To prepare a business for sale, owners should organize their financial records, document legitimate earnings adjustments, identify and address major risks, develop supportable financial projections, obtain an independent valuation, and assemble an experienced advisory team. Ideally, this process should begin well before the business is presented to potential buyers.

Selling a business can be an exciting opportunity, and may happen only once in a business owner’s lifetime, but the process is often more demanding than initially expected. Sellers must be prepared for open access – and scrutiny – of every aspect of their business.

Prospective buyers and their advisors will want to understand the company’s financial performance, operations, risks, and future prospects before moving forward with a transaction. Preparing this information in advance can make the due diligence and valuation processes more efficient, reduce avoidable concerns, and help the owner enter negotiations with realistic expectations.

Organize Your Financial and Business Records

A potential buyer will typically request several years of financial statements and tax returns, along with current interim financial information. Other requested documents may include customer and vendor contracts, leases, employee information, debt agreements, insurance policies, and corporate records.

These materials should be complete, consistent, and easy to understand. Significant differences between tax returns, internal financial statements, and other company records will likely lead to additional questions.

Owners should also be prepared to explain unusual expenses, changes in revenue, recent investments, and other events that affected the company’s historical results.

Identify Owner-Related and Nonrecurring Expenses

Many privately held businesses include expenses that may not continue under new ownership. These might include above-market owner compensation, personal expenses paid through the business, related-party rent, or one-time legal and professional fees.

This is especially important in businesses with only one owner, or with multiple owners who are family members. For such companies, the owners’ personal lives and business lives are often very closely intertwined, making it difficult to separate the two financially.

A qualified business appraiser will need to properly identify and justify any expenses which are not truly required for operating the business. These expenses may be added back into operational earnings – hence their nickname, “add-backs.” They may also be called normalization adjustments.

These adjustments can materially affect the company's indicated earnings and value. In a sale context, many proposed adjustments are add-backs that increase normalized earnings. However, the adjustments cannot simply be made based on the owner’s word. They should be reasonable, clearly documented, and supportable.

A buyer or appraiser will not necessarily accept every proposed adjustment. The buyer may feel that some expenses are regular business expenses which are required for continuing the historical revenues. For a potential business seller, preparing the supporting records in advance will make it easier to distinguish legitimate adjustments from ordinary operating expenses.

Identify Risks That Could Affect Business Value

Owners naturally focus on the strengths of their businesses, but buyers will just as naturally want to examine potential risks. These may include customer concentration, dependence on the current owner, limited management depth, expiring contracts, outdated equipment, pending litigation, or reliance on a small number of employees or suppliers.

Identifying these issues early gives the owner an opportunity to address them. For this reason, business advisors and valuators often recommend beginning the sale preparation process two or more years in advance. However, in the event that time does not allow for remediating risk factors, the seller can, at a minimum, prepare to document and explain how the risks are being managed.

The more heavily the business depends on the selling owner, the more important it may be to develop documented procedures, strengthen the management team, and establish a realistic transition plan.

Develop Supportable Financial Projections

Business valuation involves a fundamental marketplace paradox: buyers look to historical performance for evidence of a company’s earning capacity, but ultimately base their offers on the future benefits they expect to receive.

Forecasts should be based on reasonable assumptions supported by the company’s historical performance, existing capacity, customer relationships, backlog, industry conditions, and planned investments. Aggressive projections without adequate support may create skepticism rather than increase perceived value.

Management should be prepared to explain how projected revenue, expenses, capital expenditures, and working capital needs were developed.

Consider an Independent Business Valuation

Business owners are often emotionally and financially invested in their companies, which can make it difficult to assess value objectively. An independent business valuation can help establish a reasonable expectation before negotiations become serious.

The valuation may also identify the factors having the greatest effect on value, including profitability, growth, risk, management depth, and the company’s dependence on individual customers or employees.

When machinery, equipment, real estate, or other tangible assets represent a material portion of the transaction, separate appraisals of those assets may also be appropriate. The need for these additional valuations will depend on the nature of the company and the intended structure of the transaction.

