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After securing a sale for my business, I presumed that all paperwork would be in order for the easy transfer of my company’s assets over to Buyer.
Not so.
Turns out the bank – which held the titles to all our trucks – had misplaced some of those titles. Long story short, the consummation of this sale took an extra six weeks for no other reason than my Banker couldn’t find the titles. A Banker, I should tell you, who told me months earlier that putting all the titles together would be a cinch.
So in writing this article, by no means am I saying YOU need to prepare. As a Seller, you will also need to make sure EVERYBODY ELSE is prepared as well. So let’s go over a few points, something for you to think about.
Many of these things, by the way, are good policies for ongoing business operations.
CURBSIDE APPEAL
Some businesses automatically know about curbside appeal. They are retailers and know the sidewalk must be swept and windows cleaned every day. Other businesses – machine shops come to mind – often don’t worry about these things. Orders are phoned in and Customers rarely stop at the actual location.
In selling a business, of course, the Ultimate Customer WILL be coming to your location. Several times. So will attorneys and CPA’s, perhaps even Bankers or other lenders on behalf of the Buyer. The initial appearance of your business can determine whether or not things will go well as it is reviewed and considered by potential buyers. More importantly, it can justify a higher price, just like residential real estate.
PAPERWORK
Buyers are quick to dismiss any offering that doesn't seem quite ready for presentation. If the initial information (in particular, financial) is not complete or if some of the facts don't make sense, an offering will probably be rejected without further analysis. Due to my position as a Business Broker I have had the opportunity to evaluate a lot of businesses. Some businesses have solid records and their internal financials match up neatly with their tax returns. Other businesses keep their financials in a shoe box. Which one would you consider buying?
Many owners are very honest and cannot understand why a potential Buyer doesn’t take them at their word. But if you were going to buy a business, wouldn’t you want one that has clean records? Tax returns all in order? Permits all in order? After all, the purchase of a business can be among the most important decisions in a person's life.
Keep in mind this point always: there are businesses just like yours that are for sale. A Buyer often is looking at 2 or 3 different businesses. And the one with clean paperwork transparency is going to be heads and shoulders above the rest.
This is why franchise opportunities do so well. Why plunk down the additional money a franchise opportunity demands? One is the name brand, of course, but more importantly the paperwork is all straight forward. Nothing messy, nothing kept in shoe boxes.
FIRST VISIT
This is going beyond curbside appeal; this is the initial visit by the Buyer to the facility.
Perhaps even more important than the area of dating and romance, First Impressions are crucial in a business purchase. If the Buyer comes around to the facility and feels like he/she is not getting straight answers or doesn’t like the general look of the premises, chances are very, very good that Buyer will not return, ever. Rarely have I seen a Buyer willing to give a Seller a second chance.
The key is to be honest with the Buyer. If the Buyer asks a question tell the unvarnished truth. If you actually don’t know the answer, tell the Buyer directly that you will get him/her the answer.
In general, Buyers want to get an overview of the business dynamics on that first visit. Like somebody seeing the back of a grandfather clock opened and asking how the mechanism works. Be very careful about talking about customer or supplier by name. Better to talk in generalities: like 1/3 of your customer base is in the medical field.
Either on the First Visit or subsequently in escrow, the Buyer will no doubt want to see the following. Be sure you are prepared to show it on the First Visit.
ASSET LIST
The depreciation schedule is a great place to start if you're assembling a list of equipment. You want to include all of your capital equipment, as well as office furniture, fixtures, and even leasehold improvements. Pull as much information together as possible, including acquisition cost and date, service contracts and records, and even appraisals. A used equipment dealer involved in your industry may be willing to give you some idea of valuation at a nominal cost.
Any vehicles to be included in the sale can be listed separately, showing their Blue Book value, mileage, accessories and so forth.
While it's a good idea to conduct an inventory of parts, supplies and finished goods at the outset, you can do it quickly to get an approximate value. A more detailed inventory will probably be conducted when you close a sale and require an exact dollar figure.
BOOKS/RECORDS
Most buyers of small businesses feel that a three year financial history is sufficient to gain a solid understanding about the company's recent performance. If your five-year history makes you look even better, I’d go with that kind of presentation. It shows length and strength. Along with a P&L and balance sheet covering the prior calendar or fiscal years, it's advisable to provide this information for the current year, as up to date as possible. If your business is seasonal, make note of that in the year to date presentation.
Depending on the size of the business and sophistication of the market in which it functions, you may be wise to provide financials information subjected to a full review. Yes, it costs money, but this means you are a serious Seller.
This does not mean you are lifting your skirt any more than you have to. Clearly and plainly I would keep financials that are for “Buyer Only”. These would black out any customer or supplier names. All Buyer needs to know at this stage of presentation is over view numbers: gross sales, cost of goods sold, etc. Any detail that would show customer lists or suppliers (essentially accounts receivable and accounts payable) is off limits until way down the road in Escrow.
The more stories you need to create to defend your financials, the less chance you have to actually sell the business. Better the financials are self explanatory. Internal financials match up with tax returns and more importantly, the offering. If you have a “cash” side of your business that you have never reported, I’d start reporting it. Sure you have to pay tax on it, but this is shear profit and adds neatly to your overall value.
I once had a client who was in the auto wrecking business. He claimed that he was pocketing $200,000 a year cash from his business that he wasn’t reporting. Maybe that was true, maybe not. But this Seller can’t expect a Buyer to pay him for profit that is not being reported.
Secondly, this makes the Buyer sound squirrelly. What else is he hiding? Are there liabilities he is hiding, as well as the $200,000 a year cash he is taking?
Since businesses are sold on a multiple of earnings, it is better to report EVERY dollar of income because due to the sale of the business, Seller is going to be far ahead of the game financially by doing so. Better to have everything above board.
