Key Issues to Consider Once You Decide to Sell Your Business
Publication date: April, 2006
Financial Records: The sales or "list" price of a business offered for sale is almost always determined with reference to a multiple of the cash flow (discretionary cash flow or EBITDA – earnings before interest, taxes, depreciation and amortization) generated from operations. The size of the multiple is dependent upon a number of different circumstances, including the nature of the industry in which the business operates, earnings trends, sales of similar businesses, the competitive nature of the market in which the business operates, the nature of the customer base, available financing and many other factors. Since all business sales are based upon a multiple of the cash flow (either EBITDA or Discretionary Cash Flow), the seller must have all of the financial records available and well organized. It is typically necessary to have three years of financial statements and tax returns. If there are substantial differences between taxable income and book income (e.g. cash basis vs. accrual), those must be identified and explained. Identifying all discretionary, non-operating type expenses along with any other unusual, non-recurring or "one-time" expenditures and losses will also be important.
Operations: The Seller will want to identify all products and services offered by the business and the specific markets served. In this regard, it will be important to define the strategic advantages enjoyed by the business in its respective niche as well as comparative gross profit margins for each product and service.
Growth Opportunities: While buyers will purchase a business at a price predicated on current and historical cash flows, the main motivation for the purchase will be the buyer's ability to grow the business beyond its current size – that is, there should exists future opportunity. Therefore, it is important for the Seller to visualize those growth possibilities and define them tangibly in terms of product growth, adding existing products to new markets, better market penetration, wider geographical distribution, etc.
Personnel Structure: In addition to ensuring a transition of the current customer base in an acquisition, the buyer will have concerns about maintaining the existing management/employee infrastructure and their willingness to remain in place after the sale is completed. The Seller should have an Organizational Chart with titles and responsibilities (ask a Quantum Business Consultant for an example format). Ideally, you should include a key employee profile which details the job description, salary history and the employee's longevity with the business.
Structuring the Sale: The majority of sales of privately held businesses are structured as an asset sale (versus sale of stock). This type of sale will result in the buyer receiving an increased or "stepped-up" basis in the assets purchased (and hence, increased depreciation tax deductions) and minimizing exposure to unknown claims and contingent liabilities that may result with a stock sale. The seller must understand the tax implications of this transaction under every scenario so that there will be no surprise at closing or when preparing tax returns later. Remember, it's not what you get but what you keep that counts!
Available Financing: Most owners would prefer to be cashed out of the transaction at closing and provide no seller financing. However, most lending institutions whether SBA or conventional, will pay close attention to the nature of discretionary add backs in deciding whether there is sufficient cash flow for debt service. In analyzing these cash flow components, the financing companies will consider: required compensation of new owner, the debt amortization period, debt coverage ratios and available collateral to determine the extent of financing offered. Therefore, if third-party financing is limited, the seller may have to finance a portion of the sale or risk limiting the number of otherwise qualified purchasers.
If you are considering the sale of your business, please contact a Quantum Business Solutions Network business consultant for a free consultation.
