Sale Of Business Documents | Sharing Key Information In California
How do you conduct a sale of a business by sharing documents without compromising integrity or breaching confidentiality?
Here is how.
There are many components and attributes of a business that make it attractive to potential buyers. It could be your solid history of profitability, a sizeable and extremely loyal customer base, or a distinct and marketable business advantage over your competitors — like long-term contracts with customers or an exclusive distributorship. It could also be the opportunities that the buyer sees for expansion, a great location, or a highly talented and dedicated group of employees.
A buyer may be interested for any number of reasons, some of which you may not even have considered. Nonetheless, it would be very rare for a buyer to knock on your door (or contact you via your website) and make you a lucrative offer virtually sight unseen. No, it will typically take some preparation on your part and answering some requests for information. In return, you can glean some valuable information from the prospective buyer.
Let’s look at the type of preparation that will be required of you and what you can ask of a buyer to determine if they are qualified and meet your expectations.
Preparing Your Business for Sale
Let’s start by saying that if you’re even thinking of selling your business, you should begin to gather the information that will be requested by the potential buyers. You could be humming along with a successful business when a seasoned industry veteran inquires. Without any preparation, you hopefully will have at the ready a list of repairs you’ve made, your current books, and a ballpark asking price. But a legitimate inquiry from a serious buyer will require much more.
For example, he or she may want to know about the demographics of your customers, the average daily sales, the average size of orders, and a list of long-term contracts. If you’re going to consider an offer, you need to be prepared with this kind of information. If you don’t have a way of producing the data quickly, that buyer may be down the road and making an offer to your competitor. It can be hard to understand the degree of fervor and intensity with which a potential buyer may scrutinize your company. An experienced buyer may know things about your business that you don’t, putting you at a disadvantage in the sales negotiations. Don’t let that happen: work with an experienced business broker who can help you gather information and organize your financial data.
First things first: make certain that you have your books in order. Failing to provide accurate financial statements for your business promptly can result in the quick disintegration of a buyer’s interest.
Additionally, make sure to have these types of information available before you think about positioning your business for sale:
- The last three years of profit-and-loss statements;
- The previous three years of balance sheets;
- A year-to-date profit-and-loss statement;
- A current balance sheet;
- The last three years of your business income tax returns;
- A list of business furniture, fixtures, and equipment;
- A current inventory; and
- A recent commercial property appraisal or your lease agreement.
You should be prepared to provide other information, as well. This will be especially true during the due diligence phase. This may include items such as your insurance policies, employment agreements, customer contracts, intellectual property, equipment leases, and monthly bank statements. In addition, make your business visually attractive to potential buyers by making any needed cosmetic improvements, eliminating outdated inventory, and checking your equipment for any problems.
Meet with an experienced business advisor and broker in California to help you get organized and set a sales strategy in motion.
Qualifying Your Potential Buyers
Once you’ve assembled all of this financial information about your business, you don’t want to waste time and energy on a buyer who won’t be able to close the sale. Serious buyers will sign a confidentiality agreement before you provide them with anything more than a generic profile of your business. In addition, it would be nice to exchange information, so that you have some sense of the type of individual or company that’s considering the purchase.
It’s not uncommon for a seller to require that buyers submit basic information, such as the following:
- The buyer’s name and contact information;
- Their previous employment;
- Any previous ownership of businesses;
- Their educational background;
- The available funds for investment;
- The sources of their financing;
- A required minimum monthly income;
- Their anticipated timeline to complete the sale; and
- Their reasons for their interest in your company.
Selling Your Business With The Commercial Property
Once you’ve located a qualified buyer, you can give them a selling memorandum and get ready to entertain an offer. The exchange of information can cease when you ask that an offer be presented. This should be a nonbinding letter of intent or a term sheet that details the major terms of a deal.
There is simply no “one size fits all” approach whether selling or buying a business with real estate. Here are some other factors to consider.
- Some California business owners that also own the Real Estate, simply prefer to keep the Real Estate and offer a lease to the buyer of the business. If a decision has been made to sell the business, before a final decision is made about whether to also offer the commercial property for sale or not, the following are important items to consider.
- How critical is the Real Estate to the operation of the business? For example, if the business is a gas station or a car wash built on the Real Estate the business operates from, it may be hard to sell just the business and offer a lease to a buyer. This is because the business cannot easily and readily be moved
- Is the Real Estate just land or does it include buildings or structures on the Real Estate? If it includes buildings or structures, are they in good condition or do they need repairs and maintenance? If repairs and maintenance are required, is the seller willing to pay those costs so the buildings and structures are brought up to date and the latest building code?
- The buyer will probably want a lease for the Real Estate. If the buyer wanted a three- or five-year lease with options but only stayed for the initial lease and then left, would the Real Estate owner easily find a replacement tenant? If the buyer is getting an SBA loan, they will require a lease to match the length of the loan which is typically 10 years.
- Has the owner or seller of the business been allocating an amount for rent and is this amount a market rate or the amount the owner of the Real Estate is willing to accept as rent? If there is no rent allocation or the rent is below the market rate and the buyer has to pay a higher rent, it will lower the value of the business as expenses are higher.
- This also applies if the owner of the business has not been paying the property taxes, building insurance, or maintenance of the Real Estate and now expects the buyer of the business and Real Estate to cover these costs.
- Are there any environmental issues on, or near the real state? If so, this may lower the value of the Real Estate and the business.
- When was the last time that local zoning ordinances were checked so if the Real Estate is put on the market, it is ‘smooth sailing’ to close the sale?
- Related to local zoning ordinances are local Use requirements typically defined at the municipality level.
- Is the Real Estate part of a flood zone?
- Sample report of California Commercial Real Estate with basic property overview, environment, building, value, and more.
- Sample report of California Commercial Real Estate with climate check including flood, fire, storm, heat, and more.
- Sample report of California Commercial Real Estate property of the environment with regulatory summary and neighborhood.
- Sample report of California Commercial Real Estate flood certificate.
- Sample report of California Commercial Real Estate with property condition report, site summary, building summary, hazard risks, and more.
- Sample report of California Commercial Real Estate estimate of value.