If you’re wondering when you should begin to prepare to sell your business, you’re not alone. This question is asked by most all business owners when first discussing the concept of exiting their businesses. Usually, they have not yet begun to prepare for selling their business and yet may be hoping to sell within 3 months to 10 years. If they are on the planning to exit soon, it usually takes them by surprise that they are late getting started. The answer to this question is almost always, “Right Now!”
There are 4 initial aspects to consider when preparing to sell your business:
- Knowing what you need from the sale, after tax to fund your retirement plan
- Determining what adjustments are necessary to present accurate financial statements.
- Management team and infrastructure maturity
- Due diligence data room compilation of documents.
These four aspects can be done simultaneously, but typically these can require several months to several years to prepare.
Know what you need from the sale of your business
This step involves assessing your mental and financial readiness to exit the business. Reviewing with your financial planner what the gap is between what you have in retirement assets and what it will take to fund the chosen lifestyle. Determining the net after tax proceeds is what will fill this gap.
You should also determine what you want in terms of the exit: Do you want to stay employed, would you want to retain some ownership, or do you want to walk away and never look back? Some business owners are not ready to leave and are more interested in phasing out or keeping their hand involved in a limited way.
Modifying or restating your financial statements.
Frequently I find that the financial statements of the company are prepared on the income tax or cash basis, which rarely present the true profits and resulting EBITDA. A recent client had reported on the cash basis for about 25 years and did not understand that the implications of not having accrual basis under the GAAP standards of accounting to present to a buyer, much less to compute the profits and EBITDA. When we restated the statements under the accrual basis the net income and EBITDA rose by over $1M in the current year, resulting in a larger valuation and this was prior to considering what adjustments to EBITDA could increase this further.
Management team and infrastructure maturity
One of the key steps in preparation is ensuring that the management team is in place and that the owner(s) are not required to keep the business running. If the owners sit at a key team member such as the primary engineer, sales generator, service provider, estimator or other role this role must be filled by another person. The seller will depart, and it is important that the buyer has a management team without a glaring hole in a critical position.
The phrase to “de-personalize” the company of the owner means to ensure continuity of all management positions is offered to the buyer to ensure the company will not suffer when the owner is no longer in the office. Some owners don’t realize how much they are still holding on to duties and responsibilities that keep them from being able to take large blocks of time away without any loss of productivity to the company.
Preparing for Due Diligence Before Selling Your Business
Several years ago, I was introduced to a business owner who was already under a Letter of Intent by a public company, interested in purchasing the company. The first day, I walked in and the owner handed me a requested list of documents for the upcoming due diligence examination by one of the national CPA firms. This list comprised 160 separate items ranging from organizational, financial, employment, legal to environmental items that no one had started to compile.
This process took about 6 weeks and we were behind the curve the entire way, seeking to build a response which impacted the quality of some of the information we were to provide. This caused the offer to be lowered due to inadequate time to prepare the necessary items.
In contrast, I worked with another company a few years ago who had prepared the preliminary documents and had them organized on a network drive. This information was ready to populate a data room when they entered into an agreement to be examined via a letter of intent. The due diligence phase went smoothly, and when the requested list was provided we were able to supplement the prior documents quickly.
This list of typical documents is readily available and when time allows to work ahead of time, the amount of stress is lessened during this phase of preparing to sell your business.
In summary, preparation for this type of once-in-a-lifetime transaction can increase the value, lower the stress and ensure you have identified the areas that must be fortified to maximize the sale price and demonstrate that your company is well prepared for any buyer at any time.