Selling your privately held hardware business is unlike selling shares in a public company, a mutual fund, or your
personal residence. When you sell your business to a third party or transition it to someone within the family,
there are a lot of different assets and aspects to think about. If you are selling to a family member or key
employees, you may be able structure a stock sale. If you are selling to an outside third party, it will normally be
an asset sale.
    Selling or transitioning your business is a complex process, and that is why you should give yourself at least two
or three years to get prepared. During this time, there are a few questions to ask yourself and items that need to
be addressed. Do you own the real estate and the store? Do you want to keep the real estate and sell the
business? Do you want to sell both? Do you need to clean up the inventory and the accounts receivable? Are
there any other entries on your financial statement that should be cleaned up in the next two or three years?
If you are thinking about selling or transitioning your business in the next three to five years, it is recommended
that you have a team of advisors to help you get prepared. On that team should be your corporate attorney to
help with legal documents, your corporate accountant to help with tax calculations, and your financial advisor to
help structure the sale, and advise on corporate and personal financial decisions. As you start down this path,
listed below are several items that may be helpful to think about through the process:

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1. Why Are You Selling?

Owners sell their businesses for many varied reasons including:

A. The owner has decided that he or she wants to retire and slow down.

B. An illness or injury may be affecting the owner.

C. Just plain tired of the frustrations and stress of running a business.

D. Technology advances have overtaken the owner.

E. Fighting over business decisions with another co-owner.

F. The owner wants to turn over control to the next generation who is working in the store
and doing well.

 

2. Get the Business Ready

     Your goal over the next three years is to make the business look as profitable as possible before
you sell (preferably better than the national averages reported by the NRHA). The better the
financial statement looks, the more valuable the business is. Any potential buyer is going to
want to review the last three years of financial statements and those are the ones on which you
need to concentrate.

     Try hard to increase your gross margins by 1% or 2%. Reduce expenses by
at least 1% or 2%. For some retailers, the payroll is too high. If you can find a way to reduce
payroll over the next three years – do so. Clean up the financial statements and get rid of
unnecessary loans to or from stockholders. If there is excess cash, go ahead and take part of
that cash out of the business.

     If you are selling to a member of the family, he or she needs as
much cash flow as possible to purchase the store. If you are selling to someone outside the
family, then you want the business to look as profitable as possible to get the highest price.

3. Clean-Up, Refresh, and Fix-Up

     As discussed above, your goal is to make the business look as good as possible, which applies
not just to the business’ profitability but also the physical aspects of the business.
Refresh the image of the store inside and outside. Make sure that the signage is up to date and
looks good. If the walls need painting – get that done 12 to 18 months before the sale. Make
sure that the lighting is working and up to date. Maintain inventory levels to ensure clean and
well stocked shelves, including liquidating any obsolescent inventory (X-items).
    Fix the parking lot, fill in the potholes, and restripe the parking areas. Make sure that the
heating and air conditioning has been serviced and all the annual maintenance has been
performed.
    Any potential buyer is going to ask questions about what you have done to maintain the building
inside and out. If you can show that all your maintenance is up to date and everything is looking
good, then the potential buyer will feel comfortable that you have been maintaining the
building properly.

4. Get the Business's Financial Statements and Income Tax Returns in Order

     It is recommended that you work closely with your corporate accountant to review the last
three years of the business’s financial statements and income tax returns and be prepared to
answer any questions from the potential buyers pertaining to the business’ financial statements
or income tax returns that may look out of place. Make sure that all your unresolved tax matters
have been cleaned up. Make sure that you have an answer for any drastic changes to the
accounts receivable or inventory. Also make sure that you have available not only the businesses
income tax returns, but also sales tax information, payroll records, and any other financial
documents that the potential buyer may want to review.
    Remember that if the potential buyer is going to be getting a bank loan, the bank will also
want to see the business's last three years’ financial statements and income tax returns. If the
financial statements look great after you have made your adjustments, it will make it easier for
the buyer to get a bank loan.

 

5. Update the Business’s Financial Statements

     In preparing for a sale, you want to make sure that your business’s balance sheet and profit and
loss statement are accurate. If there are any adjustments that you would like the potential
buyer to know about you should have all that information listed on a separate sheet (“add-back
page”) for each of the last three years. For example, if the business pays for your gasoline, cell
phone, travel, 401(k), health insurance, or any other expenses, you should know what those
amounts are for each of the last three years. These owners’ discretionary expenses should be
listed on the add-back page, as the potential buyer will not need to pay these after the sale and
will provide the potential buyer with additional cash flow with which to work. As you can see,
there are several items that would be listed on the add-back page and that is information that
you need to work on with your corporate accountant and attorney.

