Ideally, plans to sell a company should be made years in advance of the actual sale. This will permit time to adjust accounting practices and demonstrate a three- to five-year track record of maximum profitability.
Nearly every privately held company is operated in a manner that minimizes 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 privately held company the way an owner wants and preparing the company for sale. Although it is often possible to reconstruct financial statements to reflect more optimistic operating performance, this process, known as recasting, may also raise doubts.
Audited statements are the best financial statements because they are easily verified. However, it is more common for most small companies’ financial statements to be reviewed or compiled.
Good financial statements don’t eliminate the need for making the company aesthetically pleasing. The premises should be clean, the inventory current and the equipment in good working order. In addition, financial and other records should be maintained in a neat and orderly manner.
To determine pricing, a valuation report should be prepared. This report eliminates guesswork and the painful trial and error method of pricing. All too often, sellers arbitrarily decide on a price for their company and then go to the expense and effort of developing prospective buyers, only to be unable to strike a deal. It is only after repeatedly lowering the price that they learn what their business is really worth. A professionally prepared appraisal eliminates this problem. Pricing a business is discussed in more detail in a later section.
A business presentation package should be prepared by an experienced professional. This document is extremely important because, if it is poorly done, otherwise interested buyers might get the wrong impression of the company. A buyer’s preliminary interest can turn on the inclusion or omission of a single fact.
All the following facets of the company should be addressed in this document:
- History of the company.
- Description of how the company operates.
- Description of the facilities.
- Discussion of suppliers.
- Review of marketing practices.
- Profile of customers/customer base.
- Description of the competition.
- 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.
- Identification of the owners.
- Explanation of insurance coverages.
- Discussion of any pending legal matters or contingent liabilities.
- Compendium of three to five years’ financial statements.