10 Critical Action Steps For Buying or Selling a Business

Your purchase or sale of a business might very well be the most important transaction of your life.  You will improve your chances for a successful transaction if you approach it well prepared.  You can prepare for a transaction by starting with a checklist of things to do.  Here is our suggested list of the ten most critical action steps you should consider doing – ideally well in advance of actually buying or selling a business.

1. Determine the true value of the business up front:  You need to know what a business is worth, how valuation is determined, and what makes a good investment.  If the value does not line up with the purchase price you want, then be prepared to take actions to close that gap.  Seek outside opinions on valuation.

2. Scrutinize financials:   Questions about financial information are deal killers.  Typically three years of financial statements are requested by the buyer.  Have the business tax returns and/or financial reviewed by professionals for inconsistencies or irregularities.  You’ll want to “normalize” your financials to show what it really costs to run the business.

3. Do your own due diligence.  Prepare in advance, so you can present a well run, well organized business to the buyer, one that commands a higher value.  Create a centralized contract tracking system.  Review key contracts to make sure that they are up to date and accurate.

4. Identify critical assets; verify ownership.  Create a list of assets, both tangible and intangible that are critical to operation of the business.  Don’t ignore appreciating or depreciating assets, intellectual property rights, contract rights, inventory costs, facilities, logistics, supplier requirements, customer loyalty, and potential or hidden liabilities.

5. Allocate liabilities between buyer and seller.  Determine what expenses or other liabilities may arise after the closing and which party should assume responsibility for them.

6. Develop negotiation strategies:  Develop your negotiation strategies that take into account the uncertainties and practical risks of owning and managing a business.  Understand your motivation to buy or sell, and learn the motivation for the other side.

7. Optimize the deal structure:  To optimize the deal structure, both parties should consider tax consequences, potential liabilities, and how to secure payment for indemnification claims.

8. Verify ownership of the business:  It will be critical for the seller to determine in advance what approvals or authorizations are required to complete the transaction.  Both the buyer and the seller should review the business records to confirm that all claims for equity have been resolved and documented in writing.

9. Close the transaction without delays.  Anticipate that “deal breakers,” “show stoppers,” “surprises,” and “mistakes” will occur and try to address well in advance of closing.   Set expectations early for an “on time” closing.  Identify and track any known or potential issues.  Identify the issues upfront and keep all parties informed to help the closing go smoothly and avoid unnecessary delays.

10. Build a team of experts:  Building a team will help to fill in what you don’t know and help you to execute a transaction successfully.  Your team should, at a minimum, consist of an attorney, an accountant or finance person, a broker or investment banker, and may also include an appraiser and other consultants.