Many business brokers encourage their clients, or even help them, to prepare a page of "recast" financials. This is perfectly acceptable. If you notice expense items that would not be incurred by a new owner (such as your car lease and country club membership), and if you feel that your successor - more active in the business than you are - could operate with lower labor costs, this is the place to document the dollar value of these differences. Show how the bottom line will be increased by adding back your personal expenses and deducting those costs that you have, but won't necessarily be incurred by the buyer.
Be sure to include a disclaimer on the same page that describes the recast financial information. Note that the recast is your opinion not a representation or promise that the buyer will enjoy exactly the financial results depicted.
NEGATIVE FACTS
Include negative facts right at the get go in the initial meeting with a Buyer. Absolutely do not let any surprises happen later, during escrow. It shows honesty to the Buyer and puts all the cards on the table. For example, if a large customer recently switched to another competing business, put it up on the table now. Tell Buyer you are working to get the customer back and what Buyer might have to do to get that Customer back. This can create a genuine good dialogue. Buyer asks what you are doing to get the customer back; you tell Buyer what you are thinking and then you say:
“What do you think?”
Get the Buyer’s input. Bring him/her on your team. Tell Buyer that they have great ideas in getting Customer back. Suddenly a negative fact turns into a positive for this meeting. Buyer believes they have good insight as to how to make the business work.
And no surprises, ever. If you lose a major customer or some other disaster happens sometime during escrow, bring it up immediately and make sure Buyer is aware of it.
ENVIRONMENTAL ISSUES
Many businesses may have environmental issues that they have not addressed. Quick lube operations and dry cleaners are two examples of businesses that may have this issue. For obvious reasons it can kill many deals. Better to address this LONG, LONG time before you decide to sell. Find out your local laws and what you might have to do to demonstrate a clean bill of health for a premise. Often it is a Level One audit by a local environmental consulting firm. If Buyer asks any environmental questions (and they will, or their attorney will) you can slap that report down on the desk. Very impressive. It shows you are a solid Seller and a solid Citizen. That report by itself will go a long way to making Buyer comfortable that ALL your paperwork is in order.
BUSINESS PROFILE
A good Business Broker will know how to put together a business profile for you. How long has your enterprise been in business? How long have you owned it? How many employees? How many years remaining on the lease, and at what rental? These and other basic facts about the business should be presented in a one or two-page profile that can be shown to interested buyers as a first step in the introduction of your business.
TRIAL RUN
In the process of preparing your business profile and organizing your financial informa¬tion and other documents, you might want to pretend that you are a prospective buyer and actually go through a session of your own due diligence. What questions would you ask, if you were a Buyer looking at the business? Is every statement made in the business profile supported by the documentation? What questions would you ask, in looking at the financials? When the buyer reviews the financials, will materials such as the receivables aging reports, the payroll ledgers and the check register yield the exact same information as reported on the summaries?
If there are discrepancies, this is the time to become aware of them and make sure you have a correct explanation, or make changes to the profile so it corresponds to the facts. And double check everything, including the simple math that was used in the summary sheets. If there is a math error, you may know it is a simple mistake and nothing more. But the buyer is likely to suspect that the mistake in addition, or in subtraction, is proof you've been tinkering with the numbers to produce a better outcome than the reality, and failed to cover your tracks sufficiently.
If all the information is true and accurate, the computations should be perfect. That's the reasoning of most buyers. So, if there is a problem with the math - the thinking goes - it's indicative of some plot to misrepresent the business and to confuse, or lie to the buyer.
Without the preparatory step of a trial run, you may be surprised to learn that inconsis-tencies exist in your reporting - inconsistencies which will be uncovered by the buyer. And while you're scratching your head and saying: "Gee, I didn't know about that," the buyer is likely to begin wondering if there are other "surprises," perhaps better hidden than what was uncovered. That's usually the moment when the buyer experiences a sense of distrust that can easily culminate in a "no sale."
LICENSE AND PERMITS
And don't forget the importance to the buyer of those clearances you've obtained from local, county and state governing bodies, over the years, to conduct your business and operate your equipment.
Want to make sure the license transfer doesn't become a problem in your deal? Inform prospective buyers about what is required by the state at the earliest part of the introduction to the business. Provide the forms and let them know there'll be an investigation to learn where the purchase money came from, and to determine if any buyers have a business or personal connection with persons the state considers "undesirable."
If an eager buyer suddenly gets second thoughts when learning about this procedure, you'll be glad you were in a position to find that out. Now you can send the person on their way and spend your time with those buyers who are willing and able to make a deal.
And just because the business you want to sell is not regulated in this manner, doesn't mean you escape the concern about government approval. If, for example, you use an air compressor, such as in an auto repair garage, or welding equipment of the type employed in say, a machine shop, you'd better learn what local regulators require for your buyer to do, in order to operate the business with the same equipment. You may learn that no permits or clearances are needed. But in many communities in the United States there are regulations covering these matters. And what if the rules are much more stringent than they were when you received the needed approvals?
CONCLUSION
The best time to get your business ready for sale is when you are not even close to being ready for sale. Start preparing your financials so as to disclose them to potential Buyers. Walk through your own business as though you were a potential buyer. What would you see? Ideally the following: good Curbside appeal. License and permits all in order. Tax returns match up with the internal financials. Any unseen liabilities that need addressing, such as environmental have substantiating reports. Updated Asset list. Business information such as company history has been compiled. Now you are ready. Good luck!!
"More Than A Business Broker"
Gary McAuley
Financing * Acquisitions * Mergers
Exit Strategies * Evaluations
www.sun-west.biz
gary@sun-west.biz