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As I speak with business owners considering the sale of their businesses in the near future, it’s obvious most are overwhelmingly unprepared to do so.
The onset of the pandemic has presented an uncertain future for business owners, whether they are hoping to sell their businesses soon or are in the startup or growth stage. Very few businesses enjoyed an increase in revenue over the past few years.
Unfortunately, shrinking revenue during the most recent year that precedes marketing the sale of a business is problematic. At best.
With the pandemic in full swing across the globe, coupled with business’ revenue contraction, there are very few owners in a position to put their businesses up for sale. But even if they do, buyers acquire businesses with a purchase price, terms and conditions based almost completely on the risks associated with the economy, industry and the business itself.
As these risks increase, the offer price shrinks and less favorable terms and conditions are negotiated. It’s just the way it works.
While many feel the pandemic has caused business owners to stall out on their plans to sell, I contend it’s presenting business owners with the gift of time to better prepare for a sale and to ultimately achieve a better outcome.
So, what should a business owner do to prepare to sell his or her business some time in the near future?
Aside from right-sizing the business’s overhead costs to line up with its current level of revenue, and looking for opportunities the pandemic may be presenting, there are four things a business owner can do now to prepare to sell. And more importantly, doing these four things will mean that when a Letter of Intent is received from a buyer, the business will be very well-prepared to survive the due diligence stage of the sale.
1. Organize the Business’ Contracts and Agreements
The first part of this task is to find the contracts and agreements the business has drawn with other parties. Please understand, doing so is no small feat.
Ideally, each contract and agreement should be scanned into a PDF format so ultimately it may be provided to the buyer. More on that topic in a bit.
Then either your attorney or someone on your staff with an eye for details should identify every significant term in the contract or agreement and list them in a summary document. Terms such as when the contract starts, when it terminates, whether it auto-renews or not, and if advance notification is necessary to terminate the contract or agreement are important. Assignment clauses are also very important in any contract when a business is sold to a third party as well.
All of the contracts and agreements should be summarized in a master list which can be sorted by its terms. Setting this up now will save a tremendous amount of time and will highlight for business owners where certain contracts and agreements may be unnecessary, redundant, or simply need to be renegotiated.
Undertaking this detailed exercise in advance of a sale almost always results in monetary savings for the business owner — either now and/or when they sell.
Unfortunately, if this step is not done before the business is put on the market, it will be necessary during the due diligence phase of the business sale. When that happens, the business owner risks the buyer negotiating down the offer price, or the deal not closing due to a problematic discovery in a contract or agreement by the buyer.
2. Start Building Your Dataroom
When your business goes on the market, your representative will need to electronically warehouse all of the documents the buyers will be examining. For many business owners, gathering these important documents is an exhausting and overwhelming process.
It doesn’t have to be so. And it’s not a good way for the business owner to start out when they go to market. It’s a long enough road to travel without adding this stress at the beginning of the journey.
So take stock of the typical documents a business broker or intermediary will request and start to build your own, internal data room. It doesn’t have to be all that sophisticated. Just earmark a set of folders on your hard drive, or in the cloud if that is your preference, make certain it’s secure, and begin to gather the documentation. You will be glad you did so. I promise.
3. Clean Up Your CRM
Having a Customer Relationship Management software system is necessary to succeed in today’s business environment. Establishing one for the business is typically a game-changer. However, many business owners agree that without constant efforts to keep the data in the CRM clean, the CRM can be a challenge when buyers take a peek under its hood.
Whether it’s duplicate contacts and companies, inactive customers, very old ghosted prospects, or sloppy documentation management practices, almost every CRM needs attention in order to perform as a valuable asset to the business and to survive the buyer’s due diligence.
During the due diligence phase of the sale, most buyers will want to spend as much time as the seller will allow them to poke around in the business’ CRM. There’s a lot of information in the CRM and buyers know it. So, clean it up and put in place the resources to keep it in top shape.
4. Audited Financial Statements
Buyers love audited financial statements because it saves them time during the acquisition process. But that’s not the only reason I recommend having your financials audited by your CPA firm for the two years before you sell your business. It’s also because having a CPA audit your financial statements will result in a higher purchase price.
Most buyers will spend less time during due diligence if the financials are audited. For example, they won’t worry if something that should have been recorded as liability was incorrectly recorded on the Income Statement as income. CPAs know better, whereas your bookkeeper may not.
During the two years preceding the sale of your business, your CPA will have cleaned up the books. He or she will have removed the business owner’s personal expenses from the Income Statement and recorded the payments to you as either a dividend, distribution or partner draw, depending on your business entity structure. Doing so, will mean there will be fewer conversations between the buyer and business owner about the necessity to add back expenses to EBITDA or not. Such conversations force the buyer to ask more questions and slow down negotiations which is rarely good for the seller.
As odd as it may sound, for the business owner intending to sell soon, the pandemic has provided a good opportunity to better prepare for a successful sale.
I currently own a exercise studio with my business partner. It’s a small business located in NY and we operate as an S-Corp. I would like to sell my 50% of ownership to my partner. My question is: We currently have an SBA loan. So far we have been lucky enough not to touch the loan money, and the funds remain in our bank account. My partner would like to hold on to the loan as a cushion for future operations. My question is: If I sell my 50% of the corporation to my partner, do I remain 50% responsible for the loan, or does it stay attached to the business and becomes 100% obligation to my partner? Or should I return half of the money to the SBA to satisfy my obligation?
How the sale of your shares of the S Corp to your business partner affects your SBA loan and personal guarantee should be spelled out in your SBA Loan document.
Most SBA loans are personally guaranteed by the business’ owners. Some are not, specifically those under the Emergency EIDL program if the loan amount was less than $25,000.
You should review your SBA loan agreement carefully before reaching out to your SBA lending officer.
All the best…
My Partner and I each own 50% of an LLC. The business was operating a restaurant and a food trailer. We received $29,000 in PPP1 in April 2020. All requirements for full forgiveness of PPP1 were met in August, 2020. However, our bank has not processed our forgiveness yet for PPP1. We also got a PPP2 loan of $65,000 in February 2021. We would like to operate just as a food trailer going forward and close the restaurant. I personally own the property that the restaurant is on. If I close the restaurant and sell the property as an asset sale, can we still apply all the same criteria for the PPP loans and for any RRF from the American Rescue Plan to operating just as a Food Trailer business? We would be operating the food trailer under the same LLC and Tax ID number.
The PPP Loans proceeds usage and forgiveness rules are intended to keep employees on the payroll. The rules don’t prevent you from changing the business model of your LLC. Based on what you’ve shared here, it appears you want to shed the brick & mortar-based restaurant and focus solely on the food truck.
The PPP Loan rules don’t restrict you from selling any of the assets associated with your LLC, unlike the EIDL program rules. So selling the real estate and restaurant should not cause you any issues with PPP Loan forgiveness.
The PPP Loan forgiveness rules are based on employee retention. As long as you meet those standards within the 8-to-24 weeks after receiving your PPP2 loan proceeds, you should be in good shape.
Does this help David?