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Michael Katz
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What to Consider Before Selling Your Business

WHAT SHOULD I THINK ABOUT BEFORE SELLING MY BUSINESS?

Selling my BusinessYou’ve worked your tail off. You spent the endless hours tuning and retuning your business and now have it to the point where you are ready to exercise your exit plan. You’re ready to sell it to a person worthy of owning your start-up baby. Now what?  Before selling your business, our business lawyers have some ideas you should consider.

There is no cookie cutter way to sell a business because each business is unique. Here however are some things that you must have in place before you sell.

1. First, give your self at least 4-6 months time to organize the business for sale. You should not make the decision to sell on a Monday and then contact a broker on Tuesday or worse, simply list it yourself on the web.

2. During this period organize your financial and business books and records. No one will want to buy a business that has back-of-the-napkin records. Your business records and financial records must be organized in a generally acceptable business manner.

3. Organize your client lists (if any) or otherwise take stock of from where your customers come. Again, this will help the prospective purchaser understand your business.

4. DO NOT TELL YOUR EMPLOYEES what you are thinking! That will cause havoc and dissension in the ranks. There will be a time when they are informed; but not at this point. Instead, determine the status of your employees. If you have employees that have signed an employment agreement with you, you must first consult the agreement to see if there are any limitations in your right to sell the business. If your employees are “at will” (as are most employer-employee relationships) meaning that he or she can leave and you can terminate the employee at any time for any reason (or no reason), determine which are key to the success of the business. With all due respect, some employees are more important to you success than others.

5. If you have an inventory of products, make sure that you have a proper inventory including costs on hand.

6. If you have contracts with vendors or suppliers, make sure that they are up to date.

The reason that you are performing this housekeeping is to determine the value of your business. That brings us to the next step.

What is My Business Worth?

7. Have the business valuated. That is, find out what it is worth. You will hear some folks tell you that the “rule-of-thumb” is to multiply (called the “multiple”) your gross revenue by “x” and that will be your selling price. The problem is that your gross revenue may be $1,000,000 but your costs may be $1,000,001 in which case the business loses money every year. Who is going to pay a premium for a failing business? Regardless of the multiple that you may want to use, using your gross revenue number guaranties that you will fail at selling. Instead, business valuators look to your financial statements to figure out what you as the owner benefit from in owning the business. This makes sense for several reasons:

i. First it takes into consideration the fact that each business has costs associated with the operation that do not add value to a sales price; and,

ii. Second, it takes into consideration what you as the seller have realized from your hard work.

The valuator will look at: (i) the salary that you are able to pay yourself; (ii) any benefits you enjoy through the business (including health insurance, a vehicle allowance, vacation with pay; etc); (iii) any inventory that you have purchased that is on-hand and can be purchased from you at the time of the sale; (iv) the “profit” that is left at the end of each year that you pay yourself; and, (v) similar benefits.

The valuator will then look to recent sales of similar businesses not only in your area, but around the country, to determine what in fact such businesses are selling for. It is here that an approximate multiple can then be used on the final benefits number that you enjoy from the business.

It is well worth the time, effort, and money to have a professional valuator perform this task.

8. Once you have the value squared away, and assuming that you still want to sell(!), it is time to consult your professional business advisers – your attorneys, accountants, and any others that provide you with sound business advice. They will then help you prepare the business to maximize the return on your investment. In some cases these folks will advise you to tweak one area or another to accomplish this.

Making the decision to sell your business and reaching that final goal is a fairly complex project. We at Corporon and Katz pride ourselves on advising our established and our new clients on how to best position the business for sale. In many cases we can offer you a flat fee alternative to the costly hourly fee that others charge.

Please call our business attorneys us to discuss selling your business and to see how we can help.

Michael J. Katz, Esq

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