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Considerations in Selling Your Business- Part 4: Preparation for Marketing the Business

by Patrick B. Mathis, Shareholder at Mathis, Marifian and Richter, Ltd.

Preparation for Marketing the Business

There are many considerations prior to initiating the marketing of a potential sale of a business including personal and family concerns, both financial and non-financial goals, valuation of the business, analyzing market opportunities and selecting a marketing approach. In addition, prior to entering the market, many sellers need to “clean-up” the business to eliminate issues, or potential issues, which may negatively impact its value.

iStock 72221933 XXXLARGEFor instance, if property occupied or leased by the seller has potential environmental issues the seller should obtain a phase 1, and potentially a phase 2, environmental survey of the premises. These surveys will provide the seller with an understanding of the scope of the issues. Following these surveys, the seller may then secure an estimate of the cost of remediation, time involved for such work, and ancillary requirements such as extended monitoring of the clean-up. Finally, the seller can then determine whether the remediation should be completed prior to offering the business for sale or, if not, include the anticipated cost of remediation as a discounting factor in the sale price of the business.

Similarly, claims or lawsuits related to product warranties, employment contracts, non-compete agreements, contracts, product liability or similar issues should be reviewed and resolved, if possible.

Absent such resolution, in many cases buyers will, in the interest of protecting themselves from exposure, propose significant diminution in the value appraisal of the selling business to cover the buyer’s risk, even though such estimates may be dramatically higher than the actual risk or cost of resolution.

Historical financial items such as paying family members at above-market levels for services, the payment of personal expenses through the business, “loose” inventory valuation, or other items may have been acceptable practices for the purpose of ongoing operations. However, if these items serve to reduce earnings, and the business is valued under an earnings/EBITDA approach, the impact of those expenses may significantly reduce the real value of the business. While a seller may attempt to flush these items out of the historic income or profit and loss statements, they create multiple talking points for discussion, and potential discounting, by a buyer. In some cases, sellers have spent several years “cleaning-up” their financial statements before entering the market place to avoid this discounting risk.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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