TL;DR
When preparing your business for sale, identifying all of your assets, tackling surplus inventory, and documenting intangible assets are key steps that can enhance your company's appeal to potential buyers. Minimizing outdated, surplus, or obsolete inventory frees up capital and streamlines operations. Meanwhile, identifying and properly documenting intellectual assets like patents, trademarks, and copyrights can significantly increase your business's perceived value. Despite the challenges, such as complex valuations and time-consuming processes, these steps can provide a competitive edge and make your business more attractive to potential buyers.
Welcome to the sixth installment of the Preparing Your Business for Sale series!
As investors, we've found that business owners often possess traits that can prevent successful and lucrative business sales, but the Top 3 traits that cause adverse impacts are:
- They have not prepared the business for maximum sale value.
- They have unrealistic expectations regarding value, as they calculate emotions and time spent in the business as value drivers.
- They are unwilling to invest in the time and resources needed or have the flexibility on purchase terms to achieve a maximum sale price for their business.
We've created this series to assist business owners with Problem #1: Preparing the Business for Sale… NOW. Unlike traditional advice, we do not advocate waiting until 3–5 years from a planned exit, as unplanned exits happen all of the time, whether due to health reasons, market dynamics, or unsolicited acquisition offers.
When it comes to selling a business, preparation is paramount. However, many business owners need to pay more attention to the importance of asset identification, documentation, and evaluation. In this post, we will guide you through the crucial steps of preparing your business for sale, focusing on how to identify best and handle your assets.
Creating a Comprehensive Inventory of Your Assets
Creating an inclusive list of your business assets is a critical first step when preparing your business for sale. Here are some guidelines to assist you in this process:
- Tangible Assets:?Start by identifying all your tangible assets. These will include property, plant and equipment, vehicles, inventory, and any other physical elements that contribute to your business operations. Accurate documentation of these assets, including their purchase date, cost, depreciation, and current market value, can help set a realistic business valuation.
- Intangible Assets:?Remember your intangible assets. While these may not physically exist, they often hold significant value. This category includes patents, copyrights, trademarks, brand recognition, and customer relationships. Determining the value of these assets can be complex, yet they can significantly increase the attractiveness of your business to potential buyers.
- Monetary Assets:?Monetary assets such as cash in the bank, accounts receivable, investments, and securities play a crucial part in your business's overall value. Ensure to have a detailed record of these assets and their current worth.
- Liabilities:?It's equally crucial to identify your business liabilities, such as loans, accounts payable, or any other financial obligations. Transparency in this area can instill confidence in potential buyers.
- Working Capital:?Consider your working capital—the difference between your current assets and liabilities. This snapshot of the company's short-term operational efficiency and financial health.
While this process can be time-consuming, its benefits outweigh the efforts. A thorough and organized approach to asset identification provides a clear picture of your business's worth, facilitates a smoother negotiation process, and can ultimately lead to a higher selling price. However, it's essential to approach this with honesty and transparency to maintain trust with potential buyers and avoid potential legal issues. Engaging professional assistance in this process can contribute to a more accurate, comprehensive account of assets.
Determining Which Assets to Exclude
Not every asset is vital or beneficial to a sale. You, as a business owner, might need to exclude certain assets from the transaction, usually for personal reasons or because they do not add value to the business from a buyer's perspective. Here are some steps to help you decide which assets to exclude:
- Personal Use Assets:?Personal vehicles or real estate properties used for private purposes should be separated from the business assets. These assets might not be valuable to the potential buyer as they are not revenue-generating or essential for the business's operations.
- Obsolete Assets:?Technology or equipment that is outdated or no longer in use can be excluded. Despite being part of your asset inventory, these items might not add value to the sale. They might detract from the overall business perception, creating an image of stagnation or lack of progression.
- Non-Transferable Assets:?Some assets may not be transferable due to licensing or contractual limitations. These could include certain software licenses, permits, or contracts. It's best to exclude these from the sale but be transparent with potential buyers about these limitations.
- Underperforming Assets:?Determine if you have any underperforming assets that might negatively impact the business's perceived value. These could be unprofitable product lines, poorly performing business units, or depreciating investments. A strategic decision to exclude these assets could enhance the attractiveness of your business.
- Emotionally Valued Assets:?You may have assets that hold sentimental value, such as the first piece of equipment you purchased or a particular artwork displayed in the office. These assets, despite their emotional significance, may not hold substantial financial value and could be excluded from the sale.
While excluding certain assets may reduce the overall asset value, it often presents a more accurate and appealing portrayal of the business's profitability and potential. Remember, the goal is to make your business attractive to potential buyers. Therefore, exclude assets that could deter, confuse, or mislead prospective buyers. However, engage in this process cautiously and transparently, ensuring you maintain buyer trust and legal integrity.
