Q: How do I know when to sell my business? How do I prepare it for a sale?
Ellen Fee, Access Financial Services
A: Selling your business should be part of your long-term personal financial plan. When do you want to retire? Do you even want to retire? Do you want to start another business if you sell this one?
These are all things you need to have thought about to one extent or another before you start the process. The second consideration is about 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 planned retirement date, or the idea of starting another business before you retire. As you can see, the interaction of these two things, your personal plan and the state of your business, will determine when you sell your business.
Next, to prepare for the selling of your business start the process of collecting 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. The second element, and one that is quite delicate to talk about, is to make sure that no personal expenses of yours or your family or friends are being run through the business. First, because this may be illegal if done to excess, or could at least be embarrassing if discovered by the potential buyer during the due-diligence process, and second, because running these expenses through a business reduces the reported income and that could reduce the potential value of your business.
David Vang is a professor in the finance department at the University of St. Thomas Opus College of Business.