Small Business Blog

In my last blog post, I covered a few things to consider as you decide whether or not to sell your business.

This time, I want to give you some basic, but often overlooked steps that you should begin taking before putting your business up for sale.

Assemble a team to help you sell

Most entrepreneurs give more attention to starting and building their business than they do to selling it.

As a result, all of the knowledge and experience gained revolves around growth and expansion and little if any business sales experience is ever gained.

Putting together a team of experts can give you a huge advantage, not to mention it will make your experience much more enjoyable.

Your team of experts should include an attorney who has business transaction experience, an accountant or a tax advisor, a financial planner and an intermediary like a business broker. Each of these key people will bring to the table knowledge, skills and abilities that will quickly put your plans into action.

Get your family out of the business

If the business consists of more than you and your spouse, you need to make sure that your spouse, kids, nephews, aunts and uncles aren’t working in the business. This sounds cold hearted and at first glance it is very cold hearted, so let me make sure I explain my reasoning.

The terms “turnkey” and “business for sale,” when used accurately can mean premium dollar for the business.

However, if I buy a business and have to spend six months to a year working harder and even longer hours to become proficient at the core parts of the business, how can I be guaranteed I can be successful in this venture?

Having your family tied into the business means that when the business sells and you leave, most likely so will they. Now not only is your role as the owner vacant, leaving a sizable hole to be filled, but so is the role of all of your family members, which leaves a gap the size of the Grand Canyon to fill.

Report all income for at least three years

Shhh … don’t tell anybody, but there is what seems to be a common practice among business owners to not report all of their income on their taxes. GASP! I know. Shocking isn’t it? I’m sure that you would never consider taking cash out of the drawer, but believe it or not, about three of every four businesses I see someone wanting buy are owned by someone who does just that.

“Well sure my tax returns show a $3,000 loss last year, but I have the company pay for everything including my daughter’s dance classes and my husband’s new golf clubs. That doesn’t count all the customers who pay me in cash and I never report that income. In reality, I probably take home around
$80,000, but who wants to pay taxes on that! You know what I mean don’t you?”

Don’t think for a moment that I haven’t heard similar stories from potential buyers, and here is my advice I give them in one word. “RUN!”

There are two major reasons I give that word of friendly advice. First, unless the buyer is independently wealthy and is able to pay your asking price in cash, they are most likely going to need a bank to get involved in financing at least a portion of the purchase.

Showing a bank the past three years of financials for a business that on paper appears to be barely surviving doesn’t exactly instill a rush of confidence in the bankers I know. To give a banker confidence, show them a three-year history of solid and steadily growing revenue and profits.

The second reason I give that advice is you are requiring the buyer to put a large amount of trust in you.

They trust that what you’ve told them about your reputation with your customers and vendors is correct.

They trust that you’ve given them accurate information about potential future growth is probable. They have even trusted you that what you do in the business will be easily duplicated by them and possibly even improved on.

So why would you also want to say, “Yeah sure I lie to the IRS, but I’m telling you the truth. I mean come on, why wouldn’t I tell you the truth? Just because the IRS can come arrest me, take my car, my home, and my dog, why wouldn’t I be willing to let you in on my dirty little secret?”

When trust is involved in a decision, it’s always better to be trustworthy

Ron Chernak, President of <a href=”www.fbb.com”>First Business Brokers</a> started his company in 1982 and has seen his share of good, bad and ugly businesses for sale.

Chernak commented, “Not only should you keep accurate records, but it is important that accounting statements are formatted so that the purchaser can understand them.” He continued by adding, “It’s a good idea to have a qualified expert, like a CPA, prepare the financial statements. These independently prepared documents are preferred by banks rather than just internally produced financial statements.”

Begin to document everything

If you don’t have a policy and procedure manual, start creating one. From the core foundation to the carpets get vacuumed on Thursday, make sure that everything is well documented.

“Turn-key” is an overused word in business sales. Everyone claims their business is turn-key, but I suspect few actually are.

To me, a turnkey business is one where the owner could cross Tejon St. on their way to lunch and get hit by a car. After a short afternoon break to bury the owner and move all your stuff into his corner office, you could run the business as effectively and efficiently as they did just by reading through the policy and procedure manuals.

The amount of value that this can bring to a business could be a key component in the difference between having enough to pay the existing debt off and have a little left over to buy a 25 foot RV as a retirement home and having a retirement home with a garage big enough to park your 25 foot RV in.

The next post will cover how to make sure you are offering something worth buying.

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