How to Sell Your Business

A few rules apply: Hire an experienced appraiser. Sell assets rather than the business entity. And don't assume the buyer is in the chips

I'm thinking about selling my small business. What documents do I need to put together before I put my company on the market?

—A.I., Scottsdale, Ariz.

There are a number of documents that you should prepare, both before you pursue a sale and once you start working with a business broker. Your first step is to get a formal business appraisal of your company so that you have an idea of its value, says Stan Crow, of S. Crow Collateral in Boise, Idaho. Your appraiser will need a couple of documents: an adjusted balance sheet and a "statement of seller's discretionary income."

"Prepare a spreadsheet that shows the numbers from the business' last three years' tax returns, with adjustments to add back your salary, depreciation deductions, contributions, interest expense, interest income, and any other items of income or expense that are not integral to the business," he said. This document will show your discretionary income for each of the last three years. The adjusted balance sheet that you prepare (or ask your accountant to prepare for you) will adjust your company's assets to fair market value and eliminate assets and liabilities that a buyer will not acquire, such as cash and leased equipment.

Once you have those documents prepared, hire an experienced business appraiser to give you a professional opinion of your company's market value. This number will lend credibility to your sales price should you decide to pursue a sale of your business.

Asset Sale Provides Tax Advantages

If you do, Crow recommends that you structure the sale as an asset sale rather than as a sale of the business entity itself. "An asset sale gives the buyer certain tax advantages and frees the buyer from liabilities that might pertain to ownership of the business entity. An asset sale requires careful planning, however, to minimize or avoid tax disadvantages for you as seller," Crow says.

An experienced business broker, who will work on a contingent fee basis, will help you with the complicated planning you'll need to do before you put your company up for sale. Choose a member of the International Business Brokers Assn., Crow says, who has either the Certified Business Intermediary professional designation for smaller businesses or the Merger & Acquisition Master Intermediary designation for middle-market businesses.

Your broker will help you prepare your next document, an "offering memorandum." This document contains a detailed description of the business, the tax returns, the statement of seller's discretionary income and adjusted balance sheet you've already pulled together, and all contracts that will pertain to the future operation of the business.

Finally, you'll need a confidentiality agreement that you'll ask any prospective buyers to sign before you provide them with any documents or information about your company. Potential buyers will also agree to keep confidential the fact that your business is for sale, since that news could be detrimental to the ongoing operations of your firm if it leaks out before you are ready to announce a sale.

Your broker will help you locate and vet qualified purchasers as the deal moves forward. "Don't assume that a buyer has the financial ability to buy your business," Crow says. "Require a signed financial statement and examine it carefully." Once you get offers to purchase your company, have your business attorney review and approve them and go over any contracts that you are asked to sign as part of the sale.

"Once an offer is made and accepted, establish precise deadlines for when each step of the sale—through the closing date—will occur," Crow recommends. Good luck!

Before it's here, it's on the Bloomberg Terminal.