Disposing of Non-Productive Assets
A crucial part of preparing your business for sale is carefully disposing of non-productive assets. Non-productive or unprofitable assets can drain your business's resources and may decrease the overall attractiveness of your business to prospective buyers. Here are some steps and considerations to effectively dispose of these assets:
- Identify Unproductive Assets:?The first step is identifying which assets are non-productive. These could be obsolete machinery, outdated software, or underperforming business units. Evaluating recent financial statements and operational data can reveal which assets are not contributing to your business's profits or growth.
- Determine Disposal Methods:?There are various ways to dispose of non-productive assets. These could include selling, donating, recycling, or even disposing of them as waste. The choice of method will depend on the nature of the asset and your business goals.?
- Assess Tax Implications:?Disposing of assets can have tax implications. For instance, selling an asset might result in a taxable capital gain, while donating might entitle you to a tax deduction. It is recommended to consult with a tax advisor to understand these implications better.
- Consider the Environmental Impact:?Disposing certain assets, especially machinery or equipment, can have environmental implications. Ensure that you comply with all relevant environmental regulations and dispose of these assets in an environmentally responsible manner.
- Communicate with Stakeholders:?Keep your stakeholders informed. Transparency throughout the disposal process can maintain trust and morale among your employees, suppliers, and customers.
While disposing of non-productive assets can reduce your business's total asset value, it can make it more appealing to buyers by presenting a lean, efficient, and profitable operation. It also allows you to focus on your productive assets, which can help improve operational efficiency and profitability. This process, however, requires careful planning, transparency, and expert advice to ensure that it aligns with your overall business goals and legal requirements.
Selling Surplus, Outdated, or Obsolete Inventory
Selling surplus, outdated, or obsolete inventory is another crucial step in preparing your business for sale. This process can streamline your operations, free up storage space, and increase your cash flow. Here are some strategies and considerations for selling your excess inventory:
- Identify Surplus Inventory:?The first step is to identify items that are surplus to your business's needs. These could include products that have been in stock for a long period without selling, outdated or no longer relevant to your current business model, or products that newer models have replaced.
- Options for Selling:?Once you've identified your surplus inventory, you can explore various channels for selling these items. Online platforms like eBay or Amazon can be useful for reaching a wide audience. Alternatively, consider holding a clearance sale, offering bulk discounts, or selling to a liquidation company.?
- Consider Donations:?If selling isn't viable, consider donating surplus inventory to charitable organizations. While this might not bring immediate financial gains, it could offer tax benefits and improve your business's community reputation.
- Impact on Financial Statements:?Sending surplus inventory, especially at discounted prices, can impact your financial statements. Depending on how you account for inventory, this could lead to lower reported profits in the short term.?
- Transparency with Potential Buyers:?Be transparent with potential buyers about your efforts to sell surplus inventory. This ensures that they have an accurate understanding of your business's inventory management and sales processes.?
Taking the time to sell surplus, outdated, or obsolete inventory can make your business more appealing to potential buyers. It demonstrates effective inventory management, responsible business practices, and a focus on efficient operations. However, it's important to approach this process strategically, considering its impact on your financial statements, tax obligations, and business reputation. Remember, every aspect of preparing your business for sale should be aimed at creating a positive impression and maximizing value for potential buyers.
Identifying and Documenting Intellectual and Intangible Assets
Intellectual and intangible assets often form a significant part of a business's value, especially for service-based or technology-based businesses. Identifying and properly documenting these assets is critical when preparing your business for sale. Here are some guidelines to assist in this process:
- Identify Intellectual and Intangible Assets:?These include patents, trademarks, copyrights, trade secrets, and customer lists. Also, consider intangibles such as brand recognition, operational processes, or a skilled workforce. These assets may not be physical or financial, but they contribute significantly to your business's profitability and competitive advantage.
- Document Ownership and Value:?Once identified, ensure clear documentation showing your business's ownership of these assets. This may involve patents or trademark registrations, copyrights, or non-disclosure agreements for trade secrets. Assigning a fair market value to these assets can be complex, but it's essential to reflect their true value in your business's sale price.
- Protect Your Assets:?Intangible assets are vulnerable to theft or infringement, hurting your business's value. Protect these assets through legal means such as patents, trademarks, or copyrights. Non-disclosure agreements can protect proprietary information during the sale process.
- Communicate Value to Prospective Buyers:?Prospective buyers might overlook intangible assets if they need to be well-documented or communicated. Be proactive in highlighting the value these assets bring to your business and how they can contribute to the future success of the business under new ownership.
Intellectual and intangible assets can significantly increase your business's appeal and sale price. However, identifying, documenting, and protecting these assets takes careful planning and expert advice. It's a strategic initiative that can set your business apart in the marketplace and pave the way for a successful transition.
Preparing your business for sale takes time, effort, and strategic planning. However, the benefits—increased transparency, accurate pricing, and legal compliance—far outweigh the costs. So, start preparing now, and don't wait until a few years before you plan to sell.
Stay tuned for Part 7, which discusses?Writing the Buyer's Business Plan.
If you found this article helpful and want to learn more, read our?comprehensive guide on all 48 points you need to prepare your business for sale.
You can also discover?why we advocate having your business ready for sale NOW.
