Getting Your Business Ready to Sell

Are you thinking about selling your business? If so, you’ve come to the right place to get started!

Like selling a house, selling a business requires some planning. Unlike selling a house, this does not mean painting the living room and cleaning the carpet. However, the theory is the same.

A home buyer will be impressed by a spruced up home and a yard that not only has the grass cut but the rusted hulks of old pickups removed. Likewise, a business buyer will pay more for a “better looking” business. The business seller needs to know, however, what “better looking” means.

A business buyer is interested primarily in how much money he or she will make if they purchase your business. There are several ways a buyer will determine that but the primary way is to look at what the business has been making over the last 2-3 years. If you are in the early stages of planning for your business’ sale, this is where you can “spruce the joint up”.

There are a number of ways that a business can be made to look better. The easiest way to illustrate this is with an example of a simple “cash” business such as a restaurant, an industry notorious for its penchant to “pocket some ‘excess’ cash”!

This may come as a shock to you, but many business owners feel that “da govmint” taxes them unmercifully and they are entitled to keep a little bit more of their hard-earned money than the taxing authorities want to leave them with. Perhaps not surprisingly, these owners look for ways to hold on to more of their dough – such as putting the occasional cash payment in their pocket. Once these owners decide that they will be selling their business in the next year or two, they would be wise to gradually scale this trick down so that the business appears to be making great strides in sales and the trend, to say nothing of the cash flow, is up. The better the cash flow, the more a buyer will pay for the business. (But you knew that, right?)

The number of benefits – and their value – that the business owner or his family receives from the business is a great place to look when sprucing the business up. Such benefits include a summer home, automobiles, life and disability insurance, and trips to the Azores for the annual directors’ meeting (especially when the board is made up of you and your spouse!). These are all generally legitimate deductions under most of the world’s wildly inefficient tax codes and all reduce the business’ apparent bottom line – for tax purposes.

If you are planning to sell your business in a couple of years, reduce some of these benefits so that the company is demonstrably more profitable. Yes, you will have to pay some additional taxes on this newly-declared income or increased profitability but if your goal is to sell the company for the highest price possible, the tax ramifications in the years immediately preceding the sale will seem insignificant when compared to the higher price the business will bring.

Another way to improve the business’ appearance is to trim your payroll of ugly fat. If you’ve been generously providing a paycheck to your no-show nephew or the knucklehead your daughter married, advise him to consider alternative employment opportunities at least a year before your business comes to market. Remember, a buyer will be looking at historical expenses going back several years. When the list of employee positions is produced and matched to payroll records, a couple of positions that have not existed for more than a year will be unlikely to raise any questions. However, if the positions existed as of a month earlier, questions will surely be asked.

Admittedly, there are some things both the homeowner and business owner can do to increase the value of what they are trying to sell. Making a good visual first impression is just as valuable when selling a business as it is when selling a home. Whether your business is a car dealership, a restaurant, a distributorship or a manufacturer, at some point the buyers will visit. If they are impressed when the pull up in the parking lot, you’re ahead of the game before they get out of the car. Cut the grass; mulch the landscaping; resurface and stripe the parking lot; power wash the building and clean the glass; make sure that the signage is well-lit.

Unfortunately, if you are considering selling your business in the next year or sooner, it may be too late to do much financial sprucing up. But not to worry; A good business broker will do a thorough examination of your records, spend time with you or your accountant going over questionable expense items and “recast” the business’ earnings taking into account all the expenses that are really benefits to you. In this way, your broker will be able to show what the REAL earnings were – not the ones shown on the tax returns – and price the business accordingly. As business owners themselves, good business brokers also understand the benefits a business provides to the owners. They understand that the annual regional association meeting in Buffalo is FAR less appealing to the owner of a profitable business than is the national meeting in Hawaii!

Once you have spruced up your business for sale, it’s time to find out how much it’s worth. So stayed tuned; we’ll be tackling that in an upcoming post titled “Valuing Your Business.” And don’t forget to check out – and subscribe to – our podcast at WorldwideBusinessPodcast.com on WBBN-fm, the Worldwide Business Brokers Network.