How to Prepare Your Business for Sale

Between 2001 and 2007, Julie Northcutt grew her senior home-care agency, Chicagoland Caregivers, to $2.5 million in annual sales before selling it to a large national company in the industry. But she was far from ready to retire and spend her days sunning on the beach. She already had a new business concept in mind.

“I’d had the idea for my other business, CareGiverList.com, for a few years and knew there was a huge need for this,” she says. “And I knew I needed to either expand my first business or sell it in order to continue competing effectively, since lots of new companies were coming into the industry.”

In 2005 she started receiving letters from potential buyers, one of which caught her eye: a large public company that was planning on buying several businesses like hers. “It turned out to be the perfect time to sell [in 2007] because a year later the industry became more saturated and credit disappeared. It was nice to have the money from the sale of my first business to invest in my new one.”

Northcutt’s primary advice for owners thinking about selling: “You’d better figure out what you want to do next. It might sound good to be able to sit on the beach all day, but people who are entrepreneurs usually can’t do that.”

Eric R. Voth, a serial entrepreneur who has sold five independent companies and the author of How to Sell Your Privately Owned Company, says owners can use today’s challenging economic times to their advantage by putting greater emphasis on operating leaner and meaner. “Trim expenses and increase sales with an eye toward better profitability. This will allow you to achieve maximum value, which translates into a higher asking price when you put your company into play.”

Most experts and owners who have sold businesses agree that it’s really never too early to begin planning for the eventual sale of your business. “Every small businessperson should continually consider how to position his or her business for sale,” says Vicki Donlan, a consultant and business broker. “Too often, small business owners get excited about new ways to grow and invest in new directions that don’t lend themselves to the potential for a sale.”

“Place your business in a position to sell well before you actually need to sell,” adds Chuck Morton, cochair of the Business Transactions Practice Group of Venable LLP, a law firm. “This effort should include having your corporate records in order and knowing what the drivers of value are for your business in the marketplace.”

Matt Slappey, a business transfer specialist with Murphy Business & Financial Corp., stresses the importance of making sure all your tax returns have been filed correctly. “Also it’s preferable to have your financial statements reviewed or audited by a certified public accountant,” he says. “This helps buyers feel more confident in the numbers.”

It’s a matter of substantiating your cash flow to potential buyers, says Tony Calvacca, a principal of New York Business Brokerage who specializes in the valuation and sale of privately held businesses. “Buyers today want businesses with increasing revenue and provable cash flow. A truly marketable business will demonstrate revenue growth and provide federal tax returns, income statements, sales tax returns, and payroll records for at least the past three years.”

Not surprisingly, the appeal a business has to serious buyers usually comes down to the price. “Pricing is the single most important factor in determining whether or not a business sells,” says Calvacca. “Regardless of how well-positioned a company is, an overpriced business will often remain on the market for a long time and receive minimal buyer attention.”

“Set a price that’s fair given the current conditions in the economic cycle,” says Morton. “Trying to time the market and extract every penny out of the business is often a mistake.”

Between 2001 and 2007, Julie Northcutt grew her senior home-care agency, Chicagoland Caregivers, to $2.5 million in annual sales before selling it to a large national company in the industry. But she was far from ready to retire and spend her days sunning on the beach. She already had a new business concept in mind.

“I’d had the idea for my other business, CareGiverList.com, for a few years and knew there was a huge need for this,” she says. “And I knew I needed to either expand my first business or sell it in order to continue competing effectively, since lots of new companies were coming into the industry.”

In 2005 she started receiving letters from potential buyers, one of which caught her eye: a large public company that was planning on buying several businesses like hers. “It turned out to be the perfect time to sell [in 2007] because a year later the industry became more saturated and credit disappeared. It was nice to have the money from the sale of my first business to invest in my new one.”

Northcutt’s primary advice for owners thinking about selling: “You’d better figure out what you want to do next. It might sound good to be able to sit on the beach all day, but people who are entrepreneurs usually can’t do that.”

Eric R. Voth, a serial entrepreneur who has sold five independent companies and the author of How to Sell Your Privately Owned Company, says owners can use today’s challenging economic times to their advantage by putting greater emphasis on operating leaner and meaner. “Trim expenses and increase sales with an eye toward better profitability. This will allow you to achieve maximum value, which translates into a higher asking price when you put your company into play.”

Most experts and owners who have sold businesses agree that it’s really never too early to begin planning for the eventual sale of your business. “Every small businessperson should continually consider how to position his or her business for sale,” says Vicki Donlan, a consultant and business broker. “Too often, small business owners get excited about new ways to grow and invest in new directions that don’t lend themselves to the potential for a sale.”

“Place your business in a position to sell well before you actually need to sell,” adds Chuck Morton, cochair of the Business Transactions Practice Group of Venable LLP, a law firm. “This effort should include having your corporate records in order and knowing what the drivers of value are for your business in the marketplace.”

Matt Slappey, a business transfer specialist with Murphy Business & Financial Corp., stresses the importance of making sure all your tax returns have been filed correctly. “Also it’s preferable to have your financial statements reviewed or audited by a certified public accountant,” he says. “This helps buyers feel more confident in the numbers.”

It’s a matter of substantiating your cash flow to potential buyers, says Tony Calvacca, a principal of New York Business Brokerage who specializes in the valuation and sale of privately held businesses. “Buyers today want businesses with increasing revenue and provable cash flow. A truly marketable business will demonstrate revenue growth and provide federal tax returns, income statements, sales tax returns, and payroll records for at least the past three years.”

Not surprisingly, the appeal a business has to serious buyers usually comes down to the price. “Pricing is the single most important factor in determining whether or not a business sells,” says Calvacca. “Regardless of how well-positioned a company is, an overpriced business will often remain on the market for a long time and receive minimal buyer attention.”

“Set a price that’s fair given the current conditions in the economic cycle,” says Morton. “Trying to time the market and extract every penny out of the business is often a mistake.”

All the experts agree that it’s important to have a professional business valuation performed by an independent third party before you set a price for your company. “Owners almost always have an inflated value of their business because of the time, energy, and heart they put into it,” says Slappey. “A valuation will consider similar business transactions and the return on investment your company may provide.”

Beyond the financials, Calvacca says factors like the outward appearance of your operations and the morale and enthusiasm of your employees also go a long way toward making your company more marketable. “Poor appearance and inattentive workers are negative factors frequently overlooked by sellers that often jeopardize deals.”

Northcutt notes that owners who sell their companies often have to sign noncompete agreements with buyers. “I was only able to work on the back end of my new business for two years, even though the buyer knew I was doing a Web site for the industry,” she explains. “I was so happy when the two years were up because it’s weird having restrictions.”

Voth stresses the importance of ensuring a high level of professionalism in your company before putting it on the market. “You want potential buyers to see a thriving, well-run company that’s poised for continued prosperity. In short, you want them to see a winner.”

He recommends taking steps such as establishing specific time frames for the accomplishment of goals and objectives and communicating them companywide. “This includes a company mission statement,” he says. “Review your goals and objectives on a regular basis and update them when necessary.”

Slappey advises clients not to discuss the sale of their company with employees. “This can cause a lot of worry and stress for them about the security of their jobs -- and usually for no reason.”