Preparing to sell your business is tough work. It takes time to get it into a position where you and potential buyers can be satisfied with the results.
You’ll have to straighten your finances, review your business from every angle, ensure you know what documents you need and when, and have a plan for life after you’ve sold.
This guide will explain each of these requirements, in detail, so when the time comes, you’ll be ready to sell your business.
Straighten Up Your Financials
Before you dive into the nitty-gritty on straightening up your finances, be sure your business entity is structured correctly.
C-corps, LLCs, and S-corps are all taxed differently. Not only does it affect the way you pay now, but it can also affect your tax obligations when you sell. The good news is, you can restructure your business at any time, so if you are thinking about selling (even if it’s not for another 5 years) you may want to re-evaluate to see which will be best for you in the long run.
Once you’ve determined the right business structure, it’s time to jump into straightening up your financials. As you can imagine, healthy finances are a prerequisite to selling your business. However, getting to that point takes smart decisions and organization. In fact, the more organized your finances are, the better.
Staying organized means you are on top of your finances – you know important due dates, your reporting is accurate, you are tracking the right metrics, and your books are up-to-date. Everything is in order and you have a strong understanding of the state of the financial state of your business.
Not only will this help you in the long run, but it makes it much easier for potential buyers to see why your business would be a good investment.
If you are struggling to see what organized finances would look like for your business, here are a few things you can implement into your current processes to help get you on track:
- Make sure you are tracking the right metrics
- This means referring back to your goals and determining what KPIs you need to track to reach them.
- The right metrics will also give you a snapshot of your financials so you can make informed decisions.
- Build and stick to your budget
- With a strong budget, you’ll see improvements in your finances across the board.
- Utilize forecasts
- Forecasts allow you to look at your predicted financial situation. They are an important tool for measuring the success of your business down the road.
- Maintain your bookkeeping
- Getting behind on your books creates avoidable problems. Improve your accuracy and efficiency by updating your books on a regular basis.
- Automate systems and processes.
- Nearly every aspect of your finances can be automated. This includes payroll, accounts payable/receivable, receipt tracking, document storage, reporting, and more. Automation allows a central location for all of your financial information.
Taking these steps now will help smooth out the transition process from you to a new owner and is one of the primary ways you can make your business appealing to buyers.
Make Yourself Appealing to Buyers
It’s no secret that strong financials play a role in helping buyers determine if your business is the right investment.
However, good numbers are just the tips of the iceberg when it comes to appealing to buyers. In addition to strong financials, there are five other areas you can focus on:
- The team
- Team structure exemplifies organizational structure. A good team shows that your business is set up in a way that promotes success. This also lets buyers know the level of work that needs to be done. In their eyes working with an already well-run team is more appealing and makes the transition process easier.
- The idea
- It’s important you can articulate why you started your business, the need you are filling, and where you see the business heading. A buyer is focused on potential, so clearly outlining your idea and where you believe the business can go will feed potential buyers’ imagination.
- The market
- Buyers will want to know the competitive landscape, meaning you should do what you can to remain competitive in the marketplace. Analyze competitors’ numbers, marketing tactics, and customer service interactions to see if you can implement some of their successful strategies into your business.
- The involvement
- This is all about knowing how much work it’s going to take to run the business. For example, if the finances are off, the team isn’t successful, and/or the market is saturated, the business would need a lot of work from the new owner, something a buyer may not be interested in. Ideally, your business should be able to run without you.
- The exit or the return on investment
- Making money is the goal, so as you prepare to sell, it’s essential your business is in a position to be profitable. Ultimately, a strong return on investment is the motivation of most buyers.
Follow a Due Diligence Checklist
In addition to a plan for appealing to buyers, you’ll also want to make sure you are clear on how you are selling your business. You have two options: an asset sale or a stock sale. In most cases, as the seller, you will benefit from a stock sale, while the buyer will benefit from an asset sale. Asset sales allow buyers to only purchase parts of the business, which can lead to a long negotiation process. A stock sale transfers all of your shares to the new buyer, meaning they have full control of all of your assets and liabilities.
Ultimately, you will have much more tax obligations with an asset sale because you are required to pay at the individual rate for each asset being transferred as opposed to the capital gains rate, which is your only obligation when you choose a stock sale.
Once you’ve decided between selling assets or stocks, you’ll want to ensure you have the proper documents ready.
As you begin the selling process, do your research to find out what documents you will need on hand. While it may differ for your business, here are a few required documents or things to keep in mind for most sales:
- Letter of intent
- This is an outline of the conditions, deposit amount, and any other terms needed for sale.
- Financials records for the buyer
- This is within the letter of intent and states that the buyer has reviewed the company’s finances.
- Purchase agreement
- Once the first two are completed the buyer will need to sign a purchase agreement, which locks in the price.
- Buyers method of payment
- This needs to be clarified, especially if the buyer is using a loan.
- Clarity on local and state laws.
- Laws in each state differ, so be sure you research what’s required to sell a business in your state.
- Transfer of ownership
- Once everything above is completed and signed, ownership is transferred.
Retirement
Many business owners have their eyes set on retirement after selling their business. For this reason, it’s important you start thinking about the life you want to live after the sale.
The first step in doing this is to develop a relationship with a financial planner. Whether selling is in the near future or not, they will be able to help you prepare for what’s ahead and make sure you are checking all of the boxes for a successful retirement.
A financial planner will also help you determine your end goal, that way you can work towards it now, without burning yourself in the long run. With a plan in place, you’ll be able to avoid being in a position where the sale of your business is a trade for your financial stability in retirement.
As you prepare to sell, get clear on a few essentials of retirement planning:
- How much money do you need to live the lifestyle you want?
- What do you need to invest to get you there?
- A tax plan built to optimize savings.
- Strategies to get yourself the best return on the sale of your business.
Once you being to get deeper into your retirement planning, factor in things like:
- Health insurance
- As prices for health insurance continue to rise, be sure you have enough to cover the costs.
- Where to live
- Many people choose to move after retiring but it’s a good idea to plan that out now. Cost of living varies, meaning what you need to live out a comfortable retirement in one place, could be entirely different in another location. Making these decisions now will ensure you’re prepared for the change.
- Estate/trust plans
- Estate/trust planning comes with retirement and is something that can be taken care of now so you don’t have to worry about it later. If you have an asset of significant value, a trust may be a helpful tool. However they can be pricey, so taking the time to determine if it’s worth the trouble is essential.
Consult with an Experienced Accounting Professional
As selling becomes more real, the weight of preparing to sell your business and running it at the same time can be hard to carry.
It’s important you reach out to the right help to ensure everything is in order and you are on the right track.
An experienced accountant can help you prepare to sell your business by cleaning up your financials, working with you to build strategies to make your business appealing to buyers, making sure you have the right documents in place for a smooth sale, and building a tax plan that sets you up for your ideal retirement.
If you are preparing to sell your business and are interested in working with an experienced accounting professional, consider Pasquesi Partners. We’ll help simplify the process so you can be ready for what comes your way! Visit pasquesipartners.com to learn more!