3 essential steps to prepare your business for sale
October 2nd, 2023
Originally Published In The Nashville Business Journal
Selling a business can be a lengthy and complicated process, and proper preparation is essential to ensure that potential buyers see your business as an attractive investment opportunity. Unfortunately, many business owners wait until they are ready to sell before starting the planning process, leading to a decrease in the value of the business. However, starting the preparation process early can help you maximize the value of your business when it comes time to sell.
Here are three essential steps to prepare your business for sale, whether you plan to sell now or in the future.
Step 1: Tidy up your financials.
Over the past 20 years as an attorney, I have encountered many profitable and respectable companies whose financials were, quite frankly, a mess. For business owners, it is easy to neglect this administrative task while focusing on high-growth activities, ultimately leading to a disorganized financial situation. Buyers will penalize you for any administrative items in disarray, leading to a decrease in the value of your business.
To ensure that you have an accurate picture of your financial situation, work with a Certified Public Accountant to declutter and organize your financial records. Remove any personal expenses that may be attached to your business (these might include things like dry cleaning, meals, travel and entertainment) and review your contracts frequently. Be sure to note any special clauses that could impact a sale, such as a change of control provision.
Hidden details can hurt the value of your business, and when it comes to selling, proving what’s going in and out of your accounts will go a long way.
Step 2: Lock in your key resources.
Key resources, such as employees, clients, contracts and processes, are crucial assets that make your business model work. When it comes to employees, it is essential to take a moment to honestly assess how your business would run without them and get the most vital employees under contract long before you think about selling. The reason to do this now is to stay ahead of potential conflicts of interest during a sale that can be caused by key managers. You should also ensure that you have incentives such as stock options and bonuses in writing to avoid any eleventh-hour power plays at a time when you will be emotionally invested in a sale.
To ensure that your key resources are locked in for your future sale, consider asking yourself the following questions:
• Do you need to have employees sign Non-Competition and Non-Disclosure Agreements?
• If so, are these agreements tailored to fit your specific needs?
• Are your contracts assignable?
• Do you need to have any particular key employees sign long-term employment agreements?
If you need clarification on these key resources, consider working with a legal professional to make things trackable and ensure that your contracts are properly drafted and reviewed.
Step 3: Make yourself replaceable.
It’s important to remember that if your expertise and systems live solely in your mind, it will take a significant amount of work to sell your business. Take the time to go through, automate and systematize your business where you can while you can. Make yourself easily replaceable so that the business is not dependent on you.
No matter where you are in your business venture, keeping your finances clean, locking in your key resources and setting up processes to make yourself replaceable for a future sale are pivotal. I recommend working with an accountant and a qualified law firm who can provide legal guidance and assistance at every step of a business transaction, including drafting and reviewing contracts and ensuring that every detail is addressed before closing.