Selling a business can be a lengthy and complicated process, and proper preparation is essential to ensure that potential buyers see your business as an attractive investment opportunity. Unfortunately, many business owners wait until they are ready to sell before starting the planning process, leading to a decrease in the value of the business. However, starting the preparation process early can help you maximize the value of your business when it comes time to sell. We have found that a 2-5 year window provides the best opportunity to maximize a successful transaction.
Over the decades that CAPSTONE has served its clients, we have encountered many profitable and respectable companies whose financials were, quite frankly, a mess. For business owners, it is easy to neglect this administrative task while focusing on high-growth activities, ultimately leading to a disorganized financial situation. We have seen financials that did not add up. Most business owners focus on cash balances to cover Friday’s payroll and their draws and do not take time to review the accuracy and depiction of trends within their own financials.
Buyers will penalize you for any administrative items in disarray, leading to a decrease in the value of your business. Hidden details can hurt the value of your business, and when it comes to selling, proving what’s going in and out of your accounts will go a long way.
Here are three essential steps to prepare your business for sale, whether you plan to sell now or in the future:
Step 1: Tidy up your financials.
To ensure that you have an accurate picture of your financial situation, it is important to work with a Certified Public Accountant (CPA) to declutter and organize your financial records. Perform a review of your financials on a routine basis (at least quarterly) and be sure to compare month to month as well as year to year.
Remove any personal expenses that may be attached to your business (these might include things like dry cleaning, meals, travel, and entertainment), and review your contracts frequently. Be sure to note any special clauses that could impact a sale, such as a change of control provision. Engage an attorney who has business transaction experience.
Step 2: Lock in your key resources.
Key resources, such as employees, clients, contracts, and processes, are crucial assets that make your business model work. When it comes to employees, it is essential to take a moment to honestly assess how your business would run without them and get the most vital employees under contract long before you think about selling. The reason to do this now is to stay ahead of potential conflicts of interest during a sale that can be caused by key managers. You should also ensure that you have incentives such as stock options and bonuses in writing to avoid any eleventh-hour power plays at a time when you will be emotionally invested in a sale.
To ensure that your key resources are locked in for your future sale, consider asking yourself the following questions:
- Do you need to have employees sign Non-Competition and Non-Disclosure Agreements?
- If so, are these agreements tailored to fit your specific needs?
- Are your contracts assignable?
- Do you need to have any particular key employees sign long-term employment agreements?
If you need clarification on these key resources, consider working with a legal professional to make things trackable and ensure that your contracts are properly drafted and reviewed.
Step 3: Make yourself replaceable.
It is important to remember that if your expertise and systems live solely in your mind, it will take a significant amount of work to sell your business. Take the time to go through, automate, and systematize your business where you can while you can. Make yourself easily replaceable so that the business is not dependent on you.
Final thoughts
No matter where you are in your business venture, keeping your finances clean, locking in your key resources and setting up processes to make yourself replaceable for a future sale are pivotal. We recommend working with an accountant and a qualified law firm who can provide legal guidance and assistance at every step of a business transaction, including drafting and reviewing contracts and ensuring that every detail is addressed before closing.
CAPSTONE takes pride in its ability to complement your existing advisors and to help you manage the process of transferring ownership of your business. Call to discuss the possible sale of your business.
