Advisory Insights – 55 Questions to Ask Yourself Before You Sell Your Business Part I

Your business will transition to a new owner at some point.  Regardless of whether that process is through a sales transaction or through an elaborate estate plan, you have a duty to yourself and your heirs to create a business that is both attractive and valuable to potential new owners.

For those owners who choose the sales transaction route, a common pitfall is deciding too late in the process to make changes in the business to help attract a significantly wider audience of potential buyers. Taking action early can create a competitive advantage for your company and help drive valuations to aspirational levels.

We have assembled a list of 55 questions to help you begin thinking about how to best position your business to be attractive and valuable to potential buyers. While extensive, this list is not exhaustive and does not address industry specific issues that may be pivotal in your business.

We believe it is never too early to start thinking about your business in the context of how it will be evaluated by a potential buyer and addressing as many of these issues as possible.  Most owners should start the process three to five years ahead of their targeted sale date. However, even twelve months of thinking, planning and making corrections will be beneficial.

Over the course of future Advisory Insights we will explore these questions in greater detail.

55 Questions to Ask Yourself Before You Sell Your Business

Financial – General

  1. Are my financial records in tip-top shape?
  2. Should I invest in an independent audit of my financial statements?
  3. Do I mix personal expenses in my business records?
  4. Do I have a solid monthly accounting closing process to ensure each month’s financial statements are materially accurate?
  5. Have I made written or oral promises to key employees about bonuses or other remuneration if I should ever sell the business?
  6. Do we routinely cull customers who abuse our employees or place unreasonable demands on our organization?

Financial – Revenue and Profitability

  1. How predictable are my revenues and gross profits?
  2. Are my revenues distributed among a wide range of customers, or do I have a high concentration of revenues with just a few key customers?
  3. Am I the sales rainmaker in the business?
  4. Is my business beholden to one key salesperson that could easily move his relationships to a competitor?
  5. Does my business have a strong source of predictable, recurring revenues?
  6. Do I have good data to support my manufacturing and/or service costs or do I run the business on my experience or “gut”?
  7. Do I have an effective procurement process in place that is not reliant on my day-to-day involvement?
  8. Do I have an effective process to quote new business?
  9. Do I ensure that my prices, including service rates are updated consistently as market conditions change and to reflect increasing costs?
  10. Do I have good systems and process to produce a backlog report?
  11. Is my business growing consistently?
  12. Is my business seasonal?
  13. Do have a process to forecast my future operating results?

Financial – Financial Condition and Capital Structure

  1. Does my balance sheet properly reflect the assets actually owned by each legal entity?
  2. Is there significant deferred maintenance on my facilities or key equipment?
  3. Will it take significant investments in additional facilities, equipment, and/or people to expand my business organically?
  4. Do I have strong controls and accurate records over my inventory?
  5. Are there significant amounts of obsolete inventory on my balance sheet?
  6. Are my fixed asset records accurate?
  7. Do I bill my customers promptly and accurately?
  8. Do I have a formal collections process to prevent aging of account receivables?
  9. Do I have an effective purchase order and accounts payable system in place to ensure good controls over the procurement and disbursement process?
  10. Does my revolving line of credit actually revolve?
  11. Is the amount of debt I carry reasonable for my business model and current growth rates?

Strategic, Organizational, and Human Resource Matters

  1. Do I have an effective and well-functioning management team?
  2. Do I have clear job responsibilities such that all employees know their roles and accountabilities?
  3. Do I invest in developing employees to their full potential through periodic performance reviews, goal-setting, formal and informal training, and supporting attaining and maintaining professional certifications of my employees?
  4. Do I have a good record of employee relations including a lack of tolerance for bad behavior?
  5. Do we routinely weed out low performing employees or employees who fail to consistently enhance our culture and our brand?
  6. Is the culture of my business such that it could be merged into another company?
  7. Can all key day-to-day business processes run without my direct involvement?
  8. Is there clarity about what my business does and does not do?
  9. Do I view Information Technology as a strategic resource?
  10. Do I have effective safety policies in place, and are employee and customer safety top of mind priorities at my company?
  11. Do I have a strong and effective project management function to ensure projects are completed on time and on budget?

Tax, Regulatory, and Processes and Controls

  1. Do I have good processes and controls around contracting with customers, vendors, and other key partners to properly manage risk in my business?
  2. Are all of my key contracts in force and current?
  3. Do I have good internal controls over foreign sales such that I know I’m not violating the Foreign Corrupt Practices Act?
  4. Do I have a strong Sales Order management process that ensures effective execution of the project or fulfillment of the order?
  5. Do I have strong physical and digital controls around my IT resources?
  6. Do I stay current on software licenses to run the business?
  7. Do I have good controls over company purchasing cards?
  8. Do I maintain good maintenance records on all my key manufacturing equipment?
  9. Am I complying with all applicable tax reporting requirements?
  10. Do I have hidden or ignored environmental liabilities that should be addressed?
  11. If I operate multiple legal entities for tax and liability purposes, do I maintain well-documented legal separation between the entities in my contracting and business operations?
  12. Do I have a list of all the leases that I’m a party to?
  13. Do I know if my major vendor relationships and manufacturing representation agreements are transferable or have “change in control” provisions?
  14. Is my business nimble and resilient enough to withstand potential disruptions from new technologies or rapid market changes?

We look forward to providing an expanded discussion of these questions in upcoming Advisory Insights. In the interim, HoganTaylor Advisory has experienced resources to help you think through these issues.  We can also provide advice and counsel to assist you in evaluating offers to acquire your business, organize and manage the due diligence process, and conduct a  valuation of your business whether you are contemplating a sales transaction or estate plan involving the distribution of ownership of your business. Please contact Advisory Practice leader Robert Wagner at rwagner@hogantaylor.com.

In Part II of our “55 Questions” series, we take a closer look at six general financial questions you should ask before you sell your business.