‘Operation clean sweep’: Preparing your business for sale

Charles Dallas

Guest Columnist

October 19, 2022

You’ve decided to sell – congrats!

Now how can you get the most for your business?

Looking at it in terms of real estate principles, you’ll want to “clean house” and maximize your “curb appeal” as you move down this road.

But that’s not all that goes into a successful business sale.

Other aspects should be addressed as well – which could include “cleaning up your act,” so to speak, and address some operational issues that may not have been a priority over the years.

These tips could help make for an easier process for all involved:
 
Clean up your financials
Buyers rely on the numbers presented to them, so it’s a good idea to check for accuracy and correct any errors so there are no surprises during the due diligence period.

Some companies that run their monthly financials in QuickBooks or similar software have placeholder or oddball accounts, too – things like “See Accountant” or “Undeposited Funds.”

These accounts should be reviewed and cleared out before presenting financials to potential buyers.
 
Trim your working capital
Working capital is often a negotiating point when selling your business.

A small business may be sold with no working capital beyond inventory.

However, for a lower middle-market business (those with values greater than $5 million), buyers expect owners to sell the business with enough working capital to operate.

It’s important to note there are different definitions of working capital depending on specific scenarios, but the most basic definition is account receivables (A/R) plus inventory minus account payables (A/P).

Owners are generally better off when they can minimize working capital because it could mean you’ll take home more out of the business at the end of the day.

It could help to look at aged account receivables, and either try to collect on older balances or write them off.

Also consider sending out invoices in a timely manner and work with customers, as appropriate, to bring those payments in faster.

It’s also a good idea to review accounts payable.

Are you paying bills faster than you need to?

Think about how you can make the best use of monies without jeopardizing relationships.

It could pay off when it comes time to sell.
 
Clear out excess inventory
A fair number of businesses operate with excess inventory.

When demand is strong and credit is cheap, some businesses use that credit to buy inventory.

After all, the more inventory you have, the more flexibility you have in production, and the more responsive you can be to customer demand.

If you’re planning ahead, think about right-sizing your inventory in the last couple of years before you sell, as too much inventory can inflate your working capital.

Inventory issues aren’t just about excess either.

Sometimes the real problem is “dated.”

Buyers may not pay for outdated inventories that you thought you might sell someday, so it can help to make sure your inventory is in salable condition and has value to a buyer.
 
Close out legal issues
ICheck for outstanding judgements or legal issues that haven’t been resolved or taken off the county records.

It can be beneficial to pay attention to employee issues, as well.

Do your best to resolve any pending suit, settlements or workers comp matters.
 
Spruce up fixed assets
Finally, take a critical look around.

Is your signage in good shape?

Is the shop and yard clean?

Are you portraying a professional appearance with your buildings, vehicles and equipment? Mess and disorganization can chase a buyer away.

Aging assets can also be a problem if they’re critical to the business.

If a buyer thinks they will need to replace essential vehicles or equipment after closing, then this will definitely be reflected in their offer to purchase.

Then again, tread carefully when considering other major, non-essential purchases before the sale of your business.

Run your business as if you are not selling it, however, making major investments right before you sell (to save tax dollars, for example) is usually not a smart move.

In most cases, you won’t recoup your money back out of your investment.

Charles Dallas is a mergers and acquisitions advisor with Cornerstone Business Services.