What you need to do before you sell your business
Before you cash in on the successful company you've built and retire to a tropical paradise, take time to adequately prepare for this important goal. Whatever your motivation for selling your business, the effort you put into preparing it for sale, can mean the difference in the final result, according to the Minnesota Society of CPAs (MNCPA).
Evaluate what you've got
Begin with a realistic idea of the value of your business. For an initial ballpark estimate, you might investigate the selling prices of similar businesses in your area, but be aware that the values of even seemingly comparable businesses can vary greatly. Another good option is to hire a professional business valuation expert to make this determination. Factors that will affect the ultimate sales price include past revenues, the value of your business assets, the company's future prospects and the health of the local business economy.
Keep in mind that prospective buyers will likely perform their own valuations of your business, and you will be in a better negotiating position if you have your own objective sense of what it's worth. If you find out that your business is worth less or much more than you expected, you may reconsider your decision to sell or revise your future plans. In addition, it is important to explore the tax consequences of your selling options with a CPA before you sign the letter of intent to sell with an interested buyer. Waiting until after signing the intent to sell letter may eliminate tax-saving opportunities.
The ideal buyer
Once you have an idea of value, create a profile of the buyer who would benefit most from purchasing your business. Instead of marketing to a generic buyer, consider to whom your business would be most valuable. Perhaps a local large company in the same industry would be interested in your location, customer relationships or some other valuable aspect of your operation. Maybe a long-time competitor would relish the chance to expand. Perhaps one or more of your own employees might be interested in ownership. Once you've identified the most promising potential buyers, you'll be better able to focus your sales efforts.
Present a clear and positive picture
Prospective buyers will ask a lot of questions about your company's finances, products or services, staff, customers, vendors, facilities and many more aspects of the business. Being prepared with the correct facts and figures will help to smooth the process. At a minimum, you should have five years of recent financial statements ready, including balance sheets and profit and loss statements. The potential buyer will also likely ask the IRS to send them copies of several years' tax returns, so it is important that you report the correct income and expenses on your returns filed with the IRS, to reflect the true profitability of your business. Also, make an effort to present an appealing picture to prospective buyers. Even though you are selling, be sure to maintain all the elements that originally earned your company its good reputation.
Work with a CPA
Before you decide to sell, consider what kind of future participation you'd like to have in the business. Many owners want to continue to be involved even after they have passed on the reins to a new management team. In other cases, the new owners ask for continued participation to ensure a smooth transition. Establish in writing what the outgoing owner's role will be, including any continuing financial interest in the business.
Selling a business is a complex process that carries tax and financial implications. CPAs are business experts who can help you determine the best way to benefit from the sale of a company you have worked hard to build.
Information and resources are available to the public on the MNCPA Web site (www.mncpa.org/information) including state and federal tax forms and information and financial planning information for individuals and small businesses. A free CPA referral service is also available on the Web site or by calling 800-331-4288. The MNCPA is part of the national 360 Degrees of Financial Literacy campaign to help Americans' improve financial literacy; information and resources are available at www.360financialliteracy.org.