Document Sample
					                        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
                              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
                              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
                              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: