One of the fun projects we get to do several times a year is to help a client sell their business.  Sometimes it’s due to the age (or interests) of the entrepreneurial founder, other times (the sad times) due to the death or illness of the founder.

Since we are involved in two of these projects now, I thought it would be good to share some rules of the road with you all.  In case you, too, are considering the concept.

The first thing you have to do is make sure your exit strategy is clear.  Will you leave or stay for a while after the sale?  If you are leaving, who will take over the operations should you sell (assuming existing staff remains with the firm after the sale) and will that create management problems?

Then, you need to clean up your accounting.  Oh, I know, you think your records are fine- and for your purposes they may well be.  But, if you want to transfer ownership, then the books have to meet standards- to demonstrate the valuation you want for your firm.  This is probably the time to hire an accountant, if you’ve been maintaining the books yourself.

You are going to need three years of clean financials and three years of tax records.  No missing revenue or expenses, all expenses and revenue properly classified.  And, that will include year to date financials, by the way, beside the 3 years of historical records.

We recommend that you replace your salary (or draw) with that of the highest paid individual in the firm- or the person you expect to succeed you. (Yes, that means their salary and benefits are listed twice.)  This should give the purchaser a better idea of the firm’s cash flow and profits when the founders are not around.  Especially since so many of us consider our businesses our own little candy store.

It probably means you may need to spiff up your operations and your sales.  Just like when you want to sell your car or your home.  You want those assets to appear in the best light- you need your business to shine in a similar fashion.   Be careful about spending large sums of money on marketing though, because it you don’t augment your sales, this could be a drag on the valuation, since costs will have increased without a concomitant increase in revenue.

Then, comes the fun part- what is this business worth.  The range (for a private firm) is somewhere between 3 and 6 times current cash flow.  You did notice I said cash flow and not net profits.  Cash flow will reflect loan payments (principal AND interest, capital items, and the cost of your inventory).  You may need to bring in an expert should you be aiming for the high end of this valuation, too.

You’ll notice in the example above, this firm has no debt.  Which means it is probably in the higher echelons of the valuation.  So, this firm is probably worth between $ 1,000,000 and  $ 1, 125,000.

Now comes the tough part- who will be buying the business?  Not everyone you approach will be serious- they may just be seeking valuable competitive information. (Of course there will be non-disclosure agreements, but still…)  Even if you are using a business broker (whose fees are akin to what real estate agents charge- or maybe a little more) and an attorney for this part, you can run into problems. Nevertheless, a business broker can also keep your emotions in check- you aren’t dealing with the purchaser on a day-to-day basis.

Oh- you may also need another attorney.  Yours may not be the best when it comes to contract law. Ask her (or him) for a referral, both to remove any hard feelings and to ensure everyone can work together well.

Now comes the hard part.  Do you want all your cash up front?  That certainly ensures you can walk away cleanly.  But, it also may have terrible tax consequences.

But, if you don’t get all your money up front- what will/can you do if the purchaser reneges?  Or, if the business develops problems under the new management and can’t afford to pay you?   (Even if the firm reverts back to you- do you want to step in again and turn it around?)

Now that you’ve considered the issues- are you ready to go for it?

Share this: