HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS “PREPARING YOUR BUSINESS FOR SALE – PART III”
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 the previous two articles in this series we discussed the importance of early planning and preparation – having the basics in place (i.e., systems and procedures, operating manuals, accounting/financial records, etc). In addition we discussed the importance of organizational structure, succession planning, budgets, strategic plans, timing of the sale, and required business advisors.

Today we will begin the discussion regarding what you as an owner need to know about selling a business and what you can do to foster the sale at its most favorable price. In order to optimize the “saleability” of your business you need to recognize that the marketplace ultimately determines the value of your company and, the corollary to this, most buyers of small to medium sized businesses are purchasing a stream of earnings or are purchasing cash flow.

In order to determine market value (facilitated via a business valuation which is discussed in an upcoming article) and to determine actual cash flow, it is necessary to have certain information available and on hand. Depending on the type of sale (asset sale vs. stock sale) this information should include the following financial data/documents:

• Federal Income Tax Returns for the business
• Financial Statements for the last three years
• Latest interim financial statements
• Budget/Projections for current/next year
• List of assets to be included in the sale
• List of assets to be excluded
• Accounts Receivable Ageing report
• Schedule of all indebtedness and liabilities of the company

Note that the above listing and what follows is for a typical medium sized company (estimated value greater than $1MM) on an accrual accounting basis. For businesses with an estimated value less than this or for those on a cash accounting basis, certain of the above and below would not be necessary (e.g., Income Statements or Profit and Loss statements may be sufficient – you may not need comprehensive Financial Statements; if a cash business, you would have no Accounts Receivable hence there is no need for an AR Ageing.). Generally, the larger and more complex the business, the greater is the requirement for detailed information and documentation.

In addition to the above, at certain points in the sales/purchase process, copies of leases, real estate records, contracts, vendor/customer agreements/lists, insurance policies, pension and/or profit sharing plans, patents/copyrights/trademarks, employment contracts, etc will need to be provided to a prospective buyer. Further, it is necessary ( if possible) to ensure there are no pending legal, employment, environmental, licensing, tax or other issues which could cause problems or concerns for a buyer – ideally, all such matters should be resolved prior to placing the company on the market. And, certainly, all such issues should be disclosed to a prospective purchaser (remember, honesty is still the best policy).

While the above listings are not all inclusive, hopefully the reader now has some idea as to the magnitude and complexity of the document/information gathering step of the process of selling a business. And although this is a critical piece of the puzzle (the company can not be valued properly without the above information), it is still only one step of many in the sales process.

Remember that, as the owner, you are trying to optimize the “saleability” of your business and also remember that no one (especially a qualified prospective purchaser) likes unpleasant surprises. Consequently, it is incumbent upon the business owner (1) to ensure all necessary information is provided and is correct (2) to review all facets of your business and eliminate (where possible) any problems which may cause issues or concerns to a potential buyer and (3) to disclose all relevant information (of which you are aware) which could negatively impact the business.

In general, put yourself in the shoes of the buyer – ask yourself, what records do I need in order to make an informed decision relative to my valuation of this company and what additional information and documentation do I require to validate a decision to buy? The common sense answers to these basic questions dictate in part some of the steps a business owner needs to take to optimize the “saleability” of his/her company.

As always, see you next week in this space when we will continue the series on “Preparing Your Business for Sale”. Should you have any questions or require additional information about the above or about buying and selling businesses in general, please feel free to contact the R/Fain Group at 832-646-0832 or via our web site.