Consulting for Business Buyers & Sellers

Enhancing the value of your company

It's easy to say, "you should prepare your company for sale at least a full year before putting it on the market". After all, if you do, you will get a better price for your company and have an easier time doing it. But how do you do that? What do you have to do to prepare your company for sale and maximize its value?

We can help you prepare your company for sale, and leave you free to run your business.

• Suggest relatively easy steps you can take now to make your business more salable and to increase its value.

• Make your business more financable by knowing what lenders are looking for in financing an acquisition.

• Head off problems before they occur. We can find the weak points in your business (from a buy/sell perspective) and show you how to mitigate them.

• The structure of the sale can be almost as important as the sale price. We can point out deal structuring possibilities and strategies to lower your tax bite on the sale.

Here are a few examples of how you can enhance the value of your company:

Financial Issues

Start Preparing Financial Statements for Selling Purposes

Financial statements prepared for tax purposes are designed to show income as low as is possible within the confines of IRS regulations. Large corporations typically prepare a set of financial statements for the IRS and another for in-house analysis. You should begin this practice too, if you have not already done so, and you should begin far in advance of the sale. It is much more effective than having to prepare a so-called restructured set of financial reports years after the fact. It is very effective though if you have done it on a regular basis for several years.

Talk to your accountant about possible modifications in your accounting methods that may work to your advantage when it comes to selling your company. Also, keep careful track of which expenses are not strictly necessary to run your business, such as discretionary travel and entertainment, automobile expenses, charitable contributions, and related party transactions (like the job that you gave to your mother-in-law).

Employee Issues

Personnel Changes

Buyers are afraid that key employees might leave after they take over the company. You may consider talking with key employees. If they are prepared to remain with the company through the transition, fine. If they are thinking of leaving, it is better that they leave sooner than later. This will allow ample time to train a replacement who will remain with the company through a transition. Also, to the extent possible ensure that you have non-disclosure agreements and covenants not to compete from key employees. These simple agreements will help allay many of a business buyer's fears.

Examine Retirement, Profit Sharing, and Pension Plans

Depending upon your age, your fiscal year, and the level of funding of your retirement and other compensation plans, it might be advantageous to change the characteristic or terminate the plan well before selling the company.

Similarly, if you are the trustee and or administrator of a pension or profit sharing plan, now is the time to consider turning these functions over to an outside administrator. consult your lawyer, or retirement plan advisor.

Contractual Issues

Examine Contracts

Take a close look at any contracts you have with suppliers or customers. Those that would be beneficial to a new owner should be kept and extended if possible. However, if there are contracts that you are renewing because of habit, or for other reasons that are not financially prudent, now is the time to do something about them. Contracts that are harmful to a buyer will certainly lower the value of your company. When writing new contracts make sure that they can be transferred to a new owner in the event of a sale – even if it is structured as an asset sale.

Review your Real Estate Lease(s)

If yours is the type of business that depends on location, make sure that you can assure a buyer that he will be able to stay in that location for a reasonable period of time. Above all, make sure that your lease isn't set to expire and be re-negotiated while you are actively selling the company. Negotiating a lease when you are all set to sell is like negotiating with a gun to your head.

Likewise, if your location might be inappropriate for a buyer, consider moving now.

Renewal options are generally better than long commitments because they give the buyer maximum flexibility to stay put or to move. If possible, get a lease that can be assigned to a buyer at your option.

Examine Equipment Leases

If you are leasing equipment and the lease will remain in place after the sale, look at the rationale of the lease(s) from a buyer's perceptive. If a lease will have the effect of saddling the buyer with an interest rate well above prevailing rates and any tax advantages have already accrued to you, the lease may hurt the firm's value. Your accountant can advise you here.

Structural Issues

Systematize Operations

Many small companies rely on a mix of clearly documented procedures and procedures that exist only in the owner's head. Your company will be more salable if procedures are clearly systematized and documented so that a competent manager can take over with minimal training. Get it out of your head and into a procedure manual. Make sure the procedures are tested and refined before the sale.

Separate Real Estate Divisions

It sometimes makes sense to own real estate as a company asset. But when it comes time to sell, including it as part of a business sale can increase the complexity of the sale and make a business less attractive. Sophisticated buyers like to transact real estate separately from the business itself. Also, if real estate is separate, you can start showing rental to the real estate owner as a regular line item expense for the company, making it more clear and acceptable for a buyer to assume the expense.

Ownership Structure

If you are operating as a sole proprietorship or a partnership now may be a good time to incorporate for two reasons.

First, it is better to have the corporation liable for payables and other debts. Otherwise you might find yourself responsible for the new owner's liabilities or liabilities that he agreed to take over. Make the change now because it takes time for creditors to change things over in their own records. Incorporating just before a sale to distance one's self from obligations is not foolproof. In fact, if you wait too long you may have difficulty meeting IRS filing requirements and other bureaucratic requirements that are notorious for taking too long.

Secondly, a corporation provides a clean vehicle for transferring a company in part rather than in whole. A buyer could purchase the proportion of the firm's stock (at the agreed price) that would give him the agreed proportion of the company. Discuss this with your lawyer and your accountant.

Documentation

Entrepreneurs are not known for their fastidiousness in keeping records and documentation. While updating corporate bylaws, minutes, and the like may be way down on your list of priorities, the buyer's lawyer will not be so casual about them. Talk to your lawyer about appropriate updates.

Review Timing and Structure of Sale

Selling a business is not and should not be a simple transaction so a deal can take years from first marketing to closing. It is far better to sell a few months before you need to than accept a fire sale price a few months after selling became imperative. Decide when you want to exit, and give yourself plenty of time so that you are not under pressure to sell. You can structure the deal so that you remain employed, and even retain some ownership interest after the closing if the deal moves quickly and closes before you're ready to retire.

If you are not retiring give some thought to what you will do after the sale. The wording of a non-compete agreement can hinder your future ability to get meaningful work if you haven't thought about what you will be doing after the sale.

The appropriate structure can help you get what you want from the deal, it can protect you legally and financially, and it can bring a deal to fruition that would otherwise never happen. Unless you have experience in structuring buy/sell deals, get the advice of someone who does.