Whether you are considering selling your business now or sometime in the future, the most important thing you can do to ensure a successful and profitable sale is to take steps to properly position your business for the sale. There are hundreds of reasons why a company is difficult or even impossible to sell, most of which can be attributed to a lack of up-front planning.

Selling a business is, in many ways, like selling a house. The better and more salable you make it look, the faster it sells and at a more favorable price. Everyone thinks about selling at some point and reaping the rewards of their time and investment. Some people want to retire at a certain age, while others choose to diversify their investments for other financial planning purposes, while still others may just be tired of the business. Whatever the reason or timing, I strongly suggest that you start preparing your business one to three years before your desired time of sale. In reality, it is never too early to "groom" and provide for a smooth transfer.

The process of preparing a business for sale can be viewed as "pre-sale positioning" because that is exactly what you are doing, positioning the company, its personnel, you and your family for the eventual sale.

All too often, owners come to us wanting to sell their business "yesterday," yet they have done nothing to position themselves or the company for the sale.

Companies can fail to sell because of a limited time left on their lease. Consider a Company that has less than one year to go and where the building's owner will not renew or enter into another lease because he has other plans. Few to no prospective buyers will be inclined to spend the thousands of dollars to move the operation, particularly with heavy capital equipment, not to mention the disruption to the business which can include, new phone systems, new wiring/cabling, re-calibrations, customer announcements, etc. A definite "deal deterrent."

The other side of the coin is, you don't want to tie yourself personally to a long-term lease. Typically when a business is sold, an instrument called a "Lease Assignment" is used. A typical Lease Assignment states that the original tenant (you) shall not be released from their obligations, should the Assignee (the Buyer/new tenant) default.

If you had a magic wand, when you sold the business, there would be one day left on the lease, with two 5-year options. When an option is exercised, it in effect is a new lease. The old lease establishes the terms, not the parties involved. Another "deal deterrent" is where an owner who made every decision himself and does not want to remain with the company even for one day after the sale. A new owner could be lost for months without assistance from a key employee or secondary manager.

Another misconception, by Owners selling their businesses is, if they stay on board, that they will be compensated as they were before the sale. If that were the case, then the business was undersold. Mutually beneficial consulting arrangements sometimes fit the needs of both parties. More often than not, the "consulting piece" is utilized to seal the deal.

Whether you are considering selling your business now or sometime in the future, the most important thing you can do to ensure a successful and profitable sale is to take steps to properly position your business for the sale. There are hundreds of reasons why a company is difficult or even impossible to sell, most of which can be attributed to a lack of up-front planning.

Selling a business is, in many ways, like selling a house. The better and more salable you make it look, the faster it sells and at a more favorable price. Everyone thinks about selling at some point and reaping the rewards of their time and investment. Some people want to retire at a certain age, while others choose to diversify their investments for other financial planning purposes, while still others may just be tired of the business. Whatever the reason or timing, I strongly suggest that you start preparing your business one to three years before your desired time of sale. In reality, it is never too early to "groom" and provide for a smooth transfer.

The process of preparing a business for sale can be viewed as "pre-sale positioning" because that is exactly what you are doing, positioning the company, its personnel, you and your family for the eventual sale.

All too often, owners come to us wanting to sell their business "yesterday," yet they have done nothing to position themselves or the company for the sale.

Companies can fail to sell because of a limited time left on their lease. Consider a Company that has less than one year to go and where the building's owner will not renew or enter into another lease because he has other plans. Few to no prospective buyers will be inclined to spend the thousands of dollars to move the operation, particularly with heavy capital equipment, not to mention the disruption to the business which can include, new phone systems, new wiring/cabling, re-calibrations, customer announcements, etc. A definite "deal deterrent."

The other side of the coin is, you don't want to tie yourself personally to a long-term lease. Typically when a business is sold, an instrument called a "Lease Assignment" is used. A typical Lease Assignment states that the original tenant (you) shall not be released from their obligations, should the Assignee (the Buyer/new tenant) default.

If you had a magic wand, when you sold the business, there would be one day left on the lease, with two 5-year options. When an option is exercised, it in effect is a new lease. The old lease establishes the terms, not the parties involved. Another "deal deterrent" is where an owner who made every decision himself and does not want to remain with the company even for one day after the sale. A new owner could be lost for months without assistance from a key employee or secondary manager.

