Take measured steps before you sell your business

Q: I’m contemplating selling my business of more than 20 years. What is the best way to go about this? Where do I start?

A: You must first settle on a valid reason as to why you are selling. It’s probably the first question a potential buyer will ask you. The more valid your reason, the more serious the buyer will be. The most common primary reasons why owners sell their businesses as follows:
? Liquidity: When almost all of your personal wealth is tied up in the business, the prospect of a sale offers an opportunity to convert the holdings into cash.
? Partial sale: You may decide to sell part of the business rather than all of it.x09
? Change in lifestyle: This is the most common reason for selling a business. It is hard to run a business when the inevitable problems of age and health emerge.
? Need for a change: You may be looking forward to reducing the incessant pressure so you can pursue other interests.
After deciding on the reason you wish to sell, you must ask yourself “Will anyone buy this business?” The only way to find out is to place your business on the market. A small business that is unprofitable or has a sharply declining sales history will be difficult to sell. The higher the growth potential of your business, the more chances you have to find a buyer.
In order to place your business on the market, you first need to know what the business is worth. A good buyer will evaluate your business on projected cash flow for the next few years. They will discount the value of that cash flow to reflect the amount of risk inherent in the business, change in management, loss of key employees, and the importance of their personal efforts in maintaining the success of the business. To market and sell your business, you must gather the following information:
1. Three years of financial statements.
2. Business tax returns for three years.
3. List of fixtures and equipment (use market value, not book value).
4. Approximate wholesale value of inventory less dead inventory.
5. List of employees and their length of employment with your company.
6. Customer lists and their purchasing history.
7. Copies of the lease.
8. The franchise agreement (if applicable).
9. List of loans with balance and payment schedule.
10. Copies of equipment leases.
11. Names of outside advisors, such as your business broker, lawyer or accountant.
You should have an outside firm prepare or review your books and get them ready for show and tell. Be sure to have all your personal items you have ran through the business taken out of financial statements. This is called recasting. This will increase the value of the business in the eyes of potential buyers and the likelihood of making a sale.
At the same time that you are gathering the above information, you must also keep in mind the following:
? Confidentiality: To avoid giving away information that can be used to compete against you, provide financial information only to serious potential buyers against a deposit. You can also ask a potential buyer to sign a non-disclosure agreement.
? Thinking like a buyer: Suppose you are visiting your company for the first time. How impressed are you? During the course of selling a business you’ll get a lot of prospects who aren’t really interested and can waste a lot of your time. You need to be able to quickly judge the seriousness of a prospect so that the energy you put into discussing the business is not entirely fruitless.
? Maintaining the business: Keep normal hours, maintain the inventory, paint or fix the premises if needed.
? Engaging professionals who understand the sales process: Some prospects may be more comfortable, at least initially, talking to an intermediary. A broker will allow you to maintain confidentiality, and will save you the time of dealing with potential buyers. Lawyers can also be helpful with preparing a document summarizing your business for potential buyers. If the business turns out to be less successful or less easy to run than anticipated, the new buyer may assume that the business was fraudulently represented. A lawyer can review your document to avoid the risk of litigation. Also, when you prepare a purchase and sales agreement you should have a lawyer review, if not actually prepare, the purchase and sales agreement.
Finally, make sure that your employees hear about a potential sale of the business from you and not a third party. Rumors breed nervousness, and some of your staff might decide to seek employment elsewhere and leave immediately. You may decide that one or more employees are the best potential buyer for your business. Employees know the business better than outsiders and may be able to persuade investors or lending institutions to finance the buyout.

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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