If I was given a dime every time an owner said to me, “My business is not for sale,” I would have a lot of dimes. Most owners are fixated on the current performance of their business and not on selling it.
Intuitively, we know that the best time to sell a business is when an owner wants to, not when he or she has to. Unfortunately, circumstances arise that may require the sale of a business at less than optimal times. For example, we were notified by the wife of a collection agency owner that her husband had a heart attack while mowing their lawn and she may need to sell the business. Fortunately for her, the business had outstanding leadership in place beyond the owner-operator and it was able to withstand the sudden passing of the owner until the family decided it was time to sell. Most businesses are not so fortunate. Reasons such as a sudden illness, a crippling accident, the loss of key staff or a major client could force the sale of a business. When this happens, and it happens more frequently than one may believe, an owner will inevitably receive a low purchase price or undesirable terms for the sale of the business.
Preparing a business for a potential sale is not only a defensive move that an owner can take to be ready in the event that tragedy occurs, but it is also prudent to business. A buyer will turn a business upside down and look at every aspect of the business in ways that most businesses are never scrutinized. Putting a business through a diagnostic examination well in advance of a sale by an objective expert will help an owner maximize the performance of their business even if they never sell it.
At the very least, a buyer is going to ask to review the company’s financial statements. They may request historical annual statements going back at least three years, a current income statement, balance sheet and statement of cash flow, a budget and a forecast. Having a complete set of financial records in place at all times is prudent. Going further by normalizing the income statements to reflect any one-time and excess operating expenses might be the difference of hundreds of thousands, even millions, in purchase price. Every dollar taken out of a business that cannot be accounted for can result in potentially 5-8 less dollars than what would have been paid for the business. Going even further by evaluating capital expenditures, from the viewpoint of a buyer, may eliminate any surprise costs from occurring during the due diligence process.
Additional areas to evaluate include, but certainly aren’t limited to:
Client contracts. Are there any transferability clauses restricting the sale of the business?
Employment contracts. Are there any employment contracts?
Vendor relationships. An unlimited number of seats on a software license could be of significant value to a buyer
Lawsuits. Even the most frivolous nuisance suit should be disclosed to avoid any post sale issues with the buyer
Lease obligations. If the building is owned by the business owner, does the business pay fair-market rent?
Preparing a business for sale may take a while and cost a few bucks, but is time and money very well spent. Please let us know if you want to schedule a confidential call with one of our experts by emailing us at hq@kaulkin.com.
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