You may have spent years building a business from the ground up, utilizing personal capital and investing in daily sweat equity with the hope of someday becoming profitable. For many entrepreneurs, the ultimate goal is to establish a profitable business to then sell. Selling a business is no easy decision and no easy task. A simple mistake can cost you thousands – or even millions – of dollars. No matter if your business is a small family-owned company, or a large corporation, it is important to know what you are doing.

Important Documents & Information for Selling the Business

It is important to understand that to transfer a business in Pennsylvania, it requires specific written contracts. Prior to placing the business for sale, there is a whole list of items that it is important to compile. It includes things such as:

• The business’s federal income tax returns.
• The business’s lease and lease-related documents.
• A list of the business’s fixtures and equipment.
• Copies of any equipment leases.
• The last three years’ profit and loss statements.
• A copy of the franchise agreement, where applicable.
• An estimated amount of inventory left in the business, where applicable.
• A list of any loans against the business (amounts and payment schedule).
• The names of any external advisors.

Looking at Whether the Business Will Be Profitable

Make sure to locate and ensure that the statements are all up to date. If you are only halfway through the year, it is important to collect the previous year’s tax returns as well as year-to-date numbers. It is extremely beneficial to organize all of these documents in a way in which you would be able to present them to any potential buyers – favorably on paper. Commonly pricing a small business is based on the business’s cash flow. This includes things such as the owner’s salary and benefits, the profit of the business, any depreciation, and other non-cash items. Buyers will want to know what the income and expenses of the business are in order to determine if they can make the payments on the business and still remain profitable and financially secure.

How you have formed your business is also important. Dependant upon whether you have a corporation, partnership, or sole proprietorship, how the business is legally formed can have a large impact on determining a business’s tax status and may also impact some businesses on financing.

Why Would Someone Want to Buy Your Business?

It is important for a business owner to price the business reasonably, so as not to scare off would-be buyers. Generally, on average, it takes anywhere from five to eight months to sell most businesses, though others will require more or less time. There are many reasons as to why people buy businesses. These may include things such as the potential buyer:

• Having been or is expected to be laid off or transferred.
• Is dissatisfied with his or her current job.
• Desires to be more in control of his or her life.
• Desires to do his or her own thing and be autonomous.
• Is retiring early.

Though not always true, today the average individual buyer is mostly looking to get out of an unpleasant job situation or replace a job that has been terminated in one way or another. Almost half of potential buyers will have less than $100,000 to invest in the purchase of the business, but will receive some financial assistance from family members. It is likely that the buyer will be a first time business owner as well. The main reason that an individual looks to buy a business is to be his or her own boss; they do not want to work for anyone else. When looking at potential buyers, it is important to keep in mind the traits of a willing buyer:

• Strong desire to buy the business.
• An urgency to buy the business.
• The financial resources to be able to buy the business.
• The ability to be a self-sufficient decision-maker.
• Reasonable expectations of owning a business.

Common Buyer Questions

Additionally, it is important to know – and to prepare for – what a buyer will likely ask you. This includes questions such as:

• How much money is it to purchase the business?
• What is the fair market value of current inventory?
• What is the current debt of the business?
• Will the seller remain on after the sale of the business to properly train the buyer?
• Why is the business special?
• What is the annual increase in sales?
• How can the business grow?
• How can the buyer add value?
• What do profits look like during both good and bad times?

Cash Flow is Key

Most buyers are looking to buy a business with cash flow. Cash flow is not the same thing as profit, though buyers look at that as well. They will also look at any additional compensation to both employees and family, large, one-time expenses, depreciation, amortization, interest expenses, and owner prerequisites. Additionally, things such as a business website, which can be beneficial to the business, can be another plus.

Since appearance is everything when selling a business, replacing old, worn-out equipment should be done prior to selling.  Even small things such as repainting, fixing broken signs, and replacing old carpet can make a big difference. Anything you do that increases the business’s sales will also increase profits and cash flow.

Other Value Adds

Not only does the appearance of the business have a major impact on selling, but also so do other things that add value, such as the business good will, customer lists, well-maintained equipment and inventory, trade secrets, productive employees, customized software, and any proprietary products or techniques.

By remedying anything that is wrong with the business, and eliminating any problems that can occur during the sale, you will set yourself up for success. Though it may seem counterintuitive, if the business does not have an operations manual, now is the time to produce one. Even things as simple as a manual can increase the value of the business, or at the very least create a more professional appearance – even if it simply covers the basics. With the exception of proprietary materials, anything that a new owner may find helpful is good to present to potential buyers

The Written Proposal

When a buyer is serious about your business, he or she will submit an offer or proposal in writing. This may be contingent upon certain things. This usually includes a detailed review of financial records, lease arrangements, franchise agreement (where applicable) or other terms. You have the opportunity to accept the buyer’s offer or counter it, try to find an agreeable number in between both of yours. It is important to note that if you do not accept the offer, the buyer can withdraw it at any time. It is important to look at all offers very carefully, taking into account all areas of the proposal.

Removal of Conditions and Taking Possession

Once you and the buyer come to an agreement, you must both work to satisfy and remove any contingencies of the offer. The buyer may choose to bring in outside advisors to review all information. Once the contingencies have been met, you (or likely your attorney) will draw up and sign final documents; this is the closing. Once it has been completed, money is then distributed to the old owner, and the new owner will officially take possession of the business.

What to Remember When Selling Your Business

To review, there are many things that you can do to aid in the sale of your business:

• Remain working diligently – do not slack off simply because you are looking to sell.
• Take care of anything that needs to be upgraded or repaired as it makes your business more appealing – this includes both outside appearance (e.g. burnt out lights) as well as any equipment that no longer works (this may be appropriate to remove entirely).
• Continue stocking inventory as usual – otherwise your business may look neglected and present poorly.
• Remove anything that is not included in the sale of the business, and any items that are inoperative or unnecessary.
• Clean both the inside and outside of the business

Selling a business without obtaining an experienced business attorney can be extremely risky. In fact, the risks of doing so often far outweigh any legal fees. Contact the small business transactions attorneys at Raffaele Puppio today at 610-891-6710 to learn more about selling your business in Delaware County, PA.