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FRED (Fast Resources for Enterprise Development)
Document # 351
PREPARING THE BUSINESS FOR SALE April 2002
Description: Steps in selling a business include preparing a business
presentation package
Potential buyers of businesses will request several documents to make their
decision. The documentation will also be necessary if a bank is providing part
One of the most
of the funding for the purchase. Among the documents to have available are:
important questions
• Year end income statements and balance sheets for at least three years you’ll answer for every
and preferably for five years will be needed to determine the trends the potential buyer:
business is experiencing. Why do you want
to sell?
• Business tax returns for the past three years including the depreciation The answer sets the tone
schedules will be compared to the financial statements. for all future dealings
with that buyer, and
• Employee information including length of service and current compen-
how you answer is
sation will be needed to compare to industry averages. Buyers will
extremely critical.
want to know if employees intend to stay on after the sale.
• Inventory and equipment lists will be needed to verify collateral to a
banker and for justification of the price for the buyer.
• Current list of accounts receivable and accounts payable to compare to
the balance sheet.
• Customer list if the business has long term relationships and if part of
the price is dependent on those customers returning.
• Interim financial records including balance sheet, income state-
ment, cash flow and ledgers will be used to determine recent
changes in the business, seasonal fluctuations, selling patterns and
cash demands.
• Inspection reports, licenses, permits, leases, contracts, diagrams
and surveys if they are available can be helpful for determining a
value for the business.
Nearly every privately held business is operated in a manner that minimizes
the seller's tax liability. Unfortunately, the same operating techniques and
accounting practices that minimize tax liability also minimize the value of a
business. As a result, there is often a conflict between running a business the
way an owner wants and preparing the business for sale. Although it is
possible to reconstruct financial statements to reflect the actual operating
performance of the business, this process may also put the owner in a
position of having to pay back income taxes and penalties. Therefore, plans
to sell a business should be made years in advance of the actual sale. This
will permit the time required to make necessary changes in accounting
practices that demonstrate a three to five year track record of maximum
profits.
Audited statements are the best type of financial statements because an
outside expert has reviewed the process used to create them. However, it is
not uncommon for a business' financial statements to be reviewed or
compiled. Good financial statements don't eliminate the need for making
the business aesthetically pleasing. The business should be clean, the
inventory current, and the equipment in good working order.
Next, a valuation report should be prepared. The valuation report elimi-
nates guesswork and the painful trial and error method of pricing that so
many owners rely on. All too often, they arbitrarily decide on an excessive
price for the business and then go to the expense and effort of developing
prospective buyers, only to be unable to strike a deal. It is only after
gradually lowering the price and repeating this folly several times that they
learn what their business is really worth. Having a professionally prepared
The process for getting
appraisal eliminates this problem.
out of business Finally, a business presentation package should be prepared. All facets of
successfully requires the the business should be addressed in this document. This is similar to a
same amount of planning as business plan. The information needed includes:
going into business.
While the process should 1. A history of the business. Be sure to present the business in the
be easier, it is likely best possible terms without making false or misleading state-
to be less enjoyable ments.
and more stressful.
2. A description of how the business operates. This may include
policies, procedures, accounting methods and instruction
manuals.
3. A description of the facilities. This includes equipment as well
as space.
4. A list of suppliers.
5. A review of marketing practices. Include a sample of brochures
and advertising contracts.
6. A description of the competition. Keep this positive, not
negative. What are the strengths and weaknesses of the known
competition?
7. A review of personnel including an organizational chart,
description of job responsibilities, rates of pay, and willingness
of key employees to stay on after the sale.
8. Identification of the owners.
9. Explanation of insurance coverage.
10. Discussion of any pending legal matters or contingent liabilities.
11. A compendium of three to five years' financial statements.
Author: Arlene Soto, WSBDC
Sources: U.S. Small Business Administration
The Secrets to Buying and Selling a Business by Ira Nottonson
This information is provided by:
Wyoming Small Business Development Center
P.O. Box 3922
Laramie, WY 82071
Phone Toll-Free: 800-348-5194
FRED toll-free number 1-877-700-2220
SBDC website: www.uwyo.edu/sbdc
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