Guide To Selling a Business

Review Expenses

Major expenses can often be reduced with a little effort. Not only is it good business but also since the purchase price will likely be based on your most recent financial performance any savings will be multiplied and you will receive a multiple of the savings at closing. Look for the large expense lines on your income statements and see if there are large expenses that can be cut. Often insurance, telecommunications, contract labor, office supplies, and other major expenses can be reduced substantially,

Make Extra Sales Efforts

Business growth is an important component of both the multiple of earnings that you will receive and the comfort level of a buyer. Even if you have a long sales cycle, filling the pipeline now will pay off handsomely whether a sale is consummated or not.

Many businesses will benefit from attending trade shows, mailing to prospects, telemarketing, and other sales efforts. Remember, that existing clients are often your best prospects for new sales. Not only can you potentially sell them more of what they are already buying, but you can also meet additional needs that they may have or switch them to more profitable items. If you have clients that are paying below market rates, because you’ve not raised your prices for existing clients for some number of years, consider raising the prices that you charge them.

Lock In Lease

In the case of retail stores, or any business that is very much dependent on its location, a good lease is essential to a successful sale. A lease is also a key element to consider for a business that can be relocated without serious harm, but at significant expense. A buyer will look at the expense and difficulty of a move and place a lower value on the business accordingly. Even an easy and inexpensive move is a negative concern to a lot of buyers who want to see as little change as possible in the early stages of ownership.

In most cases leases are not transferable to a new owner unless the business is sold on a stock sale rather than an asset sale basis. The differences are discussed below (section XIII.). Most small corporations and all proprietorships are sold on an asset sale basis.

If location is important to your business, negotiate with your landlord as far in advance of a sale as possible. If you wait until you have a buyer, the landlord is in a far better bargaining position; he knows he can kill the whole deal by not granting a new lease or a transfer option. It may be worth your while to pay a higher rent, to pay for an option to transfer, or in extreme cases to move the business well before it is offered for sale.

Once, I was retained by a drug store owner for advice on selling his store. He had a thriving business but no lease. The landlord, knowing that my client was ready to sell, demanded a substantial sum of money to grant a lease and demanded a $3,000.00 per month rent increase from the new owner. Had the seller dealt with the lease issue well before the sale and negotiated a lease without "a gun pointed to his head," he could have saved a good deal of money, sold his company more easily, and sold at a higher price.

Prepare A Basic Business Plan

The future direction of your business may be clear as a bell to you. However, to a prospective buyer, it may not be clear at all. He or she does not have the benefit of knowing what your customers or clients have been telling you, what improvements you have implemented, or where the opportunities lie. Unless your future is blatantly clear, you need to show the buyer the future in black and white. The way to do this is through a written business plan that details where you are going, why, and how you will get there. While this does not need to be a lengthy document, it does need to stress the opportunities you see and the groundwork that you have laid to exploit the opportunities.

I was involved in a deal that illustrates the value of a business plan in selling a business. The financial statement for this business (a book publishing company) paints the picture of a firm that is a good candidate for bankruptcy. It has a negative net worth of about $50,000 (the amount by which liabilities exceed assets). Further, it has not been able to pay more than a modest salary to its owner for over three years.

However, the owner prepared a detailed business plan showing an expansion opportunity that he planed to pursue. The plan was also personalized for each prospective purchaser to demonstrate potential synergies including detailed financial projections worked up that showed significant profits within 12 months. On the strength of the plans, he received an offer for the business for over $500,000, despite the negative net worth of $50,000! Without the plan I have no doubt that the company would have been liquidated leaving the owner with nothing but unpaid debt, some of which he would have been personally liable to pay.

Protect Intellectual Property

Many businesses have Intellectual Property with significant value. This may include proprietary process, trade secrets, patents, and Trademarks. Protecting trade secrets may require that you get employees to sign agreements, but such agreements may reduce the worries of a new owner that employees will leave and compete with the firm.

If you have a great name for your product or service it can be trademarked or service marked and the mark registered. Software can be copyrighted and in some cases patented.

If you are developing new products or services, consider patenting them if they are non-obvious and a patent would seriously impede your competitors. Business methods can also be patented now.

If you think that your business has valuable intellectual property consult an attorney that specializes in IP law to determine how best to protect it.

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