How to Position Your Company to Sell
Whether you’re ready to make the jump tomorrow or you have no plans in sight, it’s never a bad idea to start positioning your company to sell.
With a bevy of software and digital tools, including cloud accounting, it’s easy to get your company into a position that appeals to potential buyers. However, you’ll need to assess the competitive landscape and come up with a plan to get you started.
Start Planning Now
As a business owner, be aware it’s never too early to start positioning your business to sell, even if it’s not in the cards at the moment. Leaving the door open leads to a greater return on investment in the long run and less work when the time to sell does come. There are two primary ways to sell your business, both look very different from a tax standpoint, and preparing to sell for either way can be quite the process.
For the best results (and if you can afford it), work with a broker. They’ll help you drive up the price by having a bidding process and keeping the sale of your business confidential so the marketplace and competitors are not aware.
Here are the two different ways you can sell your business:
An asset sale
The most common way of selling a business, an asset sale usually leaves the seller with less money. Through an asset sale, ownership is transferred by the sale of assets.
Most buyers will want to purchase your company via an asset sale so they can have a better tax write-off, as well as limit any transfer of liabilities from your existing business. Asset sales are drastically different in their tax impact on you as a buyer, so understanding when you want to sell, how much you want to net from the transaction is pivotal in the exit planning process.
You’ve heard it before, but it’s worth saying again – it’s all in the details. Buyers look at everything before going all in, so make even the smallest improvements to your accounting system to make it more appealing to buyers, including:
- Good normalized EBITDA financials for the past 3 years and rolling 12 months
- Terrific and accurate accounting processes and record-keeping
- Accurate inventory
- GAAP compliant financials
- And so much more
Of course, this is time-consuming, but making these adjustments will improve your current accounting system and smooth the process in the long run
A stock sale
A stock sale is more ideal for most business owners, but very hard to obtain. Through a stock sale, ownership is bought through the purchase of stock. However, the buyer also takes ownership of all risks with nexus issues, litigation, etc.
If you have a goal of selling your business via a stock sale (most tax-efficient) you have a lot of preparation to do, years in advance, to ensure a buyer will be open to that type of transaction. The longer it takes to prepare your business for a stock sale, the more opportunity there is for the buyer to uncover potential risks.
For a stock sale to work in your favor, you’ll want to have:
- Compliance with federal and all state tax agencies (Income tax and sales tax)
- A thorough state nexus review should be performed
- Compliance with environmental agencies
- No open litigation or potential litigation issues
- For S-corporations, no disproportionate shareholder distribution issues
- And so much more
Look at Your Business from an Outside Perspective
Work on the next area, which is taking a step back from your business to do some serious evaluations. What you see as a gorgeous house, potential buyers may see a construction project, with faulty wiring and other structural issues that would not pass an inspection.
So step back, and ask yourself these questions:
- Who might be interested in buying?
- What would they look for when buying?
- Would you buy your business at the price you are asking?
- What issues exist within your business?
Areas that a buyer looks at and is concerned with, that they use to drive down the purchase price of your company, and/or remove the possibility of it being a stock sale, include:
- Sales concentrations, whether this is by customer, product, territory, etc.
- Yes, you may have strong sales figures, but concentrations represent risk to a potential buyer, and risk drives down the price
- Marketing and customer acquisition costs
- We’ve all seen the grimaces on the investors’ faces on Shark Tank when they hear about long lead times and high costs to acquire customers. Outside buyers will want to grow your business to get a faster and better ROI on their purchase and these leading indicators will let them know how expensive it will be to do so.
- Open litigation
- Buyers will be concerned with any potential and existing litigation that your company is involved in with buyers, vendors, employees, etc.
- Proper and timely tax return filing
- A huge area of concern for a buyer is the existence of any state nexus issues. With the arrival of the Wayfair decision back in 2018, all the states changed their rules for what activities qualify to create nexus within their states, which would prompt you to file and remit sales and income tax returns. All states are different, but if you are doing more than $100k in a state and have not filed a return there, you should contact your accountant to start doing a nexus review.
To get ahead in any business, you have to be competitive. Here is where you want buyers in your market to know your name—and you need to know your potential buyers. This attracts buyers and heightens willingness to pay for your product and your business as a whole entity. Keep positioning your company in a competitive context to drive the competition in your favor.
Nail Down Your Financial System
Probably the most important aspect of growing your business for selling is your financial system. However you manage your accounting, this needs to be done in an orderly manner. Buyers look at your financials and financial systems before even considering the acquisition.
Not only should you have good numbers, but your systems should be strong and well organized. You need to maintain several documents that will be required during a sales process for your business. These include:
- Digital photos of your business and assets
- An inventory list
- Financial statements for three years
- Average working capital position
- Business formation documents
- Customer contracts/agreements
- Sales by state and tax filings by state (nexus review)
- And so much more
You’ll also need financial ratios and trends, revenue/profit projections, purchase contracts, and agreements for a multitude of areas. It can be a lot of paperwork, which is why turning to a trusted accounting partner is one of the best ways to ensure you have everything you need before selling.
Turn to a Trusted Accounting Partner
Your trusted accounting partner will make sure your finances are in order and you have all of the necessary documentation ready to go before you begin speaking with buyers. They’ll work with you to create a plan that puts you in the best position to sell.
Here at U-nique Accounting, we understand the need for accounting services and have experience helping business owners position their companies to sell. Contact us today to learn how we can take your business to the next level.