Business Sale Pre-Planning Steps

A recent M&A Source study found that about 80 % of businesses on the market will never sell. This should be a huge wakeup call for all business owners. This means you have less than a 20% chance of success if you go to sell your company. One of the reasons for this is that owners don’t think about selling until some catastrophic event like a health problem occurs. Planning your exit strategy should always be a part of an entrepreneur’s startup business plan. If you do decide that your exit strategy involves selling, here are some thoughts about what you should do before the sale is undertaken.

Pre-Sale Planning:The goal of pre-sale planning is to deal with any issues that might slow or prevent a sale, as well as to show the business at its best.  While every business is unique, there are several possible solutions to any one issue.  Here are some of the common issues an owner must deal with when preparing their business for sale.  (Note: A negative issue for one company may be a positive issue for another.)

Tax planning: Many business owners will have a large capital gains tax due upon selling.  You should plan ahead and carefully to reduce your tax liability and decide how the money should be used to meet your financial goals.  You should discuss your situation and options with an accountant experienced in tax planning.

Deciding to Sell:When a large company is being sold, it is usually for economic reasons that carry little emotion.  But, a small business owner, who has built the business from the ground up, endures many emotions when thinking of selling the business.  Here are some questions to ask yourself:

  • Why are you thinking of selling your company? Retirement, illness, family issues or personal problems.
  • What do you plan to do after the sale? Travel, buy another business, remain as a manager after the sale?

Management: It is customary for the seller to train the new owner after closing.  If you have to sell in a hurry, do you have a manager in place that can run the company and train the new owner for you? Will current employees remain after the sale?

Facilities:

  • Is the existing location of your business adequate for future growth, is the building owned by you or another party?
  • Is the lease at a favorable market rate and does it have an option to renew?
  • Is the building in good repair, clean and organized?
  • Is the business and building in compliance with regulatory and environmental requirements?

Financials:

  • Are all assets properly reflected? Buyers will usually not pay for receivables over 90 days old and will often discount receivables over 60 days old because of poor chances for collection.
  • Are any business assets owned by you that should be owned by the business?
  • Make sure inventory is current and accurate and sell any excess or unused assets.
  • Are all revenue recorded properly?
  • Are any items being expensed that should be capitalized?
  • Do any non-recurring income or expenses need to be explained?
  • A balance sheet that shows book and market values is often used to reflect the true value of assets.

Legal:If the business is a franchise, you must comply with all franchise formalities.  Compliance with all franchise policies is a must.  You should also find out if franchise approval is required for the sale of the business.

Selling price

  • Do you have a realistic expectation of a fair price for your business?
  • Should a professional provide you with a business valuation?
  • Preparing your business for sale helps ensure a quick and profitable sale whenever you decide to sell.
  • A Business Broker may help you prepare your business for sale. 

Some things you need to know to get started selling your business:

  • How much are your water and utility expenses?
  • What type of POS system is in place?
  • Do you own or lease the equipment?  How much is still owed?
  • How old is the business?
  • How much and how long is your current lease?
  • How many employees do you have?
  • What are the makes and model numbers of all your equipment?
  • Is your business part of a franchise?
  • Do you offer additional services?

Do I need a business broker?

  • Do you want to keep the sale confidential.
  • Do you want someone else to provide representation.  The selling of a business can be a very complex process.
  • Are you familiar with the selling process.
  • Do you have the time!

Final Thoughts: Be savvy about what acquirers look for in a company, what their motivations to buy are, and the questions they are most likely to ask. Some of the most common reasons they buy include:

  • Driving their own growth 
  • Expanding their market 
  • Accelerating time to market 
  • Scaling 
  • Consolidating the market 
  • Reinventing their own business 
  • Responding to disruption 

Some of the most common questions startups should be prepared to answer include:

  • What are the top line revenues 
  • How much are gross profit margins 
  • How profitable is the company 
  • Are customers retail consumers, SMB clients or enterprise level 
  • Customer churn rates 
  • Customer satisfaction ratings 
  • Value of contracts 
  • Size of total addressable market

If you enjoyed this thought, you might also like What Is Your Exit Strategy?

Copyright ©John Trenary 2022

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