Seven “Must Do” Things To Do to Prepare Your Business for Sale

Seven “Must Do” Things To Do to Prepare Your Business for Sale

By: John B. Even

February 14, 2013

             Over the course of my career, I have helped several business clients prepare their business for sale and have assisted them with responding to due diligence requests and preparing the legal documents necessary to close these sales.  Even before the “letter of intent” stage, there are several important things that a seller can do to prepare his/her business for sale.  This article discusses seven “must do” things that a business owner should do in this process:

1.   Know What You Are Selling and Why.  Generally speaking, there are two types of business sales, asset sales (where the buyer is buying the business assets of a seller’s business only, exclusive of the liabilities) and “stock” sales (where the buyer is buying the seller’s stock or membership interest in the seller’s business, including the liabilities).  From the seller’s perspective, it is much better to structure the sale as a “stock” sale, because then the buyer will be assuming all of the business’ liabilities.  However, most buyers would rather structure the transaction as an asset sale, so that the seller will continue to be responsible for the business’ liabilities except for any specific liabilities that the buyer assumes in the legal documents.  In addition, in some case, the seller wants to “carve out” certain assets or a certain part of the business and not sell them to the buyer.  Sellers should also know why they are selling.  As with any sale, the first question for most buyers is going to be “If this is such a great business, why are you selling it?”  Whether it is for health reasons, to retire, or for some other reason, the seller needs to have a well thought-out response to this question.

2.   Business Valuation.  The next question that most buyers will ask is “What’s the price?”  Before any business can be marketed, it is important for the seller to determine the value of the business in order to price it correctly.  This should be evaluated at several different levels.  First, the seller should determine in his/her own mind what the business is worth based upon internal company financials and industry standards.  In addition, the company’s accountant should give some input regarding the approximate value of the business based on the accountant’s experience.  Next, if a business broker is involved, ask the business broker for his/her input about the value of the business.  Finally, in certain situations, especially if the company is worth several million dollars, I recommend obtaining a business appraisal of the company to determine its worth, understanding that the business appraiser may be able to do “quick and dirty” appraisal for the company’s worth based on the company’s financials and some other key information without necessarily writing up a full-blown report.

3.   Get Your “House” in Order.  Obviously, the seller wants to make sure that the potential buyer’s first impression of the business is a good one.  Therefore, if there are any issues with the company’s financial records or tax returns that need to be addressed, get them cleaned up.  In addition, if you have been running several personal expense items for you and your family through the business, then  re-characterize the financials for the potential buyers to show what the profits of the company would be without these personal expenses on the books.  Next, if there are any computer systems or other systems that need to be upgraded and/or documented, so that they work more efficiently, a “remodel” of these areas of your business is a good idea.  Moreover, every employee’s position and job responsibilities should be clearly defined, including yours, so that any potential buyer can easily understand what each employee does.  Finally, ideally, the business owner should implement a management succession plan in the business so that someone else is running the day-to-day operations of the company.  In this way, the business owner can become somewhat redundant in the running of the business and is not necessary to the potential buyer for its day-to-day operations.  All in all, the seller needs to give the company a “business makeover”.

4.   Assemble a Good Advisory Team.  Next, because the company is probably one of the most valuable assets that the seller owns, I recommend that the seller not attempt to sell it alone.  A good advisory team, including a business attorney, a CPA/tax adviser, a financial adviser (especially if the seller is talking about retiring after the sale), and a business broker (if necessary) are all important members of the team that will help you to protect your interest.  Because these types of transactions often take up to a year or more to prepare for and implement, it is important to start early in the process in assembling this advisory team.

5.   Due Diligence, Representations and Warranties, and Legal Paperwork.  One of the most important parts of any business transaction is the due diligence that the potential buyer performs related to the seller’s business.  “Due diligence” simply means that that the potential buyer is going to want to ask the seller lots of questions and see lots of documents to verify that he/she is getting the value being paid for and to make sure that there are no “skeletons” in the closet.  Typically, in the legal documents, the buyer will request that the seller make certain representations and warranties about the condition of the business to verify that there are no issues with the business.  A typical representation may be that, except as scheduled, the seller is not aware of any pending or threatened litigation involving the company.  Another one might be that the seller has filed all necessary tax returns and is not aware of any outstanding tax liabilities.  It is critical that these types of representations and warranties are correct and not overstated, because a breach of these representations and warranties could mean that the seller has to pay the buyer damages related to such breach.  Finally, the drafting of over sections of the legal documents for the transaction is also critical to make sure that the seller’s interests are protected in the transaction.

6.   Always Have the Potential Seller Sign a Confidentiality Agreement.  No matter how well you know the potential buyer or how quickly you think that the sale will occur, always have the potential buyer sign a Confidentiality Agreement indicating that the potential buyer will not disclose any confidential information, including financial information, client lists, marketing strategies, etc., to anyone outside of their advisors related to the transaction.  The transaction is not over until the closing is completed, and a transaction can still “fall apart” even at the closing table or shortly before then if an issue arises that cannot be resolved.  Therefore, in case the transaction does not close for some reason, it is always important to protect your company’s critical information with a Confidentiality Agreement.

7.   Keep Your Eye on the Ball.  The process of getting your business ready to sell, “courting” potential buyers, due diligence, and legal documentation can often take up to a year or more to complete.  This requires a lot of time and energy on the owner’s part to address various issues that come up as part of the sales transaction.  Without carefully keeping your eye on your core business, it is possible that your business could decline in value as you are trying to sell it.  Obviously, this is something that the seller wants to avoid as the buyer will certainly attempt to lower the purchase price if the business value declines prior to the closing.

This article has covered seven “must do” items for a business owner to do in preparation for the sale of his/her company.  Of course, if you have any questions about this article or about any of these seven items, please feel free to call me (602-277-7000) or e-mail me (

Even if you think that you are several years away from selling your business, you should also consider what your heirs or successors would have to do if you died unexpectantly.  If you do not have a good business succession plan in place, then your heirs may have no choice but to liquidate your business by selling the assets off in a “piecemeal” way, thereby getting nothing for the goodwill that you have spent years to building up.  In my next article, I will discuss some of the key aspects of a good business succession plan.

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