Q: How do I prepare my business for a sale?
A: If you know that you are ready to sell your business, start by compiling information for a potential buyer. You will want to pull together the following things: five years of financial statements, a list of employees and their salaries and job descriptions, a note on which employees are "key" employees, a list of assets owned by your company and their age, a list of creditors with the amounts and terms of payments.
In addition, although it can be quite delicate to talk about, make sure that no personal expenses of yours or your family or friends are being run through the business. This practice may be illegal if done to excess or could at least be embarrassing if discovered by the potential buyer during the due-diligence process. Also, running these expenses through a business reduces the reported income, which could reduce the potential value of your business.
Selling your business should be part of your long-term personal financial plan. There are numerous questions to answer to decide when the timing is appropriate to sell. Think about when you want to retire, and if you even want to retire. Consider if you want to start another business if you sell this one. Before starting the process, you need to have thought about all these things to one extent or another. Besides the personal aspect, consider the business itself. Is the product/service you provide sustainable as a market for the foreseeable future? Or is it a declining industry that will become obsolete? The combination of these two things, your personal aspirations and the long-term prospects of the business itself, will have to be reconciled.
For instance, if your business is in decline so that its potential value might not be all that great in the near future, and you are close to your time remaining before your planned retirement date, you should consider selling sooner rather than later. Likewise, if the sustainable value of the business is quite high and you are far away from your planned retirement date, you may have to reconsider your retirement date, or the idea of starting another business before you retire. The interaction of your personal plan and the state of your business will determine when you sell your business.
David Vang is a professor in the finance department at the University of St. Thomas Opus College of Business.