Thinking About Selling Your Business But Not Ready for a Valuation? Helpful Tips to Prepare
By Ashley DeCress, CPA, ABV, CVA, Senior Manager, Advisory Services
Selling or transitioning your business is a big step. However, it is a step most business owners don’t focus on because they are consumed with running the business. But what can you do to prepare yourself, and your business, so that you will be ready when the time comes? Here are a few key actions you can take now in order to better position yourself later:
1. Five Years of Financial Data
Make sure you have access to your business’s last five years of financial statements (income statements, balance sheets, cash flow statements, etc.) and tax returns to make sure they are easily accessible and accurate. Buyers will want to review the history of the business to better understand its growth and trends over a period of time.
2. Company Data
Track down operating and governance documents (i.e. operating agreements, bylaws, stock option agreements, buy-sell agreements, restrictive covenants, etc.). These agreements may contain certain provisions that must be followed in the event of a transition or sale, such as how proceeds will be allocated to the owners upon a liquidity event. They may also include direction on how to determine the value of the business for any ownership transactions. In addition to these documents, it is important to have current ownership schedules / capitalization tables and management organization charts.
Write down key notes about the company’s business and operations, documenting products/services, key customers/vendors, etc. It is important to be able to tell the story of how the business changed and evolved over time.
4. Key Employees and Management Team
Keep a roster of the company’s key employees (name, job title, years of experience, role, compensation, etc.) noting the level of management depth and overlap as well as any key employee risks. If you are transitioning your business at a later date, this step may help you determine roles for the company’s management team in your absence.
5. Discretionary Expenses
Discretionary or personal expenses are those that are paid by the business, but are not necessary for the operation of the company and instead often personally benefit the owner. Because these expenses reduce a company’s reported income, they lower the value of the business unless the company’s normalized income stream is adjusted to account for them. Owners should review their historical financial statements and determine the amount of any discretionary or personal expenses that occurred in each year. Once identified, these expenses are typically added back in determining the income / cash flow available to a hypothetical buyer of the business. Some common examples of personal or discretionary expenses include non-business meals, travel and entertainment expenses, auto expenses, memberships, officer life insurance, etc. Compiling a list of these expenses by amount and year can help to accurately determine a company’s normalized income stream and as a result, its value.
6. Non-Recurring Items
Determining a company’s normalized income stream also requires adjusting for non-recurring or one-time income or expenses. These are items that are not expected to recur in the normal course of business and may include one-time professional fees, bad debt expenses, repairs and maintenance, moving expenses, gains/losses on the sale of equipment, etc. A more recent example of a non-recurring item may relate to a company’s PPP loan forgiveness income.
7. Industry Trends / Competitors
Determine if there is anything of note happening in the industry (such as significant upcoming opportunities or threats). It is helpful to understand the industry’s competitive landscape and how it may change going forward. This assessment may also give more insight into when would be a good time to sell.
These factors are all helpful stepping stones to prepare a business owner for sale. Regardless of whether you are one, five, or 10+ years from selling or transitioning your business, having these documents and information ready will keep you prepared if an unexpected opportunity to sell arises while also providing you with information to better manage your business.