Sunday, September 10, 2006

Ten Commandments for Selling a Business

It’s my opinion that if you want to make it easier to obtain financing for your business, run your business as if it’s about to be sold. According to Jim Biedenbender of BizValPlus, you don’t just wake up one morning and decide to sell your business. Here are Jim's thoughts…

Business owners often wait until the last possible minute before they consider what they need to do when it is time to sell their business. As a result, it is common for surprises to occur when due diligence starts. To minimize these surprises, I recommend that business owners consider these Ten Commandments for preparing a business for sale.

1) It is never too early to start thinking about selling the business. This gives you time to deal with issues such as possibly weaning family members off the payroll.

2) Make sure you have a good management team in place. Many potential buyers will not invest if they are uncomfortable about how the business will run with you gone. A CEO, a strong controller and someone in sales should be a minimum. They will be vital to a smooth transaction.

3) Clean up your financial reporting act. Three years before a sale is a good time to have audited financial statements prepared to uncover potential charges or reserves that a buyer will demand for warranties, vacation pay or other unrecorded liabilities.

4) Credibility is paramount. A buyer will be more inclined to believe that your revenues and cash flow are real when they are reflected on a tax return. Telling a potential buyer “these are the real books” that do not tie to the returns can scare an institutional or fund investor into running.

5) Have a valuation prepared by someone qualified and familiar with your industry. Do not start a transaction with a false expectation of what your business may be worth.

6) Simplify your business structure and process to the extent possible. The simpler the structure and process, the easier it is for a buyer to get a true picture of the business.

7) Consider efficient tax structures or elections early in the process. An S election may provide additional flexibility in structuring the deal. Can you do a stock deal or will any buyer insist on an asset deal?

8) You may need to upgrade or bring in additional professional assistance for the transaction. Can your attorney draft a definitive agreement covering all of the necessary representations and warranties? Is your tax advisor able to discuss reorganizations?

9) Do you need an investment banker or business broker to sell your business? The best buyer may be already known to you, such as your management team. Some bankers specialize in specific industries. Pick one who knows the players in yours.

10) Be ready to sell. Some owners get close to closing a deal and then worry what they will do afterwards.

By following the above “Ten Commandments” and focusing on the big picture, you will be better prepared to deal with the uncertainties and the roller coaster of emotional highs and lows that will naturally occur during the process of selling your business.

With over 20 years of experience working with companies of all sizes on tax planning and selling their businesses, Jim Biedenbender of BizValPlus can be reached at 310-850-5014.

Please feel free to contact me with questions or ideas for future articles!

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