In the process of selling your business, you face the continual risk of devaluing your business for your buyer. Having a team of professionals assisting you through the transaction is important, as these are the people who are there to help you achieve and receive the full value of your business. There are three elements that you want to consider as you assess where your risks are in selling your business.
The “Going Concern” Value. When you sell your business, you are not only selling tangible and intangible assets (real estate, equipment, employees, vendor lists, etc.) but you are really selling your financial viability and “going concern.” The “going concern” value of a business is defined as the expectation that your business will function and maintain its ability to grow even when you are no longer part of the business. The accuracy and reliability of the financial information you give to your buyer is crucial if you wish to see the value of your business fully realized when you sell it. A healthy “going concern” value communicates to your buyer that your business is in no need of liquidation, and that it can, in fact, continue to operate as it has been.
Elements that contribute to a healthy “going concern” value would be well-trained employees, up-to-date licensure, reputable maintenance of equipment and systems, etc. However, if you are the only “glue” that holds these elements together, then the “going concern” value of your business will seemingly crumble before your eyes.
Due Diligence. One of the most prudent ways for a seller to communicate the value of their business is through due diligence. During due diligence, the buyer will request a “laundry list” of records, documentation, licenses, and contracts that will evidence your business’ value to them. Your responsibility as the seller is to provide accurate and thorough information during the due diligence process, which will require you and, often, your team of professionals to gather what the buyer is requesting. Items found on a list of due diligence include agreements with vendors, tax returns, statements of profits and losses, business licenses, etc. Have your CPA and your Attorney keep eyes on your due diligence, as they will provide you with the support necessary in communicating the full value of your business. Due diligence can feel daunting, and often takes plenty of time to sort through, but it is the key to unlocking the value of your business and communicating that value to your buyer honestly and thoughtfully.
I have encountered business owners who, when selling their business, were willing to disclose anything and everything to their buyer when asked or requested. On the other hand, there are business owners who are cautious when being asked for documentation or reasoning for certain operations. Your business transactional attorney’s job is to help you mitigate risks when interacting with the buyer in one way or another. That being said, when you work through due diligence and there are missing pieces where you simply do not have the documentation being requested, you should assume that you will need an explanation as to why there is a gap if your buyer were to ask.
Again, your team of professionals are here to act as a buffer for you so that your business transaction runs as smoothly as possible. Your business valuation certainly relies on the cleanliness of your financials; it also relies on discretion and diligence every step of the way, and your team of professionals are in the business of discretion and diligence.