You’ve come to a point in your life when you’re ready to cash in your chips and enjoy life, perhaps you’ve decided to try your hand at another type of business, or perhaps owning a business just isn’t what you thought it would be. The point is, you want to sell your business.
Where do you begin? What is the first step? Who can you call for help? In order for an owner to receive the best possible selling price for his/her business, the preparation for this event must begin well before the business is put on the market; in other words, the business must be in a condition that is “ready to sell”. Although some of these preparations may seem obvious, they bear mentioning because they are so easily forgotten, their neglect has become routinely overlooked, or pushed down the priority list.
The saying in real estate is location, location, location; well, in the sale of a business, its books, books, books. Nothing will kill a deal faster than poorly maintained books and records or at least provide a buyer with ammunition to negotiate a lower price, and nothing will impress a buyer more than “clean”, well-maintained books. So the very first thing a business owner should do is be sure the company’s books and records are in excellent shape. But what does it mean for the books to be in “excellent” shape? Let’s begin at the top and work our way down. An absolute “must” is for the Company’s financial statements (the balance sheet and income statement) to match both the income tax return and the sales tax returns. This is an absolute “Must Do”. Since a company must pay taxes based upon its income tax return, when the financial statements match the tax return it is a strong indicator that the company’s books must be accurate, creating a comforting feeling for the buyer. In addition, there are key line items within the balance sheet and income statement that should tie out to other company records. A sampling from this list (but by no means everything on the list) is as follows:
•Bank Accounts - Each and every bank account should have been reconciled with the monthly bank statement. Not just the most recent month or December of the previous year’s closing date, but every single month should be reconciled!
• Accounts Receivable - The amount that appears on the Company balance sheet for accounts receivable should match the total of the accounts receivable aging report. And of course if the Company does not have an aging report, it should prepare one and ensure it matches the balance sheet.
• Inventory - If the company has not performed a physical count of its inventory, it should do so for the most recent ending month to ensure the actual inventory on the shelves matches the quantities and amounts shown in the company’s software. If adjustments must be made to account for obsolete, damaged, lost or stolen inventory, such adjustments should be madebefore a potential buyer begins investigating the company’s books and records.
• Fixed Assets - Any buyer is going to be very interested in the details of the assets being purchased in the transaction. Be sure at least the basic information for each asset is available: for example, the date it was purchased, the purchase amount, and how much life is remaining for the specific asset. Ideally, the original invoice should be available, as well as any maintenance contract related to the asset. Also, a complete schedule should be prepared listing each of the assets so that the total of the original purchase prices is equal to the amount shown on the balance sheet.
• Revenue / Sales - It is critical to have a Sales Journal, Sales Report or some other schedule that shows a customer-by-customer list (by Month) with a total that matches the Income Statement. A buyer will want to confirm that the revenue reported on the Income Statement is supported by the detail of the individual sale transactions. It is also important to maintain an organized file for customer sales orders to back up the sales report.
• Expenses / Vendors - There should be neatly organized vendor files with copies of each invoice paid and check written, each of which should match the expenses presented in the Income Statement.
• Employee Files - Be certain that every employee has a file with all the appropriate documentation to comply with all IRS and State regulations: for example, Application, W-4, I-9, copy of I.D.
• Contract Files - Be sure you have a complete file for every contract that is currently in place: for example, the building lease, computer and copier leases, machinery & equipment loans/leases, software licenses, building security contract, maintenance agreements, even the water cooler rental.
• Insurance Policies - You definitely want to be sure you have copies of all the current insurance policies and of course any loss runs to show a buyer the history of any claims incurred, particularly if there have been any lawsuits against the company.
Although this is only a partial list of what is required to have “clean” books, it gives you a good idea of the level of detail expected by buyers. Remember, potential buyers are not IRS auditors, but they may look at your business in much more detail than an auditor because a buyer is putting their money at risk…their credit at risk…and will be liable if the business fails, while an auditor is simply trying to collect a few extra tax dollars.
When the back office is neat and orderly and when the tax returns, financial statements and books all tie together and are supported by source documents such as invoices and check copies, it gives a buyer confidence that the business performs as represented. This will help a Buyer justify paying the asking price or at least a price closer to the asking price. So, before you market your business for sale, take the time to get your books in order and ensure your business is “ready to sell”!
About The Author: Steve Fitzgerald is with Acquisition Services Group, a Southern California business brokerage firm, specializes in Seller Representation of businesses in the manufacturing, distribution and service industries. We offer our services on a success fee basis with no up-front fees: We get paid out of escrow when the company sells. Steve can be reached at 858-320-0474.
Categories: BizBen Blog Contributor, How To Sell A Business, Selling A Business