HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS “PREPARING YOUR BUSINESS FOR SALE – PART II”
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

In Part I of this series, we discussed the importance of certain aspects of “planning early and preparing early” in the business sale process – having the basics in place, having good financial records and a good financial record, and having a good management team/succession planning. In addition to these areas, other issues to explore are the timing of the sale, choosing/managing advisors, tax and financial planning, and stream-lining operations.

In order to maximize the value of your business, it is necessary to spend time getting your business in shape. A company which runs smoothly (with a minimum of “emergency decisions” to be made by the owner) and which has basic procedures and processes in place will command a higher price in the marketplace. From a buyer’s perspective, this is almost entirely due to the minimization of risk factors associated with that business; in other words, the greater the level of confidence the buyer has in the business, the higher the price premium.

A business strategy, business plan, organizational structure, budgets, and sales forecasts are only a few things which will help a business owner streamline operations and engender buyer confidence. A business owner should review his operation in the very early stages of selling to ensure all aspects of the business are organized and running smoothly. Look at record keeping, inventory levels, leases, credit/collection policies, employment levels/responsibilities, compliance with health, safety and employment issues, operational processes/efficiencies and make the necessary adjustments to enhance the operation.

Although we touched on this topic last week, the importance of having good financial records and a good financial record cannot be over-emphasized. Planning early helps to ensure your company has an enviable track record that will attract the highest possible price. If you haven’t focused as much in this area as you should have, planning to sell your business should make this area a number one priority. Look broadly and deeply to determine if there are areas in which you can cut costs without compromising the integrity of the operation – is it possible to manage inventory better?, can vendor contracts be re-negotiated to obtain volume discounts/lower costs?, as a result of deregulation, is it possible to lower utility costs?, can a different agency/company reduce my insurance costs?, can outsourcing certain processes/functions result in lower costs?, etc. The point is… to review all areas as early as possible with an eye towards decreasing costs and enhancing revenues without compromising operational integrity and quality.

Retaining competent, professional advisors is a critical piece to the puzzle. A tax/business attorney and/or CPA are crucial to this process as is a professional intermediary/broker. It should go without saying that a business owner needs professional tax counseling as early as possible in this process to allow for the sale to be legally structured in such a way as to minimize any tax consequences. It is equally important for the owner to have the services of an experienced intermediary/broker in order to enhance the probability of a timely sale to a qualified buyer at the maximum possible price. These professionals may be the difference between a successful sale and no sale at all.

Although it is critical to have the above professionals, it is just as crucial to manage your advisors. Ensure that the time spent by advisors who bill hourly is time spent on material issues and consequential matters. An experienced intermediary/broker can assist the business owner with this function; in addition, an intermediary can serve as a buffer between the buyer and the seller and thus enhances the relations between the parties.

One of the most critical aspects of selling a business is the timing of the sale – i.e., selling at the right time. If possible, plan early so that you are not rushed into a “forced” or quick sale. If you have an exit strategy which calls for you to sell in two years, start planning the sale now – not 22 months from now. Issues to consider in this area are condition of the economy in general, state of your specific business sector, condition of your company, level of interest rates, banks’ willingness to lend, etc.

In general, of the above factors, the condition of your business is the most important in the selling process. Try to sell when net income and revenue are increasing or, at the least, stabilized. Try to sell when growth prospects and potential are good. If possible, plan to sell when interest rates are low and banks are willing to lend as this obviously increases capital flow for business purchases. Remember, early planning and preparation allow you to “fine-tune” and improve certain aspects of your business to ensure its “optimal saleability”.

As always, see you in this space next week when we will continue the series on “Preparing Your Business for Sale”. Should you have any questions regarding this article or need additional detail, please feel free to contact the R/Fain Group at 832-646-0832 or via our web site.