Ground Rules for Successfully Selling Your Business

Sooner or later you are going to exit yourbefore a planned sale of the company. Doing so
business. The question isn't whether or not youwill make it much easier to accurately measure
will be ready. The sixty four thousand dollarand reflect the true earning power of the
question is whether or not your business will bebusiness, as it will be unfettered by the capital
ready. It is estimated that seven out of teninvestment in non business assets and the
privately held businesses have no succession planassociated costs. Buyers of your business are
to transfer the business to the next generation ofgenerally purchasing future income and benefit
owners. What does that mean to you? It meansstreams that will be produced by your business.
that if you do not currently have a plan in placeThe leaner and more productive your business
to transfer your business to family members,is—the more it is worth. It is never too early
existing partners, management or employees,to begin segregating non business assets from
someday you will think about selling your business.your business, as it may take some planning and
That day might come sooner than you anticipate.time. Do your own due diligence
Don't make the mistake of thinking that justSome executives of both public and private firms
because you are not currently ready to retireget a physical check-up once a year. Many of
that you have plenty of time to prepare yourthese same executives think nothing of having
business for sale.their personal investments reviewed at least once
As a business broker, I have been involved in aa year, if not more often. Yet, these same
number of transactions (and potentialprudent executives never consider giving their
transactions) where the business owner wantedcompany an annual physical, unless they are
to sell, or in some instances, was forced to exitrequired to by company rules, regulations or
the business earlier than expected. In fact,some other necessary reason. Anyone interested
retirement is NOT the number one reason whyin purchasing your business will perform "due
businesses sell.diligence" procedures on your business before
Here is a list of the most common reasons whyclosing on the purchase. All too often, sellers are
owners sell (or otherwise discontinue) theirsurprised at the skeletons purchasers can find in
businesses: Burn-out (the number one reason forthe closet. These skeletons can reduce the value
selling) Health issues Personal diversificationof your company, and in some cases, kill any
Retirement/semi-retirement Death Divorcechance at closing a sale. What skeletons are your
partner disputes Business growing too fastcompany's closets?
Second generation not up to the task Loss ofWhy not give your business a periodic physical? In
market shareessence, I am suggesting you would do well to
TAKE GOOD CARE The sad truth is that manytreat your business as if someone else owned
business owners do not take good care of theirit—and you were the potential purchaser. What
most valuable asset: the business. They don'tproblems would you discover that could cause
groom someone to continue the business in theiryou and your advisors to reduce or withdraw
absence, and do not keep the business in salableyour offer?
shape during the time they operate the business.Spending the time and money to discover and fix
Business owners tend to get too bogged down inyour company's problems now will pay huge
the day to day business operations to worrydividends in the form of increased company
about--or plan for an event that they perceivevalue—which is exactly what you want when
won't occur until sometime in the distant future;it's time to sell.
selling the business.Compliance with taxing and regulatory authorities
Unfortunately, fate sometimes dictatesMountains of regulation often seem to impede a
circumstances beyond your control, and toughcompany's growth and profitability. Some
decisions must be made. If your business isn'tregulations might seem rather easy to "slight" or
ready to sell when the time comes, what areignore.
your alternatives?Take for example one of my recent sellers who
1. Liquidation of business assets—may be aswore to me that the business had no regulatory
solution, but one that usually returns very littleviolations of any type. I reminded the seller that
money to the business owner. If the business hadanything "hidden in the closet" would most likely
been an operating business, the underlying assetsbe discovered in a buyer's due diligence
(except for real estate) may be outdated and of(investigatory) process. "Nope—no problems of
little use to anyone. At auction, the assets willany kind" I was assured. Well, guess what the
bring only what the attending bidders are willing tobuyer's due diligence turned up? Seems the seller
pay. In some instances, underlying assets are soldhad a couple of shipping/storage containers sitting
to liquidators (or scrap) for only pennies on thebehind the building—which the sellers KNEW
dollar. Liquidation of a going business often occurswere in violation of local zoning ordinances. How
where the owners have become ill or disabled, ordid they know? They had received four previous
need to retire and have not planned adequately"reminders" from the trustees about the
for their exit from the business. 2. Closing thecontainers, and the need to remove them. "Why
business—is even less attractive than liquidation.didn't you mention that to me, or disclose that
That is because many who find themselves in thisfact on your disclosure statement?" I asked. "Gee,
situation have a tendency to "put off" liquidatingnothing ever happened and the township never
the underlying assets in hope that maybedid anything—so we just figured it was no big
someone will come along to buy this business.deal." Was the seller's reasoning.