6. Set a target date

     Retailers normally hate to work on details, and they usually procrastinate as long as possible. If
you set a target date of 36 months from now, then start working backwards and figure out what
needs to be done every month or every quarter for the next 36 months. Set several different
target dates during the 36-month window and make sure that you are getting things done each
month or each quarter. During these 36 months, set target dates for your corporate attorney,
corporate accountant, and financial advisor to get you information that you will need for the
potential buyer. Also, get family members involved to help you work on the business to get it
ready.
    Make a list of what needs to be done in the first 12 months. Working on the financial statements
and the profitability of the business is the most important, so start there. A good place to start is
to increase the gross margins by 1% or 2% and decrease expenses 1% or 2%. If you are selling
the business to someone inside the family or a key employee, then get them more involved over
the next 36 months, so they can see every aspect of the business to which they have not been
exposed in the past. This is especially true of the financial statements and reports that you
receive from your corporate accountant and point-of-sale computer system.
    In the next 12 months, start reducing your payroll to where it should be based upon national
averages and make sure that your managers attend training classes to ensure that they are as
well trained as possible. You want to prove to the potential buyer that you have been paying for
your key managers to go to important training schools and that they are up to date on modern
retailing techniques.
    In the last 12 months, fix up and refreshing everything inside and outside the store, as discussed
above.

7. Accounts Receivable and Accounts Payable

     When it is time to sell your business, you will negotiate with the buyer whether to keep the
accounts receivable, or to sell them with the business. Typically, the potential buyer does not
want to collect the accounts receivable. The potential buyer may need to know what the normal
accounts receivable balances are throughout the year, as he or she will need to make sure that
they have enough cash reserves to manage the accounts receivable throughout the year. If you
are selling your business to a family member or key employee, they may agree to manage the
processing of the accounts receivable. If you do not sell the accounts receivables, you will be
responsible for collecting them.
    If you have a potential buyer who wants to keep the accounts receivable, then both of you need
to look at those accounts and decide what their real value is. Typically, accounts receivable are
divided into less than 30 days, 30 – 60 days, 60 – 90 days, and over 90 days. Accounts over 90
days may be hard to collect unless the business has a lien to protect that account, or sometimes
the customer may be a government agency or a local school system. A potential buyer typically
does not want to pay for accounts that will not be collectable. The buyer will also want a
discount to cover his or her cost of collection.

 

8. Goodwill

     If goodwill is used in negotiating the sale of the business, the value of goodwill is based upon
many factors pertaining to the business being purchased. Normally, the value of goodwill
depends upon the store’s name recognition, image, continued profitability, gross margins, and
the customer base. Goodwill can have a high value if the store is very profitable, and the name
recognition is high. On the other hand, goodwill could be low if the store is not profitable, and
the customer count is on the decline. Many businesses do not have any goodwill, as it is lost
once the current owner sells the business and walks out of the door.

 

