You are serious about selling your business. You want to do everything you can to ensure that the sale goes smoothly. What can you do to improve the chances and make the process go by smoothly?

Preparing your business to sell greatly increases the chances that you will actually sell it. Preparing your business for due diligence is simple. It involves preparing and organizing the typical documents that most buyers will request and review during the due diligence period.

Why should I prepare for due diligence? Can’t I just get the documents ready when the buyer requests them?

By preparing in advance, you may convince the buyer to agree to a shorter due diligence period, perhaps as short as 7-14 days. Your reasoning is that all the documents are prepared, organized and ready for review, and the process will be quick and simple. Immediately after an offer is accepted, the buyer can start reviewing the documents.

By demonstrating to the buyer that you have prepared the business for sale, you tell the buyer that you are serious. Buyers like dealing with serious sellers. Believe it or not, many sellers “throw” (their words, not mine) their business up for sale because they are curious what buyers think of their business and are trying to determine what it is worth. After a buyer has encountered an unmotivated seller, they become quite interested when they know you are 100% serious and have all your documentation in order. Buyers are more likely to spend time with a seller whom they know is serious and has prepared.

You increase the chances of

Should I buy new equipment before I sell my business?

As a general rule, you should not invest in new equipment or other hard assets when in the process of selling your business, unless it immediately increases your cash flow. Improvements to cash flow can come from both increased revenue and decreased expenses.

Why shouldn’t I invest in new equipment or other hard assets? Reason: You are highly unlikely to recoup your investment upon selling your business. Buyers value businesses based on cash flow. They multiply cash flow to arrive at a business value. There are only two parts to the equation – the multiple and cash flow. They may appreciate your investment in the new equipment but they are unlikely to assign any value to it. If the buyer is considering two similar businesses, then the age and condition of the equipment may be a determining factor, but cash flow always trumps everything else.

The points below also apply to other capital improvements, such as “fixing up” a restaurant by replacing tables and chairs, painting, etc.

There are two main steps when dealing with buyers:

Step 1 – Attracting buyers: This involves advertising your business for sale and convincing buyers to respond to your ad and request additional information. Buyers consider a limited amount of criteria when initially looking at your business. Their main criteria is cash flow, or profitability. Few will take into consideration the investments you have made in new equipment, or other capital assets. In other words, investing in new equipment will not produce a higher response to your ads,

Should I pay off my equipment lease before putting my business on the market?

Deciding to pay off your equipment lease before selling your business is primarily a mathematical decision with one unknown variable, the multiple. Let's look at a quick example to illustrate the math:

Example:

  • Asking price of business is $250,000.
  • Annual adjusted profit of business is $100,000.
  • Current business value = $100,000 x 2.5 = $250,000.
  • Equipment lease payment is $2,000 per month.
  • Paying off the lease will save the buyer $24,000 per year ($2,000 per month x 12 = $24,000 per year).
  • Annual profit will increase from $100,000 to $124,000.
  • New business value will be $310,000 ($124,000 x 2.5).
  • Difference between business values = $61,000.

Conclusion:

  • If the payoff is less than $61,000, then it would be wise to pay off the lease.
  • The example above assumes the multiple will be 2.5. If the multiple is less or more, than the formula will be different. Be conservative in choosing your multiple.
  • Don’t pay off your equipment lease until closing. Have this handled at escrow. You don’t want to pay off the lease and then not sell your business.
  • You must normalize or adjust your financial statements to determine the “annual profit."