5 Steps to Prepare a Business For Sale
Most businesses are simply not ready to be sold. Business owners generally organize their affairs in order to effectively operate the business on a daily basis, however, what allows for effective operations most often does not put the business in a good position to be sold. Here are 5 steps most business owners can take to prepare it for sale:
1. Get your financial documents in order: the most important step is to prepare the financial reports on the accrual basis that most business buyers will require in order to assess your business, determine a value, and make an offer. These reports include monthly operating reports, accrual financials, and forecasts/budgets for the year.
2. Ensure that you have at least 3 years of tax returns on hand: a prospective buyer will want to make sure that the company s/he is buying is not vulnerable to past due taxes or penalties. Therefore, you should be able to provide at least the last 3 years of tax returns that reconcile to the financial statements and the IRS audit history of your company. Without these documents most buyers will not consider purchasing your company.
3. Prepare a report that lists and describes the critical customer, supplier, and employee contracts to which the company is bound: this report should give a summary or snapshot of the essential elements of the business. A potential buyer should be able to understand who the company does business with, the history of the relationships (customer, vendor, employee, etc), and the current and future obligations the buyer will inherit.
4. Review company human resource (HR) records for issues and completeness: Equal employment opportunity complaints are a serious issue for any company, and as such, a business owner should ensure that updated employment contracts are prepared and organized, the company handbook is updated and a signed record of acceptance / acknowledgement from every employee is on hand. Many buyers will want to know that the company has a solid HR history (including relevant training, certifications, safety/security briefings, etc.) and is well prepared to defend itself against an EEOC claim and/or other employee issues.
5. Review the litigation history of the business and prepare a summary: the costs of litigation can be a significant risk for any business and most buyers will want to understand the litigation history of your business (who sued you and/or who did you have to sue?) in order to better understand the risks associated with buying your business. Do you own significant intellectual property (IP)? Did you have to defend it in court? Did you win or lose? Were you sued by a competitor, a customer, or an employee? What were the circumstances? All of these questions will likely be asked by a potential buyer and it’s best to be well prepared to answer them.