In order to prepare a business for sale it is helpful to simply consider what condition a buyer would like to find a business that was just purchased. Here are a few bullet points to consider:
- Management after the sale has sufficient knowledge of the business and experience running it.
- Equipment is in good operating condition and there is no significant need for additional capital expenditures.
- There should not be a concentration of business with a single or a few customers. Obviously, a loss of one of these could materially affect the business’ profitability.
- No outstanding legal issues or disputes.
- No outstanding tax issues.
- No outstanding environmental issues or potential environmental issues.
- The buyer will not assume any interest bearing liabilities so these will reduce the cash price. Therefore, there are benefits to reducing them.
- The buyer will not give credit for those receivables that are significantly delinquent. Therefore, a focus on collecting them is recommended.
- Any personnel issues that need addressing should be taken care of before the sale process begins (e.g. poor job performance, failed drug test).
- Is there a need for sale approval from a large vendor, franchisor, bonding company, or minority partner?
- Is the business cyclical? If so, is there an option to expand the product offerings to smooth out this?
- Have the sales and cash flow trends been flat? If so, it is helpful to provide an explanation of why and a plan of how to grow the business. The growth plan could simply be the purchase of a competitor or purchasing a business which provides product extensions or better distribution.
- Employee and stockholder loans need to be collected or forgiven.
- Any assets on the balance sheet that are not actually used in the business should be distributed or written off.
- If the real estate used by the business is actually owned by the stockholders then consideration of a market value and term lease is recommended.
- Accounts payable should be current.
- It is normally to the advantage of the seller to have chosen the “Sub S” tax election several years before the sale.
- Assemble for later use the company’s annual financial statements and tax returns for the last five years.
