Preparing To Sell Your Business

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Step 1 - Preparation

How To Add Value To Your Business By
Preparing These 3 Things

We've talked about preparing your Financial Statements as an important step toward getting the best price when you sell a business. Now let's talk about some other aspects of your business that, with a little preparation, can increase your selling price.

In this section we will discuss your company's leases, contracts (with customers and/or suppliers), inventory and assets. And we will talk about what you can do during the preparation phase so that these things add value to your business in the eyes of the prospect.

1.) Making Your Lease More Appealing To The Buyer

If you are renting and your business depends heavily upon location for it's success, than the specifics of your lease will be key to a successful sale.

In addition to the monthly rent amount, buyers will look for two significant features in any lease:

1.) Assignment - Can your lease be taken over by the buyer without your landlord's approval?

2.) Length - How much time is left on the lease and does the renter have the option to extend it.

Leases are usually written with a "no-assignment" clause. This means your buyer can not take over your lease without the landlords consent. Unfortunately, some greedy landlords will see this as an opportunity to dramatically increase the rent - often to the point that it kills a sale.

You should read your lease now to see just what the terms and limitations are concerning assignment.

If you have only a year or two remaining on your lease, a smart buyer will make any purchase offer contingent upon his ability to negotiate a long term lease with the landlord. At that point, the fate of your sale will be out of your control and rest in the hands of the buyer and landlord.

Even if you have a few years remaining on your lease you should consider negotiating a new lease now. You don't have to tell the landlord that you are selling, just that you'd like to lock in a good lease for the long term.

In addition to adding a clause that will allow you to transfer the lease, you should attempt to get as many options-to-renew as you can.

Even if you have to start paying a higher rent it will be worth it. A small increase in your rent won't make your business less appealing to buyers, but a lease that is about to expire or can't be assigned will.

2.) Know The Value Of Your Contracts

Gather up all the contracts you have with customers, suppliers, independent contractors etc. and review the terms of each.

Make a list of all your agreements and include the expiration date and general terms. For certain types of businesses, most buyers will request just such a list early on in their evaluation process. To protect your confidentiality do not include the names of the companies or any contact information.

If possible, try to evaluate these contracts from the buyer’s point of view. Which of these agreements would you, as the buyer, be glad to assume? Which ones would you want to avoid?

In truth, that question may be impossible to answer. One buyer may love the fact that you have a contract locked in place to provide you products to a customer for the next year or more. Another buyer may view that exact same agreement as a negative believing he could negotiate a better deal.

As with leases, a contract may or may not be assignable. So some agreements that are no longer attractive may not need to be assumed by the buyer. Likewise, before you promote the value of a low cost contract with a supplier, you want to make sure that contract will pass on to the new owner - don‘t just assume that it will.

Of course, if you have a contract in place, and based on current market conditions you know it's a good deal for your company, and you know it is in fact transferable to a new owner, then you certainly will want to play that up. This is exactly the kind of turn key feature that entrepreneurs are looking for in an existing business.

The bottom line is that you want to know the details about all your contracts with customers and suppliers ahead of time so that you can correctly answer all the buyers’ questions. At some point the buyer will review your contracts in greater detail - usually in the Due Diligence phase. So you don’t want to make promises that later turn out not to be true.

And just as importantly, you want to maximize the value, in the buyers eyes, of the contracts they will inherit.

3.) Evaluate Your Assets & Inventory

Sell or dispose of any unproductive assets such as old machinery or unused computer equipment. A buyer won't pay for them and they only detract from the overall appeal of your business.

Likewise, now is the time to finally give up on all your outdated, obsolete and damaged inventory. Your customers haven't bought it and neither will your prospect.

Better to liquidate these assets now and get what you can for them - even if you take a loss. You may be able to donate some of these things to charity and get a tax break.

Padding your asking price with old, unwanted inventory or unused equipment won't make you money but it will slow down the sales process and possibly make the negotiations very contentious. Make it easier for your prospect to buy your business - get rid of this dead weight.

Next, look at the machinery and equipment that is still in use. Is any of it in need of repair or replacement? It so, invest in those repairs and replacements now - it will be well worth it. The buyer wants a turn key business - one with no need for immediate investment on their part to fix things.

If, after observing your facility, the buyer believes he'll have to sink a significant amount of money into updating the operation, it can only lower the selling price. Also, it will make your business look less desirable compared to the other, more modern businesses the buyer is considering.

How To Make A Good First Impression

Take a look around your office, store, warehouse or whatever your location. What kind of first impression do you think it will make on a visitor?

Is the office clean? The warehouse organized? Do employees greet visitors with a smile or with a sneer? Do they acknowledge visitors at all?

If you set aside a place outside for employees to smoke, is that area littered with hundreds of cigarette butts?

Admittedly, these are minor things that may have no effect on the business' bottom line. But to a buyer who is thinking of putting his life savings into the business, these small details send a powerful message.

There is no need to make major renovations. Small repairs, such as replacing a cracked window or fixing the sign out front can be done quickly, cheaply and will greatly improve the initial impression the buyer gets when he first lays eyes on your business.

If any of the needed repairs are the responsibility of you landlord, request that the repairs be made ASAP.

All of the steps mentioned here will take just a little time and almost no money. Yet, they can have a major impact on the sale of your business. While much of this may be common sense, even obvious, you would be amazed how few business sellers will take these simple steps when they put their business on the market.

This is good news for you because with just a little thought and effort up front you can make your business stand out from all the other less prepared businesses your prospect will see.

NEXT: The Selling Memorandum - How To Put One Together And Why It's Such An Important Sales Tool