Assemble an Experienced Advisory Team

A business sale can involve legal, tax, valuation, financing, and operational considerations. Depending on the size and complexity of the transaction, the owner’s advisory team may include an attorney, accountant, tax advisor, business appraiser, and investment banker or business broker.

These professionals can help the owner evaluate offers, understand the proposed transaction structure, respond to due diligence requests, and avoid decisions that may have unintended consequences.

Begin Preparing Before a Buyer Arrives

Preparing a company for sale should ideally begin well before a potential buyer submits an offer. Waiting until due diligence is underway can place unnecessary pressure on the owner and increase the likelihood that incomplete records or unresolved issues will disrupt the transaction.

Organized records, supportable earnings adjustments, realistic forecasts, and an objective understanding of value can help the owner approach the sale process with greater confidence. They can also give prospective buyers a clearer picture of the business and reduce uncertainty during negotiations.

Business Valuation Specialists provides independent business valuations for owners, buyers, lenders, attorneys, and other professional advisors. If you are considering the sale of a business and would like to better understand its value, contact us to discuss your valuation needs.

Common Questions

How far in advance should I prepare my business for sale?

Ideally, business owners should begin preparing for a sale two or more years before they expect to enter the market. Starting early provides time to organize financial records, address business risks, reduce owner dependence, document earnings adjustments, and resolve issues that could affect business value.

What financial records will a buyer need when purchasing a business?

Business buyers typically request several years of financial statements and tax returns, along with current interim financial information. They may also request customer and vendor contracts, leases, debt agreements, employee information, insurance policies, and other records needed to evaluate the company’s financial performance and risks.

What are add-backs when selling a business?

Add-backs are expenses included in historical financial statements that may not continue under new ownership. Examples may include above-market owner compensation, certain personal expenses, related-party expenses, and legitimate nonrecurring costs. Buyers and business appraisers generally expect proposed add-backs to be reasonable and supported by documentation.

Should I get a business valuation before selling my business?

A business valuation can help an owner establish reasonable expectations before entering negotiations with potential buyers. It may also identify factors that increase or reduce business value, giving the owner an opportunity to address significant risks before beginning the sale process.

What factors can reduce the value of a business before a sale?

Factors that may reduce business value include customer concentration, dependence on the current owner, inconsistent earnings, limited management depth, expiring contracts, deferred capital expenditures, outdated equipment, and dependence on a small number of employees or suppliers. Reducing these risks before a sale may make the business more attractive to prospective buyers.

After owning and running your company these past years, you have achieved many of the goals you once had to create a successful enterprise. The day has now arrived when you decide it’s time to move on to retire or create another opportunity with a different business. If you don’t have a desire or the ability to sell to your employees or hand the reins over to family members, the option to market your business in the public arena is a viable one.

The upside to an open market sale is that you can potentially realize top dollar from a competitor or new entrant and walk away from the deal with 100% of the proceeds in your pocket. However, there are a few roadblocks to consider that may get in the way of a smooth transaction. You need to manage these carefully while not losing sight of the overall end game of a successful sale. Here are a few things to consider:

Should You Engage with a Business Broker?

No one knows more about your company’s history and future growth potential than you do, however, selling your company requires a lot of time to prepare and market on your own. Selling companies is a business that requires certain experience and expertise you may not have, and the additional time to handle this without assistance can be overwhelming.

Consider researching business brokers who are familiar with your industry and company model, while gathering the internal data they will need to understand how best to sell your business. If you find someone you believe can greatly increase the odds of a successful sale, you can formally engage them to represent you in the open market. Having a reputable business broker working for you can give you a layer of independence and added credibility while potentially reducing the time it takes to realize a sale.

Obtain a Formal Company Appraisal

Another level of unbiased independence can be gained when you have a business appraisal completed by a certified professional. This step should be completed in the early stages of marketing so you can present the report to potential buyers and your broker if you’ve engaged with one.

In summary, selling your business in the open market is an exciting opportunity that comes with challenges that are best faced with a level of independent support that maximizes the chances of a successful outcome. Consider all the options you have carefully to determine what will work best for you.

