Learn the essential steps to get your business ready for sale, from organizing financials to planning for taxes, in this first installment of our Business Sale Basics series: Prepare the Pieces.
Preparation is the foundation of any successful business sale. Owners who take the time to get their company “deal-ready” often sell faster, for more money, and with fewer surprises and snags. This post covers key steps to prepare your business before putting it on the market.
Key Steps to Prepare
1. Organize Financials & Records
Accurate and well-organized financials are critical. Buyers generally want to review at least three years of statements, so savvy sellers should review and organize the following items (ideally in a centralized digital data room or diligence binder).
- Accounting records (P&L, Balance Sheet, etc.) in current, accurate, and reconciled form (preferably with assistance of a professional accountant / CPA).
- Corporate documents: articles, bylaws, operating agreements, meeting minutes and resolutions.
- Contracts, leases, permits, licenses and intellectual property documentation in a centralized file.
2. Identify & Address Risks & Liabilities
Buyers are highly sensitive to hidden liabilities and risks. A smart seller should conduct a fresh risk assessment for potential yet-uncovered issues, as well as identifying and listing known disputes, litigation, and liabilities. Below are some key areas for review and assessment. Once identified, a prepared seller should form a plan to resolve or address each item of risk or liability.
- Confirm company and asset (real estate, operating assets, intellectual property, permits, licenses, etc.) ownership records reflect reality.
- Resolve disputes with minority owners.
- Review buy-sell agreements and stock restrictions, as well as employment agreements and restrictive covenant (nondisclosure / noncompetition / non-solicitation) agreements for key personnel.
- Evaluate tax accounts (federal, state and local).
- Consider any zoning, environmental, or other industry-specific regulatory issues.
4. Optimize Operations & Team Readiness
Buyers are often acquiring more than the business – they may also be taking the team that’s in place. As with all team-based pursuits, performance and value is heavily dependent on each team member and the process in place. A strong seller should take the steps below to improve the company’s team and methods prior to sale.
- Invest in management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
- Review key customer and vendor contracts to align the proper internal personnel and processes for continued success.
- Identify (and improve, where necessary) and document processes and systems to demonstrate stability.
5. Plan for Taxes Early
The tax structure of a sale can significantly impact a seller’s net proceeds. Early planning allows you to evaluate whether an asset sale, stock sale, or other structure is most favorable. A savvy seller should begin by considering the following tax matters.
- Alternative deal structures and impacts on taxes (asset sale, stock sale, or stock sale treated as an asset sale for tax purposes?)
- Evaluate potential tax elections as relevant (e.g., IRC §§ 338(h)(10) or 336(e)).
- Consult with a tax advisor to identify potential tax issues and opportunities, and improve tax efficiency of the deal.
Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.
