Plan carefully to sell a business

Owners looking to sell a business need to do everything they can to reduce the risk that potential buyers see in the transaction, says a consultant who specializes in mergers and acquisitions.

The reduction of risk, D.R.Whitson says, often requires that owners begin preparing their businesses for sale one to three years before the company is put on the market.

"A lot of people think they're going to sell their business, but they don't do anything to move toward that end," Whitson said during a presentation the annual conference of the Institute of Management Consultants in Reno last week.Whitson's company is based in Scottsdale, Ariz.

For starters, he said owners thinking about selling a business need to make sure that their legal paperwork is in order.

Articles of incorporation or operating agreements for limited liability companies need to be up to date.

Contracts or letters of engagement with major clients need to be on file.

So do agreements about salaries or partnership arrangements.

It's also important to have good financial records in place.

Buyers, he said, want to see financial statements that are clean, don't raise questions and aren't unduly complicated.

Sellers who want to further increase the value of their business can include projections of sales and profitability, Whitson said.

Those projections will be particularly valuable if the company has prepared them for several years and can show that they've been accurate in the past.

"You can get a lot of mileage out of projections if you're really good at it," he said.

Another step that will reduce a buyer's perception of risk and add sales value is the creation of written operating procedures and the maintenance of good records.

If nothing else, Whitson said, this demonstrates that the company is well-managed.

Buyers coming from outside the company almost always will see more risk than insiders such as employees, Whitson said.

That means outsiders typically offer less money but employees and other insiders typically don't have the necessary capital to buy a business.

If an owner considers selling to employees,Whitson suggested that the planning begin as early as possible to allow employees to gather the capital they'll need perhaps through bonuses that are set aside in a special pool.

Owners who think they'll be selling within a few years should get some professional guidance as early as possible in the process.

"Most business owners have inflated ideas what their business is worth," he said.

"Value is determined by outside parties."

The advice of a certified public accountant is particularly important in figuring the tax implications of a potential sale.

Once a letter of intent not a sales contract, but a letter of intent has been signed, the planning of tax strategies no longer is possible,Whitson said.

Other advice he offered to sellers of businesses:

* Learn everything you can about the buyer's expectations.

This allows the seller to shape a deal that will meet the buyer's desires perhaps boosting the amount the seller is willing to pay in the process.

* Save some of the cash from the sale, and keep it ready in case of a later legal battle over the sale or its financing.

* Recognize that spouses of buyers and sellers often are unpaid advisors who aren't particularly well informed.

Get them involved in the process early and make sure their concerns are addressed.

* As a seller, try to nail down as many issues as possible in the letter of intent.

That keeps them out of the negotiation of the final sales contract.

* Recognize that a savvy buyer may offer less for an all-cash deal that doesn't require the seller to take a note.

* Remember that the seller's credibility is one of the factors that determines the value a buyer places on a business.

With that in mind, be conservative when talking about the company's prospects.

* While many sellers and buyers turn to business appraisers to set a value, remember that an appraisal may limit the seller's ability to get a higher price from an enthusiastic buyer.

* Remember that employees, vendors and partners all add value to the company.

"Nobody,"Whitson said, "ever climbed Mt.

Everest by himself."