Preparing Your Business for Sale or Acquisition:  Key Considerations and Common Pitfalls

Selling or buying a business can be a transformative moment for any entrepreneur. Whether you’re the seller seeking to cash out and move on to new ventures or the buyer looking for a growth opportunity, preparation is critical to ensuring a smooth transition. Unfortunately, small business owners often overlook key steps in this process, leading to missed opportunities, reduced valuations, or failed transactions altogether. Here, we’ll explore how to prepare your business for sale, what to consider when buying a business for growth, and common mistakes to avoid. 

Messy Books

When selling a business, your goal should be to position it as an attractive and sustainable asset to potential buyers. Common themes that come up over and over again that could help or hinder the sale of your business includes keeping clean and accurate financial records. One of the biggest red flags for potential buyers is messy or incomplete financial records. Buyers want to understand the financial health of your business, and that requires clear, organized books. Invest in a qualified accountant to ensure your records are up to date and error-free. Provide three to five years of financial statements, including profit and loss statements, a recent balance sheet, and tax returns. The profit and loss should be matching the tax return. We understand there are businesses with a lot of cash, but a bank lender that the buyer is using will not give you any credit for the cash that is not reported. Whatever not-so-perfect practices you might be using when reporting financials to the government should be stopped a minimum of three years prior to the sale of your business.

 Establish a Succession Plan

Many small businesses are heavily dependent on the owner’s involvement, which can make potential buyers hesitant. Creating a clear succession plan—identifying individuals or systems to take over key responsibilities—adds value and demonstrates that the business can operate independently of you. Buyers are more likely to invest in businesses with strong, competent teams. Having a "key man" or "key woman" in place who understands the day-to-day operations can ensure continuity. Invest time in training your leadership team or senior employees so that they can confidently take on responsibilities when you step away.

 Manage Inventory Levels if/when that is an Element of Your Business

Many business owners neglect inventory management during the sales process. Insufficient inventory or a system to track it can disrupt operations during the transition and cause delays or customer dissatisfaction. Make sure you have an adequate supply of inventory to keep operations running smoothly post-sale. Some times the inventory or accounts receivable will be deemed “working capital” to a buyer. We’ve seen knock down drag out fights regarding this element so have a clear picture of what you’re willing to accept by being reasonable. Know the answer to this question: If I took over your business today, how much working capital would I need before cash starts flowing to pay for on-going fixed and/or variable expenses.

 Be Realistic About Your Business’ Value

Many sellers overestimate the worth of their business, leading to unrealistic expectations that can derail negotiations. Obtain a professional valuation (there are multiple methods and kinds of valuations so be aware of this. There can be a whole blog post about valuations) to set a fair asking price based on industry benchmarks, financial performance, and market conditions. We offer these valuations via Transworld Business Advisors of La Grange OR we can always direct you to someone that does certified valuations, but those are definitely more costly.

 Time Your Communication Wisely

Telling employees too early about the sale can lead to uncertainty, fear, and potential disruptions. Wait until the deal is finalized to share the news, and do so with a thoughtful communication plan to reassure staff about their future. There is a great podcast about this via “The Deal Board” that is worth checking out via this link: https://thedealboardpodcast.com/episodes/confidentiality/

 Final Thoughts

When you’re preparing to sell your business, success lies in preparation and due diligence. For sellers, focus on creating a business that is attractive, sustainable, and independent of your direct involvement. Avoid these common pitfalls outlined above and engage the services of a intermediary or business broker early on. We see such heartache for those businesses that could have made good, simple changes along the way to create more value for their business. We also see a lot of “I’m just done. I can’t do this anymore” which is a fair and logical feeling, but even engaging a business advisor to make sure you’re plotting the right path for exit can pay itself back many times over.  Don’t be afraid to ask questions! Business owners live on islands most of the time as they don’t want to disclose finances. Get over this quickly as you want to make sure you’re moving in the right direction. So often businesses owners run their business by looking at the balance in their checkbook. If there is money in there, they must be successful. This is not always the case so engage someone that can help you analyze what is working and what is not working. Good businesses with clean, explainable financials sell A LOT quicker than businesses that require a lot of discussion to get to the core of what is attractive about the business. Finally, we talk about, “if you just” a lot. This means business owners think the value of their business is tied to the potential of this business and “if you just did X, then the business would be so great.” It’s not. Read that again, the value of your business is not based on potential. It’s based on what the business is doing today and the historical figures, right now in this very minute. Wild swings of up and down success and not-so-great times over the years can make a buyer very nervous about the volatility of your particular business or industry. Do not be concerned about paying a business broker commission to sell your business. We see folks penny pinching and then fail miserably trying to do it on their own by losing value instantly that wasn’t taken into account. A business is only worth what someone is willing to pay for it so use someone that can see comps on businesses sold, know how the SBA lending process for small business acquisition works AND has a lot of great buyer contacts. When the pipe bursts at you home, you call an experienced plumber to fix it. When you need and/or want to explore the process of selling your business, engage a good business broker or intermediary to help with the confidential process.

Matt Friscia
Transworld Business Advisors of La Grange
26 S. La Grange Rd., Suite #106
La Grange, IL  60525
708-328-8800 – Main line
708-328-8886 -  Direct/Text
www.tworld.com/lagrange

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