Bridging the Way BayState Business Brokers blog

Year-End Checkup: Is Your Business Ready to Sell?

by | Dec 14, 2016

Year-end is a perfect time for business owners preparing to sell their business to review the main factors that could increase the attractiveness of the business or discourage potential investors.

The circumstances leading to a sale could occur due to market or personal conditions. For instance, an attractive offer could be presented or there could be a generational change in the business leadership. Owners should always consider the possibility of a sale and ensure that actions taken create and enhance the business value.

Early stage preparation for a sale starts with a presale checkup, or sell-side due diligence, complemented by corrective measures. The checkup represents a diagnosis undertaken years before the actual sale that highlights the steps to be followed for selling the business. For example, these could be analyses of the information systems, of the management teams’ ability to run the business absent of the president, the health of the company’s assets, customer relationships, supplier side potential issues, or improvements that can be achieved to increase the value of the business and make the buyer willing to pay a premium for it.

Year-end checkupCorrective actions can run  the gamut, from ensuring proper financial statements and strengthening accounting systems, to increasing the quality of financial reporting, attention to existing arrangements with customers, suppliers and employees, protecting intellectual property rights, solving human resources issues, tax considerations, and compliance with government regulations.

The end of the year is the best moment to perform a business health check by exploring a number of major areas of interest:

  • Business owners are advised to run a general diagnostic test that includes an informal valuation, financial projections for 2017, and reviewing industry forecasts. If you are a seller, you should analyze current financial statements and action plans against past records and industry benchmarks, to better understand your financial position, assess the achievement of your goals, and craft the strategy for 2017 and beyond. Prepare reliable, consistent, financial statements for the last three years, and compare the essential key performance indicators for your industry to those of your business. Remember that inaccurate financials are one of the most common causes of deal breaking.
  • Tax returns. These are important, especially because for businesses without audited financial statements. The tax returns are the primary statements used by buyer accountants and lenders to evaluate the business.
  • Inventory and operations. You should explore the business process from beginning to end to identify methods to streamline and cut expenses. Business owners can outsource an inventory count or have their employees take inventory. Various firms offer barcode systems that automate inventory tracking. This is relevant because obsolete or misplaced inventory on your books means burdensome costs. Failure to write-off obsolete inventory results in overstating the profits of the business.  Also, buyers will object to buying obsolete inventory.
  • Management backup. Without any doubt, you are pivotal to the performance of your enterprise. However, having a key competent individual or team to effectively run the business would be extremely important to potential acquirers. For many of the larger buyers, a management team to replace the owner is a requirement.
  • Limitation of reliance on few major customers. You should diversify the customer base and work to become less dependent on single customers. Seek to raise recurring or repeating revenue instead of one time sales. In addition, it would be helpful to know what the reaction of the main customers would be to an ownership change.
  • Legal checkup. This is essential even if you are not actively selling the business. You might have arrangements that need to be updated or changed (such as third party agreements, employment contracts, and leases).
  • Human resource policies. The use of independent contractors requires a proper classification under the IRS rules, so you avoid fines for individuals classified as employees.

The attractiveness of your business to potential buyers is driven by a myriad of factors.  It is vital that the year-end checkup covers as many elements as possible so that you attract the best buyers who understand the dynamics of your business, share and appreciate what has been built, and negotiate the best price, allowing you to enjoy a smooth exit.

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