MLR

Six steps to preparing your business for sale

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Selling your business to a third party could provide you with a lucrative and effective exit strategy.

value drawing

To maximize your proceeds, prepare both yourself and your company for a sale. Taking action now will help you to be better prepared and improve the salability of your business.

To do this properly, consider taking the following steps:

1. Obtain a valuation – You may have an estimate of the value of your business, but how reasonable is it? Owners of large, profitable companies often underestimate the value of their businesses, while owners of small, marginally profitable companies often overestimate the value of theirs.

Engaging the services of a professional business valuation analyst can provide you with an objective and realistic estimate of the fair market value of your business. In addition, a valuation analyst can help you assess the strengths and weaknesses of your company and assist you in developing strategies to increase the value of your business.

2. Reduce owner dependence – Can your business function effectively without you? If not, consider training personnel to assume critical responsibilities. Reducing your company’s dependence on you will increase the value of your business to a buyer.

3. Improve financial statement credibility – Do your financial statements offer a satisfactory level of confidence? Audited financial statements provide the highest level of confidence for a buyer. The following types of financial statements are ranked in order of credibility from highest to lowest confidence level: audited, reviewed, compiled with footnote disclosure, compiled, prepared by management.

Consider upgrading your financial statements several years prior to the sale of your business. Keep in mind, however, that if the presentation of the statements changes, you will want to recast prior-year statements using the new format to allow for comparable analysis.

4. Examine owner’s compensation – Is your salary greater than fair market value? If so, a buyer may argue that your salary level is the appropriate amount to use in determining the sales price of the company. Owner compensation that is higher than fair market value may reflect misleading reported earnings and lower the sales price of the company.

To increase reported earnings, think about paying yourself a salary equivalent to what a professional manager would earn. The incremental difference in the salary level might be replaced by S corporation dividends. Reducing your compensation to a fair-market-value level may eliminate a negotiating point for the buyer and generate a higher sales price for the company.

5. Evaluate owner’s benefits – Does your company pay for unnecessary or excessive benefits? Examples include luxury cars, club dues, personal vacations, personal meals, entertainment and officer life insurance. Forgoing these expenditures or paying for them personally will increase the reported earnings of the company and eliminate another buyer negotiating point. Take steps now to evaluate and eliminate these types of benefits if they are unnecessary. If you wait until the time of sale, it may be difficult to document and substantiate these items as personal versus business expenses.

6. Develop a selling memorandum – Can your business be described easily and concisely? Preparing a selling memorandum for your business may increase buyer confidence, reduce due diligence efforts and result in a quicker sale of the business. In addition, developing the memorandum will help you better evaluate the strengths and weaknesses of your company.

In general, items in a selling memorandum include the history of the company and industry identification, a description of operations, corporate strengths, market strategies and a forecast. Also included are the financial position, financial and operating trends, and financial and operating ratios.

It is best to prepare yourself and your business for sale several years in advance. Taking action today could enhance the value of your business and speed the sales process.