Preparing to Sell Your Business

Preparation is often described as cleaning up the books. In practice it is broader than that. It is a structured review of the company through the eyes of someone who will eventually need to verify what they are told.

Depending on the business, that review usually covers:

• Financial performance
• Accounting records
• Owner involvement
• Operations and systems
• Employees and management
• Customer relationships
• Vendor relationships
• Contracts and leases
• Licenses and permits
• Business assets
• Unresolved issues
• Transferability

The point of the exercise is to find, in advance, what a serious buyer is likely to question. This article stops where the business is ready to go to market. The stages that follow are covered in how to sell your business.

Financial information carries more weight than anything else in a sale process. Buyers, their advisors and any lender involved need to understand how the business performs and whether the reported performance can be supported.

Depending on the company, relevant records may include:

• Tax returns
• Profit and loss statements
• Balance sheets
• Bank statements
• Payroll records
• Accounts receivable
• Accounts payable
• Asset and equipment information
• Debt and financing obligations

Requirements vary by business, buyer and financing path, so no fixed list of documents or number of years applies universally. What matters more is that the records are organized, internally consistent, understandable to an outside reader and reconcilable where different sources should agree.

Where accounts are incomplete or inconsistent, the company accountant or CPA is usually the right place to start. Preparation here is a matter of accuracy rather than presentation, and the IRS overview of what is considered in the sale of a business is a useful reference for the kinds of records that ultimately matter.

Reported accounting profit is not always the figure a buyer or a valuation professional works from when evaluating a privately held company. Owner compensation, financing decisions and one time items can all distort what the business actually produces.

Depending on the size and structure of the company, the analysis commonly involves Seller's Discretionary Earnings for owner operated businesses, or EBITDA where a management team runs day to day operations. In either case, normalization attempts to separate the ongoing economics of the business from certain owner specific, discretionary or non recurring items, where those adjustments are legitimate and verifiable.

Two cautions matter here. Not every personal or unusual expense is an add back, and adjustments that cannot be supported by records tend to weaken credibility rather than raise value. The objective is a defensible earnings picture, not the largest possible one.

Preparation and valuation are connected for exactly this reason. Organized records and clearly supported normalized earnings are the inputs behind any credible view of value. The mechanics are covered in how much you could sell your business for, the methodology in the Kendall business valuation guide, and the multiples applied to earnings in valuation multiples explained.

One practical question sits behind much of how a buyer evaluates a small or mid sized company: what happens to this business if the current owner is no longer there every day?

Owner dependence commonly appears in:

• Revenue and relationships. Sales, customer contact, vendor negotiation and pricing decisions held personally by the owner.
• Operations and knowledge. Technical skills, production decisions or institutional knowledge that exists nowhere in writing.
• People and approvals. Employee management, hiring, scheduling and day to day authorizations.
• Financial control. Purchasing, collections and financial decision making concentrated in one person.

Heavy owner involvement is not automatically a problem, and many businesses sell with it. It does raise questions about transferability, and those questions are easier to answer when the owner has already mapped the role rather than being asked to describe it under scrutiny.

Documentation is the difference between a business a buyer must learn from conversation and one they can read. It also makes transition planning considerably more straightforward.

Depending on the company, useful documentation may include:

• Operating procedures
• Employee responsibilities
• Sales processes
• Customer service procedures
• Pricing processes
• Vendor and purchasing processes
• Inventory procedures
• Technology and systems
• Recurring administrative tasks
• Key contacts by function

Access and credentials are a transition matter rather than a marketing one. Plan how systems will be handed over securely at the appropriate stage, and do not circulate credentials during a sale process.

Buyers assess people as carefully as they assess earnings, because the workforce is usually what keeps the business functioning after closing.

It is worth understanding, in advance, who performs the important functions, which roles would be difficult to replace, how management responsibilities are divided, how compensation is structured, and whether any written employment or non compete agreements exist.

This is an internal review, not an announcement. Confidentiality strategy varies by transaction, and there is no universal rule about when employees should be told. The purpose at this stage is simply to understand the operational dependencies before going to market.

Two companies can report the same revenue and present very different risk. Composition matters as much as volume.

Considerations commonly include:

• Dependence on one customer or a small group of customers
• Recurring revenue compared with project based work
• Customer retention and length of relationships
• Contractual compared with informal arrangements
• Consistency of revenue across periods
• Seasonality where it applies

There is no target concentration percentage that every business must reach. The purpose of the review is to know what a buyer will notice and to be prepared to explain it.

For some businesses this is a minor item. For others, a single supplier, an exclusive arrangement or a favorable pricing structure is central to how the company operates.

