Ready to sell your baby?

Preparing Your Business for Sale

Article written by EricBank

You've determined that it's time to sell your small business and you want to earn the highest possible price for it. This requires you to spruce things up a bit: streamline operations, lower debt, create business plans and in general give the financial statements a thorough review. A makeover can add value to your company and actually improve the quality of your firm. The better the management of the company, the quicker it will sell. So ask yourself, what do buyers want to see in order to evaluate your company?

Financial Buyers

A financial buyer will be looking to finance most of the purchase price of the company, using the company's cash flow to repay the financing. You therefore want to maximize your cash flows. These buyers will put a three- to six-times multiple on earnings before interest and taxes (EBITA) after adjusting for expenses that will not continue with the new management. They subtract from this figure any interest-bearing debt they will assume with the company, so you may want to get rid of your debt before putting your firm up for sale. Of course, the downside of paying down debt is that it soaks up cash that you might otherwise use to generate profits -- for instance, by buying inventory. A sudden drop in revenues stemming from an inability to purchase merchandise for sale can hurt your firm's selling price, so you must evaluate debt reduction in this light.

Strategic Buyers

On the other hand, a strategic buyer will want to combine your business with others and achieve certain synergies. The buyer may be a competitor that already knows the industry and wants access to your confidential information. For instance, you may keep a secret list of sales leads that can be very valuable to a competitor. Therefore, you must be cautious dealing with a strategic buyer and make sure not to give away any proprietary information before the sale is complete. In the worst-case scenario, the bidder will extract valuable information from an eager seller and then suddenly withdraw the bid, or in the case of public corporations, attempt a hostile takeover at a lower price.

Accounting and Auditing

Of course, all your financial statements must be use proper accounting techniques and must be audited if you want to appear credible to a buyer. Bankers will not finance a deal without high quality, audited financial statements. However, if you are a very small business, it's likely you don't have audited statements, so if your buyer insists on them, use a reputable accounting firm that specializes in small businesses. In all cases, you want statements going back at least three years (assuming you've been in business that long) that reveal all pertinent information regarding sales, profits, depreciation, expenses, inventory, receivables, and all other important financial aspects.

Finally, make sure that you have a management team in place that can run the company without you. The new owner may or may not want to replace them, but having a team there will reassure the buyer that your company can survive the loss of you.