When getting ready to sell a house or a car, the first thing people do is clean it up and get rid of the clutter. It is not different when selling a business. The process just has to begin much sooner.

Buyers look at the past three or four years of financial performance, so that is when the cleanup process should begin. Sellers need to look at what the future buyer will be looking for and organize appropriately. It is important to consider the following before deciding to sell:

Are you taking out too much compensation, travel, entertainment or other related expenses? -- This may save you money on income taxes, but buyers have a difficult time differentiating between what is required for business and what is excess. A buyer may agree to pay x-times, so an additional $100,000 of expenses could cost you hundreds of thousands of dollars in sale value. With excess expenses, your bottom line or net income is lower, which makes the profitability and the amount a buyer will pay lower.

If your business is an S corporation or LLC, consider taking out equity distributions that don’t affect operating income. -- Equity distributions are taken out after profits that were already taxed. Since profits will be higher because of taking out equity distributions versus owner compensation, the business will be viewed to be more valuable. Earnings (amount of profit or after-tax net income) are only subject to income tax and not employment tax, which may also save money.

Are you keeping more inventories and working capital in the business than you actually need to run it? -- Buyers will assume that the inventory and working capital level that the seller maintained is what is needed. Take those dollars out of the business now or they will be lost inside the purchase price. You only need enough inventory to meet business needs, and that is what the buyers look at. Don’t put the money into inventory when it is not required or it is money lost.

Have you carefully evaluated capital investments to ensure you still will own the business to see the return on those investments? -- Depreciation expense is added back to calculate EBITDA (earnings before interest, taxes, depreciation and amortization). Lease expenses are not added back. One will cost you money upfront while the other will cost money over time and come out of future expenses. Reconsider hiring staff and salesmen to develop or market new products or business lines as that can take years of added expenses to develop income for future periods.

Have you done what you can to reduce risk? -- Try to lock up significant customers into long-term purchase contracts. Add employee safety programs to reduce workmen’s compensation claims. Document your product warranty policies and product usage terms. Prepare an employee handbook if one does not exist.

Have you kept good records? -- Buyers will be interested not only in your financial performance, but inventory and accounts receivable turnover, rates of closing on quotes and employment records of your staff.

Are you preparing annual financial statements for your business, and are they done by an outside accountant? -- Most buyers will do their own due diligence, but having financial statements done using Generally Accepted Accounting Standards by an outside CPA will add credibility to your financial results. Income tax returns are prepared to yield the lowest possible income, using accelerated methods to write off expenditures for equipment or product development. Tax returns may not reflect the true income of the business that you want to present to a buyer.

A very important thing to consider when deciding to sell your business is to keep your heart in the business up until the day you sell it. A business is only sellable if it is profitable. The more you can grow and increase your profits, the more your business will be worth to the buyer.

Written By: Tom Scharf, Partner at Walthall CPAs