SPEAKING OF BUSINESS: Lay groundwork before you sell your business

Q: We have been running our business for two years, and we are ready to sell it. We do hope to see some profit for all the hard work. What is the best way to sell our business and optimize our profits?
A: Selling a business can be the largest and most important deal of an entrepreneur’s career. I call it ?payday!? Whatever prompts the sale, selling your business is a high-stakes transaction, with far-reaching financial and emotional consequences.
In the best of all worlds, the owner begins to prepare his or her business for sale at least one year, and preferably three years, in advance. Preparation is important to make all the paperwork as impressive as possible. Start by assessing financial books with an eye toward creating audited financial statements that illustrate the company’s revenue and growth potential. Records should be formalized. Clearly document all transactions so a new manager can take over with minimal training.
Next, you need to examine all supplier and customer contracts. Make sure terms and conditions will not expire or require renegotiation just as a new owner unpacks. Terminate contracts that might trouble a potential buyer, drain the company financially or serve no purpose. As you examine records, start codifying company policies and procedures that exist as unwritten rules.
You must also fully evaluate and catalog company assets, from property to warehouse inventory to employees. For one to three years before the sale, keep inventory at a minimum to demonstrate company efficiency and maximize profit. If company assets include real estate, separate or sell the property before your company hits the market.
Equipment leases require the same scrutiny as real estate. An extremely important asset is a customer list. If possible, make a list of your customers for the past three years, showing how much each has purchased in each of those years.
Intangibles are things such as trade names, logos, package designs and advertising slogans. Unless an intangible asset has a definite economic value, it is usually included in the calculation of good will. Finally, don’t forget about your most important assets, your employees. The loss of key employees during a sale can kill a deal. It is important that your employees hear about the pending sale of the company from you and not a third party in order for the new owner to retain as many employees as possible and ensure a smooth transition.
To capitalize on selling your business, you want it to be at its best so that it will attract interest and a good price. Your business is only worth what the highest bidder will pay, and few people want to buy unsuccessful businesses. It?s time to increase your sales figures through aggressive campaigning, reduce your costs and eliminate certain expenses that need not be listed, such as company vehicles used mostly for personal use. You will also want to ensure that your information systems are up to date and transparent so that they will instill trust and confidence in the potential buyer. And, finally, formalize employment contracts or deals with customers and suppliers.
Now it is time to calculate your selling price.
In most cases, it’s best to engage a professional appraiser. However, there are several ways to calculate selling price such as: net book value plus, adjusted book value, multiple of earnings or capitalization-of-income method, and full replacement cost.
Now you are ready to start marketing the business for sale.
Once the potential buyers appear, you must seek to obtain the best deal possible. Creating competition between potential buyers is a sure way to encourage higher bids. Clinching a deal with the most attractive bidder can be a drawn out process. Your preferred buyer should be able to prove their credentials with financial documents and a general transparency about the deal.
Both you and the buyer(s) must be open about what you expect from each other, such as liabilities, responsibilities, and form of payment. Once you?ve chosen a buyer and negotiated the basic selling price and terms, draw up a terms sheet that can be signed by you and the buyer, which outlines the basic agreement you have reached, and which can be the basis for formal selling documents that can be prepared by your attorney. Finally, inform the other bidders of your choice, and agree upon a timetable for the sale.
Remember, ultimately it is your preparation that will make for a smooth selling process, and your valid revenues, earnings and growth prospects that will garner you the highest price.

Windsor resident Russell Disberger is a founding member of Aspen Business Group, a Northern Colorado-based specialty consulting and venture capital firm. He can be reached by e-mail at rusell@aspenbusinessgroup.com, or at (970) 396-7009.

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