Preparing a business for sale

Homebuyers pay a premium for modern upgrades and move-in condition. Similarly, businesses that operate at optimal performance are more likely to sell at top value. Is your business move-in ready? Or does it require repair and capital reinvestment? Here’s how proactive owners plan to maximize their financial gains.

Get inside the buyer’s mind - Business owners who plan ahead sell their businesses faster and for more than those who neglect maintenance and administrative chores. To prepare a business for eventual sale, an owner should:

Prepare reliable, transparent financial statements - Due diligence is less painful if the company’s financial statements have been audited by an independent public accounting firm. Nonexistent reporting, deviations from industry accounting norms, mathematical errors and statements that grossly understate taxable income create uncertainty in the buyer’s mind as well as more work on the buyer’s end.

Minimize adjustments - Sellers who minimize the need for potential buyers to adjust their financial statements stand a better chance of maximizing sales proceeds. Examples of financial statement adjustments include:

• Nonrecurring items, such as lawsuit settlement proceeds and gains from asset sales,
• Related-party transactions, such as transactions with subsidiaries and above-market rents paid to the company’s owner,
• Unreported cash receipts, which sometimes occur in industries where customers pay in cash and private business owners seek to minimize taxable income, such as restaurants, construction or landscaping,
• Owner expenses, such as country club dues or luxury autos, or
• Excess (or deficit) owner’s compensation.

Set up formal administrative controls - Companies with competent management and effective controls appeal to more potential buyers. Prepare formal business plans and budgets. Implement a system of internal controls, including fraud training and prevention, separation and duplication of duties, and formal job descriptions. Strong internal controls minimize fraud risks and demonstrate management depth.

Cultivate a positive company culture - Buyers will assess employee loyalty, satisfaction and retention. How do compensation rates and employee turnover compare with competitors? Have top executives signed employment contracts and non-compete agreements? Are labor union relations amicable or strained?

Present a solid balance sheet - Buyers typically prefer high liquidity and low leverage. Further, most prefer core operations. So, it’s a good idea to sell off non-operating assets and collect related-party loans before putting a business on the market. This saves buyers the trouble of cleaning up later — especially if the company operates as a C corporation and has built-in capital gains tax issues.

Achieve above-average financial performance - Informed buyers know your industry and will benchmark you against the competition. Beyond a solid balance sheet, buyers pay more for companies that offer consistent, upward income trends and higher returns on investment than their competitors. Challenge the status quo by continually improving and pursuing growth opportunities.

Reinvest in the future - The condition of fixed assets is also important. In addition to maintaining accurate fixed asset listings, keep up with maintenance and replacement. Neglect can be especially costly if technology is obsolete, products are near the end of their life cycles, management has cut back on research and development spending, or a plant lacks capacity to handle future growth.

Minimize potential risks - Buyers discount the selling price for risk factors. These may include undue reliance on key people, contingent liabilities (such as pending lawsuits, tax audits and unsettled insurance claims), and concentration risks in which one customer or supplier represents more than 10% of revenues or purchases. Risk and value have an inverse relationship. So by minimizing these risks, sellers can maximize their returns.

Expect the unexpected - A sale of the business isn’t the only time it’s important to understand value drivers, prepare transparent financial reports and operate at the top of your game. Preparedness also facilitates stock transfers in conjunction with equity-based compensation plans, employee stock option plans (ESOPs), management buyouts, gifts or equity recapitalizations.

In addition, involuntary transfers may unexpectedly arise. For instance, are you prepared for shareholder disputes, bankruptcy, divorce or the death of a shareholder? Owners can minimize pressure under fire by drafting detailed buy-sell agreements, which cover various triggering events, including death, disability, termination and dispute.

No time like the present - Selling may not be part of your short-term plan, but since there is no ready market for a closely held business, it’s wise to plan ahead. You never know when someone will come along and offer a price you can’t refuse. Or you may need to cash out for personal reasons — for example, to fund a divorce, an elderly relative’s medical care or your own retirement.

Informed shareholders are ready to deal with potential buyers — and their businesses are positioned to sell for a premium. They are also better suited to weather uncertainties and misfortune.

Sidebar: Seek valuation expertise

When you begin to plan a potential sale or are ready to sell your company, valuators can educate shareholders about internal and external value-related issues, including:

• The business’s strengths and weaknesses,
• Its cost of capital,
• Its unrecorded intangible assets,
• Valuation approaches and rules of thumb,
• Gift and estate planning strategies,
• Deal structures, sales terms and tax implications,
• Industry merger and acquisition trends,
• The range of values potential acquirers may pay, and
• The level of debt that can be used to optimize transaction value for both buyer and seller.

Valuation professionals can help busy owners achieve “move-in” condition.