Preparing your business for sale is essentially the same as preparing it for continued success. For many firms, the main exception to this is with respect to accounting practices. Whereas many operating businesses seek to minimize taxable income reported annually, now they need to show prospective buyers a history of strong and steadily growing profits. This alone is a good reason to begin developing your exit strategy sooner rather than later.
Buyers of active businesses pay more for companies that are performing well. As the sales process is underway, you need to maintain your attention and dedication to building the business. This means having a robust business strategy, along with a sales process that identifies buyers prepared to pay the maximum price for the business, and a sales structure that minimizes capital gains and other taxes paid on or after ownership transfer.
Have a robust business strategy
Maximize the value of the business as a going concern, independent of your ongoing involvement. This means running your business effectively and efficiently, implementing systems and business processes that support consistently above-average earnings. Develop a sale-oriented business strategy with special emphasis on the following components, all of which reassure buyers that yours is a well-run business worthy of purchase:
- A stable and loyal management team and staff. Buyers want to know that your team will stay after your departure. This requires that you share your intent to sell with at least your most-senior staff. The current management team, if any, will need to remain confident of stable company leadership.
- A strong customer base. Buyers will want to know that your customers are loyal to the business, not just to you personally. Customers can be expected to learn of the business transition, so attention needs to paid to managing the communication process.
- Effective internal controls. Systems and processes should be documented and seen to run smoothly, especially in your absence.
- Positive cash flow. You should have several years of financial statements showing healthy returns, without requirements for unexpected or repetitive injections of owner capital. Any operating lines of credit are only accessed seasonally. Operating and capital loan payments are always made on time.
- A history of orderly and appropriate capital investments. Your capital assets are well-maintained and up to date technically. Obsolete equipment is disposed of promptly.
- A tidy facility appearance that reflects pride and orderliness. There should be no collections of unused goods and equipment left anywhere on site. Your facility is clearly not in need of painting or major cleaning. Get an objective third-party opinion on this item if you are not naturally a tidy person.
Develop a sales process
You need a sales process that will identify qualified buyers, those who are prepared to pay well for the business. This task is directed at the sales process itself, ensuring that whichever sales model is chosen, buyers are identified who would pay the maximum amount for the business.
For internal buyers (family, employees, or co-owners), this can be achieved by obtaining agreement to use an objective third-party assessment of fair market value of the business. If agreement on an unbiased valuation process cannot be reached, then the best option may be to find an external buyer.
Strategic external buyers (those who want to work in the business) may be identified through informal business networking, or a business broker may be involved. Financial buyers (those who want the business to run without their involvement) are more likely to be identified through a business broker. The sale price for external buyers may be determined through mutually agreeable third-party valuation, direct negotiations, or a competitive process facilitated by the broker.
Develop a tax-effective sales structure
The objective here is to minimize capital gains and other taxes paid on or after ownership transfer. This is the domain of tax experts, especially accountants and financial planners. These individuals should be consulted early in the sales process, to ensure personal financial arrangements (estate plans, family trusts, etc.) are in place. They also will need to be consulted when negotiating terms of your business sale, to minimize taxes paid on or after ownership transfer. Final sales agreements should always be reviewed by lawyers for both buyers and sellers, before being signed.