You started a business and you have run a business but, have you considered selling your business? If you are like most small business owners, the answer is “no” which makes perfect sense. That’s okay, there are plenty of resources to help you understand some of the basics of exiting a small business.
This article covers important questions that most buyers ask as they consider buying your small business and during the due diligence process. If you want to learn more about the due diligence process, check out our article.
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Which Expenses Are Discretionary?
What is a discretionary expense? It is a business expense that is not necessary to keep the business running. Examples may include a club membership a business owner uses to meet prospective clients and entertain customers. While this may be an expense that has proven to find great costumes and build business relationships, the business can operate without it. Another common discretionary expense is a car lease, especially if the car is used for both personal and business which is different from a car or truck used solely for the business such as a delivery or equipment truck.
These costs are different from operating costs such as rent or cost of goods sold (materials or supplies) that are required to make the business work and generate revenue.
A prospective buyer may also inquire about our salary and any family members on the payroll. Yes, you have to get paid for the work you do and the same goes for any employee. A buyer may want to know if the pay is above or below the market rate. After all, when you depart the business, any family members may leave as well and a new owner will need to understand the cost (rate or salary) for replacing you.
What Do Revenues Look Like For The Next Three Years?
At some point in the process, a prospective buyer will ask for a current balance sheet and probably three years of profit and loss statements (income statements). In addition to the historical financial information, a buyer will want a revenue forecast for the next two to three years and will compare the historical information with a forecast.
It is important to have clear and honest answers as to what happened and the underlying assumptions you made in your revenue forecast. Perhaps revenues declined due to the COVID pandemic or supply chain issues made your cost of goods sold go up and that reduced profitability.
A prospective buyer will likely go into the details about revenue and customers to understand how predictable the business is and how to grow revenues. If things are starting to turn around, forecasting growth to pre-pandemic levels is reasonable. Documenting marketing strategies, revenue cycles and other business patterns help explain how the business operates and is worth taking the time to put into writing that can accompany the financial statements and forecasts.
Do You Anticipate Any Major One-Time Expenses In The Next 3 Years?
The investment of capital in assets varies depending on the type of business you operate. For example, a bar or restaurant requires costly equipment, dishes, and furniture in order to serve customers and the condition of these assets can have an impact on the price for your business. Any buyer will want to take a closer look at these items to assess what, if any, major expenses they need to make in the next few years and factor that into the investment they will make to run and grow the business.
Anticipating these questions is a smart move and having the information on the age and condition of assets and other expected expenses are forecast in the next two years will help advance discussions around the price for the business and transition.
Are Any Employees Vital To Running Your Business?
If you have employees, you know that some of them may be an indispensable part of the business. Whether it is expertise in trade, having key customer relationships, institutional knowledge of the business, certain employees are absolutely critical when it comes to running the business. When you depart, a new owner will need to ensure any employees that fit this description are ready (and excited) to stay with the business. Without them, a new owner may struggle to maintain the business because of the time and money to find a replacement and train them to be as effective as a current employee.
Are Your Tax Returns Up To Date?
Taxes! Yes, there is no getting around this one. If you have filed your returns and things are up to date, you can provide copies of your tax returns to a prospective buyer for review. If you are not current, you will want to address this immediately and file and pay any liabilities and penalties before engaging a prospective buyer.
Are There Any Claims Brought Against Your Business?
Should you get to a purchase agreement, it will very likely contain language to protect the buyer from any existing claims. If you are aware of any such claims or there are any claims outstanding, you will need to disclose these at some point during the process.
Will You Assist In The Transition Process?
Helping a new owner transition into your business may be important for a buyer. In fact, it may be a requirement to make the transaction happen. As an owner and operator, you have accumulated years of knowledge about different aspects of the business. You know which suppliers are reliable, your customers and employees, and business processes. This goes well beyond the numbers and a savvy buyer will want to make sure this knowledge is transferred which may require you to work with the new owner for a period of time. This may be a set period such as a few months or clear milestones such as revenue goals or finishing a specific project.
If the transaction will be seller-financed, it is in your best interest to ensure the new owner is in a position to successfully transition and grow the business so they can pay you out of the proceeds generated by the business.
Any process will have its share of surprises so be prepared when something unexpected comes up as you navigate the process of selling your business. That said, some of the questions are common enough and we hope that this information will help you better understand what to expect.