Selling your business; If you own a business, it is likely to be your most significant asset. Yet often when a business is sold, the price obtained is far below its value. There may be a variety of reasons for this, but there is a recurrence of mistakes owners make which tend to lead to the undervaluation. These include:
• Lack of preparedness so that it is difficult to document the financial performance of the business or its potential. Frequently, a prospective buyer will appear out of the blue, so it is important to have annual financial statements available that document financial position, cash flow, and business operations.
• Negotiating the sale without the expertise and advice of an attorney and a financial and tax professional. A buyer making an offer will generally have more experience in these circumstances than the seller.
• Marketing the business yourself rather than using a banker, CPA, attorney, business broker or other professional. This limits the number of potential buyers and reduces the confidentiality of the activity. As a result, key employees may become aware of your plans and leave. Also, your negotiating position is compromised when the buyer knows that you are anxious to sell.
• Opting for deferred payment, since this increases the risk underlying the transaction because business conditions may change or the new owner may mismanage the enterprise.
• Failure to consider tax planning because the professional tax advisor is not adequately consulted until after the sales contract has been negotiated and finalized. For example, in certain circumstances it may be advisable to convert a closely-held C corporation into an S corporation before the sale, to lower taxes.
We also run into situations where business owners are so preoccupied with the sale of the business, that they forget to focus on its day to day management so that by the time a suitable buyer appears, the business has deteriorated and much of the potential sales value has disappeared. If the possible sale of your business is envisioned, you need considerable time to prepare properly in order to obtain the highest possible price for your business as well as to insure its flawless operation during the sales process.
Before Selling Your Business
1. Have an annual audit of your financial statements to enhance the credibility of your financial data to the prospective buyer. When selling your business, three years’ audits are often desirable (nope, we do not perform audits but we have
many firms we can so recommend).
2. Resolve any financial or tax issues and uncertainties that arise from the audit.
3. Modify compensation plans to induce key employees to stay with the firm during the selling process, and thereafter, if the acquirer wishes to keep them on.
4. Analyze the company’s strengths and competitive advantages so they can be adequately communicated orally and in writing to a prospective buyer.
5. Familiarize yourself with sales formulas in your industry and establish sales price parameters for determining serious offers. Also, decide whether you would accept stock or debt in lieu of cash, and how
that would impact on your sales price.
6. Collect and retain relevant current financial and operating data a potential buyer might deem essential in concluding negotiations.
7. Provide detailed analysis explaining unusual variations in operating results and income to enable a buyer to evaluate your recent business history.
8. Provide a detailed document explaining your business processes and the backgrounds and skills of your management personnel.
You can never tell when an opportunity for selling your business or a merger might arise, and it is highly desirable to be ready. Consulting accountants like us help many clients develop systems and procedures that will enable them to obtain vital business data on an ongoing basis, and, of course, we can take an active role as part of “the team” in the successful execution of a business sale or merger.