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Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.
After you have made the decision that you want to sell your business, the next step is to consider the buyer’s point of view in purchasing your company. When looking to buy a business, most purchasers are looking for ones that have a predictable level of risk and reward. They are looking for a company that will generate a predictable cash flow with the potential for future growth.
Any serious bidder for your business is going to have a checklist of items they want to see in their due diligence review before making a bid for your company. To make the business more attractive to potential buyers, you must be prepared to provide the items requested quickly and answer their questions with honest and concise answers. You do not want to be scrambling to come up with explanations when the buyer is standing in front of you. That is, if you want to maximize the probability that the company will sell at a reasonable price.
The following is a summary of the items a serious potential buyer of your business will want to see in their due diligence process. To get the best price for your business, you need to consider these factors long before you actually put your business up for sale. This will give you time to work on increasing your customer base and profits. Two of the primary factors in a business valuation are:
One of the first questions a prospective buyer will ask is, ’Why do you want to sell your business now?’ You should have an honest and concise answer to this question that does not convey a sense of urgency. If they realize that you have been planning to put your business up for sale at this time for years, it gives them the strong impression that you are not being forced to sell the company because of financial difficulties.
There are numerous reasons for selling a business – the desire to retire, illness of the principle or a member of the immediate family, disagreements on the direction of the company between partners, or simply a desire to do something different. You must be honest in your answer.
If the primary reason you are selling the company is because the company is not profitable, don’t deny the problem exists but do not highlight the issue either. You will never be able to hide the problem. The potential buyer will discover the company is not profitable when they review your tax returns and financial statements.
You should also be prepared to answer whether you would be willing to continue working for the company to ensure a smooth transition with the customers, suppliers and employees.
Another question that will be asked early in the due diligence process is, ’Why do your customers do business with you rather than one of your competitors?’ You should be prepared to discuss your competitive advantages in detail. This discussion will normally include your unique selling propositions, target markets, intellectual property protection that would limit competition, restrictive agreements with suppliers, long-term agreements with customers and your approach to marketing the business.
Any potential buyer knows that there is a risk of customers leaving after you are no longer involved in the business. You will need to convince them that they are loyal to the business rather than simply loyal to you.
Buyers need accurate and complete financial information in order to make an informed decision on whether your business is a good match for them. All buyers will want to review three to five years of financial statements and tax returns. They are buying a future cash flow stream that will be used to recover their investment. These records need to include sufficient detail to allow them to figure the company’s income if they were the owner. Examples of things that should be covered in these records include – Do you own a company car? Are there travel expenses that could be considered discretionary? Have there been unusual non-re-occurring expenses included in these prior years?
Buyers will often hire certified public accountants to assist them in valuing your company. The foundation blocks for any business valuation starts with the financial records which are used to project future profitability. If your accounting records are sloppy and have numerous inaccuracies, they will not have faith in them, and it will negatively impact the sales price. It is very important that your accounting records are complete and easy to analyze.
The review of financial records will include any lease agreements, vendor contracts, maintenance agreements and any customer or supplier agreements. If you have a sizable investment in property and equipment, it may be advisable to prepare a list of all equipment and obtain an appraisal on its value.
They will also want to review all legal and incorporation documents for corporations, LLCs, or partnerships.
The value of a business to a buyer is not based strictly upon the historical income produced, but also what the future income is expected to be. The income approach to valuing a business is the primary business valuation technique. The value of a business that has demonstrated growth in sales and profit is significantly higher than one with static sales and declining profits.
Many sellers want to coast the last few months prior to putting their business up for sale. This is the worst thing that they can do if they want to maximize the sale price of their business. Buyers want to see the potential for future growth in sales and will discount the value of business that is stagnate.
Just as you would do before putting your home on the market, you should give your business a makeover to create the best possible first impression to potential buyers.
When potential buyers visit your locations for the first time, do they see order or chaos? When a potential buyer’s first impression of a business is that it is orderly and well run, they will often assume that the management and administrative office of the company are efficiently managed as well.
Some things you should consider doing before putting your business up for sale would include freshening up an old looking store front, unloading obsolete inventory sitting around, brightening up the lighting, and cleaning and organizing your premises. You should also consider updating your signage and marketing materials.
Something that is often overlooked when trying to improve the buyer’s first impression is the personnel who greets and meets with them during a visit. Are all of the employees friendly and customer focused, or are they sarcastic and abrasive? It may be time to make a few personnel changes also.
When preparing for the sale of your business it is advisable to hire a professional to assist you in determining the value of your company. The value of any company is what a seller would be willing to sell for and a buyer would be willing to pay. Sometimes there is a wide difference between the two. Obtaining a professional valuation of your business will give you a realistic idea of what your business would sell for and, if done a few years before putting the business up for sale, will give you time to make adjustments to improve the value of the company.
There are numerous methods in valuing a company depending upon the industry you are in. In addition, there is often a rule of thumb in valuing your business. This is especially true for franchised companies. A business valuation professional will take all of these approaches into consideration in preparing their report and arriving at a value for your company.
Sharing a copy of your business valuation report with potential buyers demonstrates your willingness to be transparent during their due diligence and builds credibility with the buyer. This will also save them the expense of obtaining a business valuation in their due diligence review of your company.
When you are preparing your business for sale, remember that planning and organization are key elements for a successful sale. This process is time consuming and stressful for both the buyer and the seller. By keeping the buyer’s perspective in mind in preparation of putting your business up for sale, you will save both time and stress. Another thing you should do to save time during this process is to pre-qualify your potential buyers. Do they have the resources available to actually acquire your company? By eliminating those who do not have the ability to finance the purchase of your company, it will give you more time to spend on those who do.
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