When you're selling a business to a third party, the topic of appraisals may arise. But why is it important when you're selling your company, and what difference will it make at the end of the day? A formal valuation of your company is one of the key components that drive the transaction. Here's why:

Why Business Valuation is Important When Selling a Business to a Third Party

When you're planning to sell a business to someone you don't know, you want to make sure everything is done fairly and equitably. Completing an independent, certified, third party appraisal early on is the first step to ensuring this happens. By having an appraisal performed, you can see where your business needs improvement, and learn where it is already strong so that you don't have to put further effort into areas that are already in great shape. Once you've made changes and improvements in those areas that required them, your business should increase in value, allowing you to realize the benefit from your actions and detail these updates to potential buyers.

If you're like many business owners, you know that your company should be worth more than the assets on the balance sheet, but may not know exactly how much more. By having a certified business appraisal in hand, you have a better idea of what that figure should be, and can consider offers that are reasonable while dismissing those which are not. You can also decide if you want to ask a price that is in line with similar businesses in your market or if you feel you have a unique position that should be accounted for, ask something higher for that consideration.

Having a formal business valuation helps you at the negotiating table. Because a certified appraisal is based on accepted standardized methodologies, it represents best appraisal practices and procedures, and can also be useful in legal, insurance, and financial circles. If you want the potential buyer to come up in price, providing them with a copy of the appraisal report may make them aware of facts and circumstances about your business they may have previously been unaware of. This gives them a legitimate supportable reason to either change their initial offer or meet a counteroffer you've proposed to them during negotiations.

Business appraisals are vital to your success when selling a business to a third party. If you're getting ready to sell your business and haven't contacted a business valuation firm, please feel free to contact us today. Our qualified business appraisal specialists are ready to help you get the maximum benefit from your business sale.

If you're considering selling a business in 2019, have you considered all the factors that come into play in maximizing your profit? If you've put years of equity and your own personal effort into building a company, isn't it worth putting a little more effort in this year to make sure you're getting everything it's worth? This guide will help you make the most of your business sale by showing you how to go about that process to ensure you're getting everything you can from your business.

A Business Owner's Guide to Selling a Business in 2019

• Consider why you're selling. Are you selling because you're in a desperate situation with your company? If you are, it may not be the best time to sell to maximize your value. Consider alternatives such as bringing in fresh talent to turn the business around or provide additional support while you work through a health crisis or family issues. This may make it easier to keep your business and make it profitable again.
• Start the sale process by getting your paperwork in order. Is your bookkeeping up to date and accurate? Are your assets accurately portrayed in terms of value in your books? Do you need to update other documentation, such as who is in charge of which portions of your business or your business processes in your manual? Make sure that this paperwork is up to date and ready for any potential buyers.
• Deal with any obvious problem areas. If you have a large portion of bad debts, consider calling them in, writing them off or using an outside agency to collect on them. Do you have old equipment lying around that needs to go? Get it sold first. Only when you've dealt with these issues is it time to consider talking to a professional.
• Have a business valuation performed to find hidden value potential. When you work with a business valuation specialist, they prepare a report that includes areas where your company is strong and where it is weak. Make sure you work with a certified valuation specialist to ensure the accuracy of the information.
• Improve the areas recommended on the report. Once you've received the report and have clarified any areas where it may be inaccurate, start acting on the areas where your company is weak to improve them and solidify the areas where it is strong to retain the value they provide to your bottom line.
• Get a secondary business valuation report prepared. Once the improvements are made, have a secondary report developed so that you can make sure you've maximized your company's potential value. It's only at this point that you should ask for recommendations for a reliable, reputable broker and interview the best to find the right fit. 

By taking the time to go through these steps, you can ensure that selling a business in 2019 is as painless a process as possible while maximizing your company's potential for profitability in the sale. Don't assume that simply listing your company for sale with no further preparation is in your best interests, but use the advice of a certified business valuation specialist to make improvements that will have a real impact on your final sale price.