Selling Your Business

Advice on preparing to sell your company. Tips include choosing the right type of buyer, avoiding a costly audit, and dealing through brokers and other intermediaries.

A primer on getting your company ready, understanding buyers' motivations, and dealing with brokers

Getting your company ready to sell means sprucing up operations and mimicking the professional standards of public companies--first-class financial statements, budgets, business plans, and management that's not dependent on one person. At the very least, running your business as if you were preparing to sell it will improve your management practices and increase the value of your company. And should an offer come through that you can't refuse, being prepared will put you in a great position to close a deal quickly.

In researching my book ( How to Sell Your Business--And Get What You Want!, Gwent Press, 1998), I interviewed 57 former business owners who had sold their companies. Some issues came up repeatedly that have little to do with the mechanics of getting your company ready to sell but that instead require you to do some soul-searching. What do you want for yourself--and for your employees--in the future? How much of your self-esteem is tied up with owning and running your company? Could you report to someone else? Thinking through the implications of a sale for you, your family, and your employees will go a long way toward helping you select the sort of buyer you'd be most comfortable with.

There are two basic types of buyers, financial and strategic. Financial buyers make up an enormous segment of the market. They look for businesses they can buy using debt financing for 50% to 75% of the price, and that have sufficient cash flow to service that debt. With few exceptions they value a business by using a multiple of four to six times earnings before interest and taxes (after making adjustments for expenses that would not continue for a new owner). They deduct from the price any interest-bearing debt that they will assume. There are disadvantages to selling to a financial buyer: there are no synergies--such as access to a larger sales force, or complementary activities in production, engineering, or any other part of the business; and there are pressures to increase the cash flow because of the added debt. Financial buyers are in business to make deals, so they may overlook some weaknesses. They often leave day-to-day operations unchanged, but they buy with a view to selling, which could disrupt your business life a second time.

Strategic buyers expect synergies with their other holdings. They can afford to pay a premium, but they may not need to because they know the market. Buyers offering premium prices are in short supply. The best match sometimes comes about if they seek you out after having determined that your business fits their plans. Strategic buyers may diminish your role, and their goals may differ from yours.

Financial statements are the best indicator of the future performance of the business, and audited financial statements are much more reassuring to a buyer--and to the bankers financing a purchase--than unaudited ones. Many buyers have fiduciary responsibilities--that is, they are accountable to shareholders or to others who have placed funds in their hands. Therefore, the buyers have an obligation to avoid undue risk. That means they will prefer, or maybe even require, audited financial statements. You help yourself by reducing risk for a buyer.

The buyer will put your financial statements under a microscope. Audited numbers strengthen your hand in the negotiations and allow you to demand better terms and to switch suitors more readily--and threatening to do so is one of your strongest weapons.

Buyers might question the quality of your earnings, meaning that your accounting may be too aggressive. For example, capitalizing product-development costs can be controversial, as can the presence of onetime gains in operating income. Be ready to point out those areas in which your accounting might be conservative, such as profits that have been understated because of accelerated instead of straight-line depreciation, or last-in-first-out inventory valuations.

To avoid the cost of an audit--roughly $25,000 for a manufacturing business with sales of $10 million--some owners have their financial statements reviewed by outside accountants. Buyers know the difference, but at least the review provides a professional presentation. One other step is vital if you have inventory and think you might need retroactive audited statements: have outside accountants observe a year-end inventory count for a year or two so that later they can express an opinion about the fairness of the statements.

Management depth adds value. A business that is excessively dependent on the owner is risky for a prospective buyer. Appointing a second-in-command and department managers enhances a company's value by alleviating that risk.

Focus on the strengths of your business. Eliminating weak product lines should increase your overall profit margins and improve your return on assets. Buyers don't want diversified businesses; they want resources concentrated in your strongest activity. Also, buyers like to see data showing gross profit (and return on assets) by activity or product line, so making optimal use of computers will be a measure of your competence.

Are there other assets in the business (such as land) that are not contributing to earning power? Your proceeds will probably be higher, and you will improve your overall financial ratios, if you sell those assets before talking to prospective buyers.

Who owns the real estate? If your company does, consider buying it yourself or moving it to another corporation. The price for the business might not change much without the real estate, and you will have kept a significant asset.

You can sell the stock of your corporation, or you can sell the assets and liabilities--the tax consequences are quite different. Buyers like to buy assets, because they can usually write them up and thereby increase depreciation or amortization on the books, thus reducing future taxes. But sellers usually pay more taxes when they sell assets. Ask your accountant for an analysis of the difference, which you can use in price negotiations with the buyer.

Many brokers and other intermediaries prepare selling memoranda (also called "books") to describe businesses for sale. They assemble all the data and present the reasons the company is an attractive investment. It's better, though, to sell your story yourself by doing up a business plan. Financial projections are of primary interest to buyers, and sellers rarely give them the attention they deserve. A business plan has several advantages. It does not signal to employees that the company is for sale. It does not send any messages about how long you may have been talking to buyers. And a good plan reflects well on a company's management--you are describing an enterprise with continuity independent of the owner's instincts. A business plan is a perfect tool to show to prospective buyers without signaling an intense desire to make a deal soon.

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