Where vendor relationships are important, the questions worth answering before going to market are whether they are documented, whether they can transfer to a new owner, whether consent is required, and how much of the relationship rests on the current owner personally.

Agreements govern much of what can actually be transferred. Reviewing them early avoids discovering a restriction at the point it becomes a closing condition.

Depending on the business, that review may cover the commercial lease, customer contracts, vendor agreements, equipment leases, licensing agreements, financing obligations, franchise agreements where applicable, and partnership or ownership documents.

These are legal questions rather than brokerage questions. A transaction attorney is the appropriate person to interpret specific language and its consequences.

Many businesses operate under licenses or permits that affect how ownership can change. Requirements depend on the industry, the jurisdiction, the transaction structure, the buyer and the activities the business carries out. Florida businesses can check professional and occupational licensing requirements through the Florida Department of Business and Professional Regulation, and sales tax registration questions are handled by the Florida Department of Revenue.

Not every license transfers with the business, and some must be reissued to a new owner or applied for independently. Identifying which approvals apply, what they require and how long they typically take is preparation work rather than closing work. Where the requirements are complex, a licensing or regulatory professional should review them.

Sellers are often surprised by how much clarity a simple asset inventory creates. It establishes what is being offered and what is not.

Depending on the transaction, the list may include:

• Equipment and machinery
• Inventory
• Furniture and fixtures
• Vehicles
• Technology and software
• Intellectual property
• Domain names and digital assets
• Trademarks
• Customer information where transferable
• Contracts and agreements

Nothing on that list transfers automatically. Transaction structure and the final legal documentation determine what is included, excluded or assigned.

The most useful question an owner can ask during preparation is direct: what is a serious buyer likely to discover later?

Common answers include:

• Inconsistent financial records
• Unresolved tax or accounting questions
• Litigation or disputes
• Lease restrictions or short remaining term
• Licensing questions
• Customer concentration
• Owner dependence
• Employee or staffing issues
• Outdated or unsigned contracts
• Deferred maintenance
• Undocumented processes
• Unusual or unexplained expenses

The objective is not to conceal anything. It is the opposite. Issues identified early can be corrected, planned around or properly disclosed, and a matter that is disclosed and explained rarely carries the cost of one that is uncovered.

Due diligence preparation should begin long before a buyer requests anything. By the time a serious buyer is engaged, the value of preparation is already fixed.

Assembling material in the categories a buyer is likely to request reduces missing documents, contradictory information, slow responses and the surprises that create friction late in a transaction. A workable structure looks like this:

• Financial
• Operations
• Legal and contracts
• Employees
• Customers
• Vendors
• Assets
• Lease and facility
• Licenses

Not every category applies to every business. For a fuller view of what buyers examine and why, see due diligence when buying a business.

There is no universal answer, and any fixed rule about months or years should be treated carefully. What is generally true is that earlier preparation gives an owner more room to identify issues and make considered changes rather than reactive ones.

The appropriate lead time depends on:

• Condition of the financial records
• Operational condition of the business
• Degree of owner dependence
• Complexity of the company
• Reason for selling
• Desired timing
• Issues that need to be addressed

Some owners begin planning years in advance. Others need to move on a shorter timeline for personal or business reasons, which is a different exercise in sequencing and is covered in how to sell my business fast.

The common advice is to grow revenue before selling. That is too simple, and occasionally counterproductive. Preparation is better directed at the underlying quality and clarity of the business than at short term results produced for appearance.

Areas owners often evaluate include financial consistency, profitability, customer concentration, owner dependence, operating systems, management depth, documentation and unresolved problems.

Some of those changes take time to show. Others may not make economic sense immediately before a sale, particularly where they require capital that a buyer will benefit from rather than pay for. The question is whether a change genuinely strengthens the business or only makes it look better for a season.

Preparation does not change fundamentally by location. What can differ is the practical detail around a transaction.

Commercial leases and landlord consent are frequently a gating item for businesses operating from leased premises. Local and state licensing may need to be transferred, reissued or applied for by the buyer. Certain industries carry additional regulatory requirements that apply regardless of the transaction structure. Identifying these items during preparation rather than during closing is the practical difference.

Owners who want a considered view of where the business stands today can speak confidentially with Supreme Capital Business Brokers Kendall or review our selling a business service. Owners who want a documented opinion of value can review professional business valuation.

If you are considering selling, Supreme Capital Business Brokers Kendall can help you evaluate where the company stands today, identify preparation issues and understand the next steps before going to market. You can also reach us through our contact page.

Confidential inquiry. No obligation.