviser should be able to walk you through the process.
Ownership issues also need to be addressed. If possible, owners that are not active in the business should be bought out. When the time comes to sell, you don’t want to be held hostage by a former partner, ex-wife or retired parent. These are impediments to buyers and need to be avoided.
This is also the time when you need to consider moving certain assets out of the corporation. This could include real estate, land, trademarks or subsidiaries that you don’t intend to sell with the primary business.
Three to five years pre-sale
This is the period of time when you want to build a company that can survive and thrive without you. Buyers want to know that the business can continue to grow and flourish without the departing owner.
Now is the time to build a management team that can run the business on a day-to-day basis. It is vital to delegate the responsibility and authority to your middle managers so that they can gain the experience necessary to be of value to an acquirer. With their assistance, processes and controls can be implemented in the business, which provide a buyer with confidence that the business is well run and sustainable into the future.
It is also advisable to have a professional valuation of your business completed in this time frame. The valuation will provide you with a starting point for the consideration of a sale. Comparing this initial valuation to your goal will help you to further assess the work to be done and the required time to completion.
Begin to look at your financial statements with a buyer’s eye. Ask yourself these questions:
- Are sales growing consistently year-to-year?
- Are gross profit margins improving or declining?
- Are expenses in line with industry standards?
- Are expenses growing faster than sales?
- Are capital expenditures being made?
At the same time, you now want to begin dealing with unprofitable customers or lines of business. This may mean pulling poorly performing accounts, raising prices, lowering commissions or renegotiating contracts. Similarly this is the time to take a hard look at your third-party vend management business and its impact on your margins and profitability.
One to three years pre-sale
As you get closer to your target date, it is important to get your books, records and financial statements in order. Buyers are normally looking at the most recent three years of financial records. The more formal your statements (accountant reviewed or prepared versus internally generated) the better the impression that you will make. Additionally, this is the time to remove personal expenses from the business. Although it may cost you some taxes in the near term it will pay dividends when it’s time to sell as it demonstrates to buyers that you’re running the business truly as a business.
Capitalization policies need to be reviewed and revised. Business owners naturally want to expense everything possible in order to minimize current year taxes. However, this practice increases expenses and decreases net income. The goal is to portray the business in the best possible light. Overstating expenses obviously hurts this cause.
I recommend a two- to three-year steady state period for businesses. During this period, the business refrains from expanding geographically, acquiring small competitors or bringing on new lines of business. This demonstrates to a prospective buyer that the business is on solid footing, grows organically, provides consistent recurring revenue and is improving margins while controlling costs. These are all major concerns of a buyer so anything that can be done to put them to rest will increase the value of your business in their eyes.
Vending operators have historically discounted the value of contracts. In their minds, contracts are not enforceable, too legalistic and an impediment to a sale. Buyers, on the other hand, have a dramatically different view. Contracts are seen as evidence that the business is run in a professional manner and that the client is likely to still be around once the owner leaves. Therefore it is important to bring as many of your clients under contract as possible prior to a sale.
The final step of this phase is to have the business once again professionally valued. A valuation at this point is an excellent indicator if in fact you will be able to achieve your target price. Further, it provides tangible evidence that your efforts over the preceding years have been beneficial.
The final year
It is important to assemble your team of advisers at this point. This will include tax advisers, financial planners, accountants and attorneys. Interview several attorneys with an eye to experience in mergers and acquisitions along with strong negotiating skills. Seriously consider hiring an industry-specific intermediary to represent you and help you through the selling process.
This is the time to review all of your legal paperwork. Make sure that your articles of incorporation, permits, licenses, customer and vendor contracts are current and in order. It is advisable to run a lien search on the business as well. This will flag any old liens that haven’t been removed and allow time to correct.
You should also clean up potential liabilities. Make an effort to clear up any pending or potential legal problems, such as employee lawsuits, IRS audits, insurance disputes, etc. A buyer that purchases only the assets of your business (instead of corporate stock) generally won’t get stuck with inherited legal problems; however, the very existence of lawsuits or other problems may raise red flags in their minds.
Real estate leases need to be addressed. Review the terms of your leases. When do the terms end, are they assumable, is there a buy-out clause? These are important issues and you need to know the answer. If you own the real estate and lease it back to the corporation, is the lease at a fair-market value? In this circumstance, a market appraisal by a commercial real estate agent is advisable.
It may seem like small potatoes when compared with the bigger items on your to-do list, but it’s extremely important to make a good first impression. Your office and warehouse are a reflection of you and your business. They need to be neat, orderly and clean. Dispose of old assets that have no value to you or a buyer. Provide uniforms for the employees so they project a professional image.
Finally, keep your eye on the ball. Don’t let the business performance decline because you are too focused on the sale process. This will only give buyers additional negotiating power and ultimately lower their offers.
Successfully selling a business is not a passive process. Just like planning a vacation or road trip, it takes thought, planning and preparation. Put in the effort pre-sale, and you will ensure that you arrive at the destination of your dreams.
