Intend to Sell Your Business? Make Sure You Do These Things NOW (Part 2)

Summary video

In the previous article, we talked about the most important factor in determining your ability to sell your company on the private market: has it been built to depend upon you? Hopefully the answer is ‘no.’ If you don’t solve that problem, doing the things below won’t matter. But assuming you have built your business to not need you, or you’re in the process of making that transition, then there are a number of other things you’ll want to do in order to maximize your company’s saleability.

A buyer wants to know what they’re getting into. It’s impossible to convey perfect information, but for the most part you should expect they won’t want to walk into any surprises. And for your own protection, you need to make sure the buyer doesn’t feel misled about material aspects of the business. A savvy buyer will know the kind of things to ask, and you need to be prepared in advance.

First, make sure the finances are in order. This doesn’t mean you need complex financial analysis, audited statements, advanced analytics, or anything else of the sort (though the larger your company, the more likely those things will be expected). But it does mean at minimum that your core accounting needs to follow best practices.

One time some partners and I were looking at acquiring a small business, and during financial due diligence the guy just gave us a bunch of bank statements. That won’t fly. No buyer wants to sort through your mess of unorganized data and do bank recons for you. You need to be able to produce clear, clean, and current financial statements: an income statement (profit & loss), balance sheet, and cash flow statement. You also should be ready to furnish the business’ tax returns. These should all go back at least as far as 3-5 years, if not longer.

But financial data preparedness goes beyond just having the documentation; it also means the documentation needs to be reliable. Founder-run companies tend to be very sloppy with these controls, but you can’t afford to be if you want to sell your business. One major thing to get in order is accurately recording your executive compensation. This is different from total compensation, which includes what you pay yourself as an owner. Are you separately itemizing the income you receive as an employee-executive as a labor expense? The buyer needs to understand a market rate for what it would cost to hire someone to replace you, and how much shareholder profit is left over after they do. If you aren’t keeping these things separate, it will distort the picture in your financials. Some other major things to watch out for include making sure expenses are coded correctly and that personal and business expenses are kept separate.

Second, you need to have good HR records. That means things like hiring paperwork, termination and exit paperwork, compliance information (OSHA, Department of Labor, etc), policy and training signatures, performance reviews, and warning documentation. Employee liabilities are one of the major landmines that an informed buyer will be looking for, and making sure your ducks are in a row here is vital to avoid any perception of looming employee discrimination claims, wrongful termination suits, or other similar problems. A great way to handle this is to contract with a Professional Employer Organization: a third-party company that partners with you to ensure these functions are administered in a compliant way. Doing so will go a long way in signaling to buyers that things are in order on the HR front.

Third, your infrastructure needs to be prepared for a clean handoff. Important documents and contracts (which hopefully you have backed up into the cloud alongside any local or hard copies), online accounts (web domain, corporate email, bank accounts, commerce platforms, vendor portals, and anything else you can think of), physical property titles and the like all need to be ready, organized, and able to be handed over to a buyer. Don’t find yourself scrambling to get it all together at the last minute.

Fourth, if your business depends heavily on a rented physical location, you need to make sure things are in good shape with the landlord. This one thing could torpedo your chances of selling the company if you don’t have a decent landlord-tenant relationship, especially if your lease is expiring soon or has a clause that permits the landlord to block transfer to a new operator. That doesn’t mean you should let an aggressive landlord steamroll you, but it does mean you need to have a good working relationship (and if not, figure out how to fix it, or move while you still have a chance).

Fifth, you’ve got to invest in employee retention and satisfaction. A new business owner is often a massive change for employees, and it’s very common to have turnover during that process. A buyer doesn’t want to see everyone jumping ship. You need to be able to demonstrate a track record of employee tenure (the longer the better) and work with the buyer on a change management plan to ensure employees feel confident in the new setup.

Some of these things can be addressed fairly quickly. Particularly with finance and HR, if you don’t have the expertise in house, then a fast, effective option is to hire consultants specializing in those things. On the HR front in particular, if you work with a Professional Employer Organization they will often have support to help you bring things up to par. Other matters, especially the relationship-driven ones, are things you need to build towards over time. But all are very important if you ever intend you sell your business on the private market at a good price.

In the final article in this series, we’ll take a look at methods to find buyers and alternative options you could explore.

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