Another misconception, by Owners selling their businesses is, if they stay on board, that they will be compensated as they were before the sale. If that were the case, then the business was undersold. Mutually beneficial consulting arrangements sometimes fit the needs of both parties. More often than not, the "consulting piece" is utilized to seal the deal.

Pre-sale planning

The goal of pre-sale positioning is to minimize any negative aspects that might hinder or prevent a sale, as well as to show the business in its best light. While each situation is unique and there are often many solutions to any one situation, following are some of the major issues an owner must deal with in positioning his business for sale. (Note: A negative situation for one company may be a positive situation for another.)

Making the decision to sell

If a subsidiary of a larger company is being divested, the decision is generally economic or strategic with little emotion entering into it. On the other hand, if you are the owner and/or founder and have worked in the business everyday for decades, the decision and process of selling can become very emotional. Some questions to consider include: Why do you want to sell? For some, this may be easy, while for others it may reflect such things as family pressure or business problems. What do you plan to do after the sale... retire, travel, buy another business, remain available after the sale?

If you have other partners or stockholders, be sure that everyone agrees to offer the business for sale. In the case of a Partnership (this includes working shareholders) consider having a "Buy-Sell" Agreement in place. This can be the subject of another article.

Management

The more important an Owner is to the Company, the less the business is worth... Do you have secondary management in place that can run the company for an absentee owner or perhaps as a division of another company? Do you have excessive management or supervisory personnel or excessive bonus programs that negatively affect the profitability of the company? Do you have employment agreements or contracts? Will key employees remain after the sale?

Facilities

Are existing facilities adequate for future growth, is the building owned by the business owner, is the lease at a favorable or market rate, is the building in good repair, clean and organized? Are there options to renew the lease? Is the facility in compliance with regulatory requirements? Environmental issues are very important today. Balance sheet Are all assets properly reflected (frequently leased equipment that has been "bought" for $1 is not on the b/s)? You must have tight controls on your receivables and payables. Buyers will not pay for receivables over 90 days old and will often discount receivables over 60 days old because of poor chances for collection. We generally suggest that any notes owed to the owners be converted to bank debt, as buyers seldom give consideration to company debts owed to the owners. Are there assets owned by the owners that really should be assets of the company or assets of the Company that should be owned by the Owner (like a company car)? Make sure inventory is current and accurate. Excess or unused capital assets should be sold. You should attempt to remove all personal guarantees from company notes or leases.

Income Statements

Are all sales recorded, and are they recorded properly? Are any items being expensed that should be capitalized? Are there non-recurring income or expense items that should be explained? Be a "boy scout" as best as you can, particularly the year before you sell.

Recasting financial statements

Recasting the income statement is probably one of the most important tools to show real income. A balance sheet will show book value where market value is more relevant when it comes to buying or selling. This exercise is best left to the intermediary, as over zealous recasts can cause a "credibility loss" which can lead a deal to fail.

Legal considerations

If the business is a corporation, you must comply with all corporate formalities and deal with any contingent liabilities, unresolved tax problems or audits. Compliance with all local, state and federal agency laws, rules or policies is a must, as owners will be asked to represent and warrant that they are in compliance. Full disclosure will prevent (provided it's documented) any "legal whining" after the sale. Also, determine if regulatory approval is required for the sale of the company.

Tax planning

Many owners will have a huge capital gains tax upon selling the company. Owners need to plan very carefully to reduce their tax liability and plan how the money should be used to meet financial goals. You need to discuss your situation and options with an experienced and qualified tax accountant. This may not be your existing accountant - it needs to be an accountant experienced in tax planning. Currently there are low long-term Capital Gain taxes in place (15% federal). How much longer do you think that will remain in place? Also if you are a "C" corp., consider converting to being another type of non-taxable entity such as an "S" corp. if you qualify. This will prevent the double tax trap of being a closely held C corp. This must be done at least a year and a day before you sell.

Selling price

Do you have a realistic expectation of a fair sale price for your business? Has a third party (like yours truly) given an opinion as to the value of the business? There can be hundreds of items to take into consideration when positioning your company for sale, but the effort and expense are well worth the reward.