This is the third story in a series of articles about selling a business during the pandemic. The first story discussed the value of improving markets for business sales and the second focused on the financial information buyers will want to review.
This article will review other types of information potential buyers will request or a seller might wish buyers be made aware of to increase the value of the transaction. The influence of some of these items may well be reflected in the financial statements, but much of it has to do with fundamental aspects of a business’s operation.
At the beginning of sales negotiations, even before financial statements are shared, sellers should consider having buyers sign a non-disclosure agreement (NDA) which is a legal contract that describes the confidential information a seller is asked to or wants to disclose to a potential buyer and its advisers but which cannot be shared with others outside the transaction. “Some of these details may relate to expenses a buyer might incur,” notes Mark Dunsmoor senior vice president of Legacy Bank “while others relate to revenue opportunities.”
The expense side includes costs currently incurred by the seller. While a new owner may eventually switch providers for some of these products or services, the categories of expenses required to operate the business will most likely remain the same. “Expenses might include mortgages or lease agreements for buildings and property occupied or used by the seller, as well as, leases for or amounts due on equipment or machinery used in the business,” adds Dunsmoor.
“Insurance policies covering property, vehicles and equipment fall into this expense category, as well as, professional liability insurance, workman’s compensation and product liability,” remarks Dunsmoor. Other typical expenses most sellers may disclose include employee-related expenses such as salaries, health insurance, retirement plans and perhaps employment agreements with certain individuals.
“In this day and age, it may be important to have ‘work from home’ arrangements disclosed that highlight fees the company incurs for crucial communications technology that facilitate emerging remote work lifestyles,” adds Dunsmoor. Some, but not all, of these costs may be based on contractual arrangements, the details of which should be shared. There are also other operating expenses such as utility costs, building and equipment maintenance as well as federal, state and local permits and licensees that might be required to operate the business.
If the company has union employees, the union agreement is an important element to consider. The buyer must also be made aware of any pending legal action against the seller.
“Potential buyers will wish to review files documenting the selling firm’s formal business status including bylaws, resolutions, operating agreement and stock ownership if this is relevant. This will confirm the seller’s ownership and its authorization to sell,” explains Dunsmoor.
In addition to expenses, sellers may have information to share related to its revenue stream. This could include a list of current customers and the amount of revenue they represent featuring a list of viable prospects and vendors or any long-term contracts that may effect the transition.
“Sellers who hold patents, have unfinished patent applications or operate with other trade secrets, which make its products or services unique in the market may be asked to share that documentation,” added Dunsmoor. “These types of documents can hold a high level of value to the right buyer.
Most business will have marketing programs that support the sale of its products and services such as advertising, trade association membership, trade show participation and public service/ community relations activities that are usually requested. While this category might be classified under expenses, it is directly related to the seller’s revenue generation and competitive advantages which together offer a high level perspective of daily expectations.
Mark Dunsmoor is a senior vice president of Legacy Bank with 40 years of banking expertise. Dunsmoor has been recognized as the Greater Pueblo Chamber of Commerce Charles W. Crews Business Leader of the Year and volunteers in many capacities including on the local hospital board.
Article feautured in the Pueblo Chieftain: Link to Article