9. Pricing Your Business

     There are typically two valuation approaches utilized to determine the selling price of your
business: the asset value and earnings-based approaches. The asset-based approach utilizes the
market value of the assets of the business that will be sold, while the earnings-based approach
utilizes the past earnings performance of the business.
    First, the asset-based approach is the value of the assets on the business’ financial statements
that will be sold. When doing an asset sale, the business is looked at in two parts—the assets
that will be retained and the assets that will be sold. The assets that will be retained should not
be included in the valuation of the business. These assets typically include co-op stock, co-op
notes, cash, and any other assets that are not needed in the business operations. For the assets
that will be sold, inventory, accounts receivable (if being sold as discussed above), and fixtures,
furniture, and equipment (shop tools, computers, checkout counters, shelving), the value listed
on the business’ balance sheet can be utilized and necessary adjustments to their value can be
made. A downward adjustment to inventory should typically be made to account for
obsolescent inventory (X-items), as the potential buyer will only want clean, current inventory.
You and the potential buyer will set a method of valuing the inventory, and most potential
buyers will want an inventory taken near the close of the sale. A downward adjustment is
typically made for some accounts receivable, as previously discussed. An upward adjustment to
fixtures, furniture, and equipment is typically made due to the actual value of the assets being
worth more than the current depreciated value on the business’ balance sheet. Also, some
goodwill could be added in at this point.
     Second, the earnings-based approach is prepared by both the buyer and seller and is the
“useable cash flow” of the business which is also sometimes referred to as adjusted EBITDA
(Earnings Before Interest, Taxes, Depreciation, and Amortization). Here is a small example; if the
useable cash flow generated by a business is $100,000 then perhaps the business is valued at
two or three and a half times that useable cash flow. The numbers that go into the useable cash
flow would be year-end profit plus interest, taxes, depreciation, amortization, owner’s excess
salary, and any other owner’s discretionary expenses (gasoline, cell phone, travel, 401(k), health
insurance, life insurance or any other expenses). The proper way to look at the value of any
business is to compare how much usable cash flow is being generated over the last three years
from the assets on the financial statement. Comparing the values derived from both the asset
and earnings-based approaches is an effective way to understand the true value of a business
and the potential that it can generate for the new owner.
    A “Suggested Selling Price” Excel workbook can be provided upon request, which walks through
both the asset and earnings-based approaches and provides a good starting point when looking
to determine the selling price of your business. It is not a formal business valuation and is only a
suggested selling price that you will want to review and make changes based upon your
knowledge of the business. You may want an independent business valuation prepared by a
professional that knows the hardware industry well. Depending upon the complexity of your
business, a typical valuation would cost between $3,000 and $6,000.

10. Consummating the Sale

     Closely held family businesses throughout the United States are bought and sold every day. For
both parties, it is often the largest single transaction in their business careers. For the seller, the
sale represents the culmination of years of demanding work and risk. For the buyer, the
purchase may be the start of a new business, expansion of an existing business, or an
opportunity for increased profits.

    Weigh the Buyer’s Needs
A prospective buyer who has responded to the offering of your business for sale has the right to
ask general questions about your business. He or she wants to know why you are selling, your
business history, and your product or service lines. Likewise, you have the right to ask questions
of the buyer, why he or she is interested in buying, what prior business experience does he or
she have, how he or she will use the business or transform it, and what his or her expectations
are to continue to the business.
In the initial stages, you want to screen your prospective buyers for those who are serious and
have “the ability to pay.” It is usually a good idea to have someone representing you or helping
you, such as a corporate accountant, corporate attorney, and/or business broker, and let them
screen out the bargain hunters, predators, and others that are not seriously interested.

Agreement on Price and Terms
    After all the shuttling back and forth between principles and advisors there comes a decision
time. The point arrives when no added information, facts, or questions can be mustered by
either side. Either the buyer is serious and wants to buy the business or not. Either the seller is
serious and wants to sell the business or not. This is the time when a gross sales price must be
settled upon.
    The publicly listed price of a business, when listed for sale, is the asking cash price. It is rare
indeed for any business to be bought with all cash. There will be some good faith cash deposits,
but mostly it is some percentage of the asking price. The higher the percentage, the more
serious the buyer. Consequently, before agreeing on an overall price there must be some
agreement on the amount of cash down and the terms for receiving full payment.

Typical Documents Involved in a Sales Transaction
Accordingly, the following is a list of documents that may be used in a sales transaction:

A. If you choose to use a business broker, typically there will be a listing contract.
 

B. Before you provide financial information to a potential buyer, typically you will want
him or her to sign a confidentiality agreement.
 

C. You may need a professional valuation report prepared for the sale.
 

D. You will need to produce the business’ income tax returns and financial statements for
the last three years, as well as other corporate documentation.
 

E. A term sheet or letter of intent may be the first document prepared for both the buyer
and the seller, which discusses the price and terms.
 

F. After negotiations, your attorney or the buyer’s attorney will prepare a formal sales
contract for both parties to read, make corrections, and accept.
 

G. Instructions for an escrow officer of the title company if real estate is involved in the
transaction.
 

H. The seller may require the buyer to sign a new triple net real estate lease.
 

I. There may be a contract for consulting and/or a non-compete agreement for the seller.
 

J. There may be employment contracts for the seller’s key employees.
 

K. There will be a final closing statement, which should be reviewed thoroughly by all the
seller’s advisors before completion.

This outline is intended to provide you with items to consider when looking to sell your business. We can
provide you with additional information if you request it.