Preparing Your Business for Sale: Part 2
In Part 1 of this series, we covered several early steps in preparing a business for sale. These included articulating your goals, organizing financial records, reviewing cash flow, and reducing dependence on you, the owner.
Once those areas are in order, the next step is to review the risks, records, and transaction terms that may shape the sale.
Address customer concentration
A company that depends heavily on one or two customers may be viewed as riskier. You’ll want to review how much revenue comes from your largest accounts. Consider whether those relationships are supported by written contracts, recurring work, or a long history. Where possible, work toward a broader customer base before the sale.
You should also document important customer relationships and explain why those customers continue to work with the company.
Review contracts and legal records
Gather important agreements before a buyer requests them. These may include:
- Customer and vendor contracts
- Leases
- Loan agreements
- Employment agreements
- Licenses and permits
- Insurance policies
- Ownership documents
- Intellectual property records
Look for expired agreements, missing signatures, unusual terms, or restrictions that may affect a sale. An attorney can help identify issues that should be addressed before negotiations begin.
Resolve tax and compliance matters
Unresolved tax issues may create concern for a buyer. You’ll want to confirm that federal, state, and local filings are current. Review income taxes, payroll taxes, sales taxes, and information reporting.
Also consider whether the company has filing requirements in other states because of sales, employees, property, or other activity. In addition, address notices, past filing errors, and payment arrangements before due diligence begins.
Understand what the business may be worth
Business value is not based on revenue alone. A valuation may consider:
- Earnings and cash flow
- Company assets
- Customer concentration
- Management strength
- Industry conditions
- Future opportunities
- Business risks
Owners sometimes rely on informal estimates from competitors or past sales. Those comparisons may not reflect the company’s current facts.
A qualified valuation professional can help you understand a reasonable range and the factors that may affect it.
Consider the structure of the sale
A buyer may purchase the company’s assets, ownership interests, or a combination of both. The structure of the deal may affect taxes, liabilities, contracts, and the amount each party receives. Other terms may include:
- Seller financing
- Earnout payments
- Working capital requirements
- Consulting or employment agreements
- Noncompete provisions
- Holdbacks
- Escrow arrangements
A higher stated price does not always produce the best financial result. Be sure to review the full offer, including timing, conditions, and tax consequences.
Build an expert advisory team
Selling your business will likely involve accounting, tax, legal, financial, and negotiation matters. Assemble your advisory team, and include a CPA, attorney, valuation specialist, wealth adviser, and business broker or investment banker. Bring these advisers into the process early as they can help identify concerns before those concerns affect the price or timing.
Plan for life after the sale
The business is likely a major part of your routine and identity. Think about what comes next. You may plan to retire, start another company, invest, travel, or remain involved for a limited period.
Knowing what you plan to do can help you review offers with greater confidence. It may also help you avoid accepting terms that don’t fit your long-term needs.
Preparation creates more options
As discussed in Part 1, strong financial records and stable operations create a solid starting point. The steps in Part 2 help address the legal, tax, valuation, and transaction details that often receive close attention from buyers.
Preparing early gives you time to correct problems and make informed decisions. Even when a sale is not close, this work can make the business easier to manage and better prepared for future opportunities.
