Key Steps for Preparing a Business for Sale

Business Sale

Key Steps for Preparing a Business for Sale

Business Sale

It’s your largest asset and one that you have spent a lifetime building. Preparing your business for sale may seem daunting, but one thing is certain: preparing a business for sale requires the same dedication to improvement and success that building it requires.

Today, a successful sale or transfer of a business involves a complex process of succession planning, financial and tax planning, operational improvements, compliance reviews and personnel incentives, among other strategies. If the business is family-owned, planning for the transfer also may include sensitive family negotiations.

Ideally, the process of preparing a business for sale begins at least five to seven years in advance, and is geared toward maximizing the value of the business. Business owners should involve their key advisors from the beginning, including accountants, attorneys and other professionals with the expertise to help improve the value of the company.

Key steps in preparing your business for sale may include:


Advisor Relationships, Business Valuation and Partnership Agreements

Review your relationships with trusted advisors – The process of planning for a business sale may start with a review of your relationships with trusted advisors. It is essential to work with accountants and attorneys who are experienced in mergers and acquisitions advisory services and succession planning services. Sit down with your advisors and discuss the process of preparing for a sale. Ask them for examples of business sales they have helped other clients achieve within the past three years, and talk to those client references. Quality advisors will understand and encourage you to do your due diligence as you prepare for the sale of your largest asset.

Business valuation – It may seem counterintuitive, but owners should have a business valuation performed at the beginning of the process, and again within 18 months of the expected sale. Two valuations done a few years apart by an independent business valuation firm can support your asking price by demonstrating to potential buyers the improvement in value that has resulted from your actions. The initial business valuation also can help identify key areas needing improvement, and help you prioritize the actions in your improvement plan.

Shareholder agreements – Review shareholder and buy-sell agreements, as well as life insurance funding. If you do not have a formal buy-sell agreement with your business partner(s), now is the time to create one. You do not want shareholder disagreements or misunderstandings to interrupt the process in the middle of a business sale.


Financial Reporting

Financial statement audit – If you do not currently have an annual financial statement audit, consider obtaining an independent audit for each of the three years prior to the anticipated sale of the company. Potential buyers and financing partners may require audited financials, and even if they don’t, they will place more trust in your representation of the company’s financial condition with audited statements. 

Check the condition of your balance sheet – Do you still have old fixed assets that were depreciated a long time ago on the balance sheet? Is there outstanding debt on the balance sheet for such items as shareholder loans? Clean it up, and make sure inventory is up to date.

Check variances in income and expense items – Did you have several unusual one-time expenses? Document the reasons for such expenses so they don’t become red flags for potential buyers and financing partners.

Make sure all tax filings and compliance reports are current – This includes federal, state and local taxes, as well as sales tax, payroll taxes, business entity filings, employee benefit plan filings and other special reports that may be specific to your company or your industry.

Revenue projections – Your forecasting and budgeting should include revenue projections that look out over three to five years. This shows that you are knowledgeable about your marketplace and the economic forces that shape it, and it helps a potential buyer form solid expectations about revenue trajectory.

Informal agreements – Document any verbal or side agreements you may have with customers, vendors, lenders, shareholders and business partners.


Tax Planning

Tax ramifications – Discuss the sale of your business with your tax advisor to determine the most advantageous deal structure, including timing. Is an asset sale or a stock sale more appropriate for your business? A stock sale may offer the benefit of ease of transfer, but many buyers prefer an asset sale. Choosing one or the other may impact the speed with which you are able to sell the business.

Multi-state issues – Does your business operate in multiple states? Consider obtaining a state tax nexus study to help prospective buyers understand potential tax liabilities.


Human Resources

Incentives – Every company has key employees who help make it successful. Retention of those employees will be important to prospective buyers. Incentivize your key employees with such measures as bonus plans or phantom stock plans to keep them on board through the sale process.

Employee benefit plan compliance – Review plan documents to ensure they are up to date and that they say what is intended. Make sure that all compliance filings are up to date.

Review and manage participant counts – If your 401(k) plan is approaching 100 participants, but includes many retirees or terminated employees who still have funds in the plan, encourage those participants to move their funds to an IRA or other financial instrument. Removing them from your plan will help avoid the cost of an annual plan audit, which is triggered when the plan reaches 100 participants.

Overall plan review – Check your plan for any weaknesses, such as low 401(k) participant counts or low employer match. In today’s competitive employment market, strong employee benefit plans can make the difference between high turnover and a loyal, consistent workforce. Prospective buyers will take note.


Operational and Technology Systems

Operations – Are your operational processes up to date and consistent with how other companies are operating in your industry? If capital expenditures are necessary to improve your company’s competitiveness, now is the time to evaluate your options and put the financing in place. Include a discussion with your tax advisor about tax incentives.

It is important to note that the new Tax Cuts and Jobs Act includes two important benefits for businesses that invest in capital improvements:

1. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. The TCJA also expands the definition of section 179 property to include roofs, HVAC, fire protection systems, alarm systems and security systems. Some limitations apply.

2. The TCJA also increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. This provision of the law has numerous limitations.

Computers and IT services – Review technology systems and, if necessary, implement a plan to upgrade prior to sale. Likewise, ensure that your company is in compliance and has up-to-date IT security systems.

Every company is unique and requires careful long-range planning to ensure a successful sale. Call David Jean at Altus Exit Strategies to start the discussion about how you can put the pieces in place today to maximize the value of your business tomorrow.

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