Preparing The Business For Sale

Feb 04, 2010

Over the past few years, I have been involved in a number of transactions involving the purchase and sale of businesses. The process for each transaction is very similar, the owner decides that it time to sell. Usually with the assistance of an advisor, they put together a summary of the business, several years of financial statements, and a few key documents. The advisor markets the business and receives a non-binding letter of intent or indication of interest. Then the real action begins- time to perform due diligence and negotiate a contract. During that process, nearly everyone is surprised by something uncovered by the buyer, almost always negative in nature. What happens? The buyer no longer trusts the rest of the information provided, the offer gets reduced, and nobody is happy.  So, how do you keep this from happening?

Preparation begins long before the business is marketed for sale. An owner should be running their business with the end-game (exit strategy) in mind all along. That means, the financial statements are being scrutinized by someone other than the preparer on a regular basis. The corporate books and records are kept up to-date. Minutes of shareholder and board meetings are prepared each year. Unfortunately, that’s more the exception than the rule.

So, you’ve decided to sell the business but have been rather lax in the recordkeeping department. Time to perform your own due diligence. Engage a professional to provide a typical due diligence checklist before hiring the advisors. Assemble all of the documents that are likely to be requested. Review all of the asset accounts to make certain the detail agrees with the financial statements. That means, performing a physical inventory and adjusting the quantities in the system to actual counts. Review the costs of the major items to make sure they are accurate. Review your accounts receivable listing and write-off the uncollectible accounts. Review your corporate documents and bring them up to date. Obtain copies of all loan agreements, lease documents, data processing contracts, software maintenance agreements, and computer software licenses.

In some of prior transactions I’ve seen, due diligence uncovered some of the following items:

  • Inventory quantities were overstated by 30%
  • 15% of another inventory was obsolete
  • Several customers were also vendors. The company had recorded both the accounts receivable and payable, but had not offset them causing an overstatement of the assets being purchased
  • Multi-year commitments for data processing and long-distance contracts were discovered (the buyer had expected significant savings in this area)
  • There was only one Microsoft Office license for every five computers the company owned

The point of performing this time consuming task before offering the business for sale is so that when you have reached a tentative deal with a buyer, they are not disappointed and you as the seller are not surprised. The due diligence and contract negotiation process will go much faster and there will be a much smaller chance of the buyer walking away. Total professional fees on both sides will be much lower. If you are considering exiting your business, a two year head start allows the owner to fully prepare themselves and the business for sale. A B2B CFO® is an expert at assisting business owners in the process and quarterbacking the numerous advisors that can be involved. Give one of us a call if you would like to learn more about how we can help you Find the ExitTM.


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