Selling a Business: The DocumentationAre you selling a business? As either the seller or the broker? If so, you’ve got to make sure that your documentation act is together. Documentation preparation is one of the top five questions we get from the folks taking our course, “Learn How to Value and Successfully Sell Businesses“, especially if they plan to add business brokerage to their real estate practice. A lot of sellers are unwilling to put in the effort necessary to think through and assemble the documentation that will almost always be needed to successfully sell their business. Of course, if they were REALLY serious about selling, they’d hire a professional business broker or M&A advisor to handle the heavy lifting but, as we all know, that is not how many sellers approach what is likely to be the most significant financial event of their life. One of the reasons the majority of businesses that come to market without professional representation don’t sell is that business owners don’t put in the time necessary to prepare for the process. (Another is price, but that’s another story altogether.) And many owners grumble about having to produce all the necessary data when asked by a professional broker. Well, that’s tough, Bucko. If you want the business to sell, you have to have a minimum amount of documentation. If you want the process to go smoothly, you better bulk up your documentation folder.
Two Types of DocumentationThere are really two categories of documentation that have to be considered: pre-marketing documentation – what is needed for the valuation – and post-marketing documentation – what is needed for due diligence. If you’re working with a seller, it’s a good idea to assign them the task of collecting all this documentation up front.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches how to value and sell businesses.
Become a Professional Business Broker…If you’ve taken our course, you know that one of the steps to successfully sell a business is the preparation of an Offering Memorandum, or “Book on the Business”. This document should be at a level of thoroughness so that a buyer would have almost zero questions – and all a buyer would have to do is confirm what the Offering Memorandum contains. This is when the due diligence documentation comes to the fore. But before you can prepare an Offering Memorandum, you have to value the business and then establish a target price. You can’t do any of that without the valuation documentation. So, let’s look at that first
Valuation DocumentationWhen selling a business, we first have to determine what that business is worth. Many sellers have an “exaggerated opinion” (to say the least!) of the value of their business. And many of these sellers will be well and truly disappointed when they get the truth. But unless the broker has nothing better to do with their time, they are unlikely to take a listing without doing a valuation. They would, after all, like to believe there’s a real chance of finding a buyer. Properly pricing the business – that is, basing the price on the value – is the surest way to achieve this. The basic documentation for determining value is pretty easy to identify:
- Profit and loss statements for the last three to five years and year-to-date.
- Tax returns for the same period
- Balance sheet
- Description of work-in-process (if appropriate)
Due Diligence DocumentationWhen selling a business, the documentation needed for the buyer’s due diligence is much more comprehensive. Remember, if the Offering Memorandum is thorough, the buyer will have all the information they need but will want to confirm all the information it contains. The financial information should be confirmed by the valuation documentation. But what about all the other information?
We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses and to novice business brokers.
If you’d like to learn more, email me at joe@WorldwideBusinessBlog.com
(And, incidentally, a professional business broker will ask a seller about the level of compliance with vendors’ terms because if the business has been assessed late fees or interest as a result of its non-compliance, those fees would be treated as discretionary during the valuation process – which will enhance the value of the business.)