We have been discussing what preparations the small business seller needs to make before listing the business for sale. There are items seller needs to start taking care of as much as 1 year in advance As the sale process gears up you need to prepare number of documents for the sale to complete fast and without any major hiccups.
The biggest obstacle to the sale of small business stems from buyer’s FUD (Fear, Doubt and Uncertainty). When the buyer is betting hundreds of thousands of dollars on the business and is committing large part of his future life he is bound to have cold feet and second thoughts at some point in the process – just like in marriage!!! Your job as a seller is to address these FUDs and alleviate buyer’s anxiety.
While there are number of fears and questions the buyer will have the two biggest fears have to do with money. First, the buyer wants assurance that the financial performance shown by the seller is accurate and second, he will not be hit with large financial liabilities after purchasing the business.
The first question that comes to any buyer’s mind when considering a small business purchase is this – “what is the guarantee that the financial numbers shown by the seller are accurate and genuine?” As we mentioned in the previous posts the best way to address this is to prepare 3 years worth of financial statements (P&L, Balance Sheet, Cash flow statement) as well as tax documents. If you have recasted some of the numbers include a clear explanation of what they are and why. Also, you should think about which numbers are likely to bring out more questions from buyers – declining revenue, high labor cost, marketing spend or others. Prepare your answers with as many details as you can. Remember, many of the potential deals do not move past the early stage simply because the buyer cannot trust your numbers.
The second question likely to come up is – “What if I am faced with liability lawsuits after I purchase the business?” The reason for this fear is understandable. The buyers don’t know how many skeletons they will find hidden in the closet after they have signed on the dotted line and written check to the seller. After all, the selling process is replete with potential lawsuits.
We think there are two different aspects of potential liabilities that buyers are scared of. The first type is what is generally well-known – the taxes that may not have been paid, the supplier invoices that are still unpaid, rents or utility bills and so on. The way you can address this is by getting tax clearance certificates from federal and state agencies; by getting all-clear certificate from suppliers and so on. You can also show the records of invoices and payments in the recent past.
The other aspect of the liability is what we referred to by skeletons in the closet. Things that the buyers don’t know could surface 3 months or 6 months after the closing is done. The best way to address this is by setting aside an escrow setup by you, the seller, for a fixed duration. The escrow can be used to pay for the potential liabilities as agreed to by both buyer and seller. If nothing goes wrong after a preset time the seller gets his money back from the escrow. This gives large peace of mind to the buyer.
In the next post we will look at other FUDs that can derail the selling process and how you can overcome them. Till then, let us know what your experience has been as a buyer or seller.
Excellent article. Thanks for posting. Here’s my article on what I think are the top three issues involved in selling a business:
http://www.WilliamBruce.wordpress.com
William – Thanks for sharing. Nice article.
When you are going to sell your business then the major fear is of the buyer. So it is important that make all the documents right and ready before preparing to sell a business. Complete the valuation of your business and check the goodwill in the market of your business.