This almost never happens. BUILD WEALTH NOWNo big deal, except when the purchaser turned up
BY PLANNING FOR THE SALE OF YOURthe non compliance issue, it threw a few extra
BUSINESS Okay, so you think you have enoughwrinkles into the mix. In that case, the issue was
to do without throwing more onto the pile. Am Ieasily resolved (yet, much to the additional cost
right? That is why I have written this article forand chagrin of the sellers). But, sometimes known
you. It provides a "down and dirty" overview ofviolations are not so easily remedied. In those
things that you ought to begin thinking about andinstances, a seller runs the risk of blowing a good
planning for right now. Doing so will provide youdeal.
with an additional safety net that will helpWhat's the bottom line?
safeguard your valuable business asset.Clean up any tax, industry, OSHA, EPA or zoning
Here are just a few of the benefits of planningissues with which your company does not comply.
now: A planned sale allows for your goals andOrganize and keep records available. One never
objectives on your timetable You may begin toknows when opportunity might knock. If and
identify potential buyers You may be able towhen it does knock, will you be ready to strike
create an attractive acquisition candidate You canwhile the iron is hot? How many times have you
begin to understand why a buyer may want toheard someone say something like, "I'd sell
buy You might learn why buyers would not wantanything, including my business for the right
to buy—and be able to fix the problems Youprice?"
may begin to realize the worth of your businessMaybe you have even said it yourself. But would
now, and learn how to increase the value as partyou know what paperwork and documents a
of your retirement planningserious buyer will immediately need in order to
BUSINESS VALUE HOUSEKEEPING CHECKLISTpursue the purchase? When a qualified buyer is
Record All Sales Business owners often inventready to begin serious due diligence, they will need
remarkable ways to beat the tax collector. Buta variety of company documents.
the taxman can be a business owner's best friendFollowing is a partial list of things a buyer will ask
when it comes to selling one's business. Incomefor: • Three to five years income tax returns
taxes are a great investment in the years• Copies of one to three years quarterly
immediately preceding an anticipated sale of thepayroll reports • Three to five years CPA
business.prepared financial statements • Current year
Paying income tax proves to the buyer AND theto date financial statements • Detailed
banker that your business operations have beendepreciation schedules listing each fixed asset
profitable. Nobody wants to pay more incomeowned by your company • Corporate Minute
tax. But consider this example: Ronald BunkBook with updated minutes • Recent aged
systematically underreported business income byaccounts receivable trial balance • Recent aged
an average of $20,000 per year. Assuming aaccounts payable trial balance • Company
combined tax rate of 40%, Mr. Bunk savedorganization chart • Copy of the Summary of
$8,000 in taxes per year. But, the underreportedInsurance Coverage (provided by your carrier)
income also reduced the company's earnings base• Information about Employee Benefits
by $20,000 per year. If, for example, theprovided by the company • Information about
business could be sold for a multiple of 5x theEmployee Retirement Plans • Copies of labor
company's reported earning base---the companycontracts • Copies of other contracts to which
would sell for $100,000 less ($20,000 averagethe company is a party • Copies of licenses,
earning base not reported times the price multipleregistrations for patents, copyrights, trademarks,
of 5) than it is really worth!etc.
Without considering the time value of money, itThe foregoing list is an example of the types of
would take in excess of twelve years of (illegal)records your company should have up to date
tax savings to make up for the loss of $100,000and on hand at all times. These records are
in business value. The lesson: In trying to screwextremely important to speed the sales process
the government, business owners often findalong. Though this advice sounds basic, I often
themselves on the short end of the stick; often inencounter companies whose records are not
more ways than one.complete and up to date. This situation can
Eliminate co-mingling of business and non businessdramatically affect a potential sale.
assets A common practice among closely heldI suggest using a three ring binder to keep the
companies is to co-mingle non business assets andbasic updated records available at all times. This
expenses with business assets and expenses. Ialso makes other business needs for the
have seen businesses owning motor coaches,documents much more manageable.
boats and airplanes; all reported as businessCONCLUSION
assets. The costs of maintaining and operating theYou can increase your wealth by knowing a few
assets were expensed as regular businesssimple ground rules for successfully selling your
operating expenses.business. Just like other owners of closely-held
It is true that those businesses (not audited bybusinesses, you know how to operate your
the IRS) are saving a certain amount of incomebusiness on a day to day, month to month and
tax, and providing an extra "fringe" benefit for theyear to year basis. But your experience in running
owners of the company. Wise business ownersthe business has not prepared you to know how
should endeavor to separate non business assetsto sell your business.
from the business in the three to five years