11. An independent valuation of our land and three buildings. This may have been premature when it was originally completed (well before the sale); however, we did it to highlight any potential issues requiring our attention, such as zoning, parking or survey irregularities. It was a proactive move, and required only minor updates for the final sale documents.

12. An environmental assessment. We had this done by an independent certified environmental site assessor. Our Phase I audit was relatively inexpensive and provided deemed us “clean.” Potential environmental issues, such as air, water or soil, would have been exposed to a potential buyer—had they existed. And these definitely would have required attention and correction before any business sale could have taken place.

13. A summary of legal actions from the past five years, including any pending or threatening action. Thankfully, this was a short list. It included three workers’ compensation claims that had been appropriately resolved. Each was documented in detail. Two others included an unjust dismissal and a minor claim for sexual harassment. The resolutions were documented.

14. A copy of our company handbook and our gain-sharing plan. This was easy to include because it was updated at least once a year and printed and distributed to all employees.

15. My calculation of normalized EBITDA (NE). We used this as a benchmark to determine our preliminary company valuation. EBITDA is defined as “earnings before interest, taxes, depreciation, and amortization,” and is normalized by increasing that figure with expenses such as excess owners’ salaries and bonuses, life insurance premiums related to the buy/sell agreement and other perks not expensed if owners were replaced by independent managers. It is to the vendor’s advantage to maximize this calculation since a multiple of this figure is one method of establishing a value of sale price. For mid-cap, privately held companies, multiples of two times NE would be considered on the lower end, while multiples of four are on the higher side. The more attractive the Black Book, the higher the multiple justification. For companies with a well-established, respected and sustainable corporate “brand,” the multiple can double!

Read: The Appraisal You Can’t Afford to Miss

16. A listing of our current accountant, lawyer, and other consultants used within the past five years, with contact information for each.

17. The organization chart, showing reporting responsibilities.

18. Copies of non-compete agreements.

19. Listing of employee fringe benefits, with percentage paid by the company.

20. Copies of our insurance policies, including policy number, type of coverage, expiration dates and annual premiums. This included property, liability, and health and life insurance on owners.

21. A list of potential buyers for our company, with a one-page synopsis of why each may be a credible suitor. I came up with only three. Although I did not approach any, one of them was referred to us by a mutual friend and we met to discuss the possibilities. He turned out to be a classic bottom-feeder, and I realized how difficult it would be to pursue a buyer on my own.

If this sounds like a lot of work, it was. But completing it slowly over several months decreased the anxiety and pressure. When the right time arrived, much of the data I needed was easily available.

As I researched, identified and interviewed potential advisors, the Black Book provided a communication tool to describe our organization and aided in selecting the most appropriate fit before committing. Within a few hours, these advisors were up to speed, with an excellent overview of our organization. When we eventually retained our transaction accountant and lawyer, one used the material for the company valuation; the other, for his pre-due-diligence audit.

Considering that 50% of deals fall apart during due diligence because buyers discover undisclosed adverse information, this start to the pre-due-diligence greatly increased the probability of a deal completion. I feel confident that the related reps and warranties contained complete and honest data, and that subsequent legal action for misrepresentation was avoided. And when our buyer did come forward, it was that much easier to pass the champagne!

Garth Stephanson, CPA, CA, is a retired business owner and CEO based in Belleville, Ont. He is a coach/mentor who assists many business owners at the beginning stages of selling their companies. He can be reached at (613) 966-2800 or by email.

More from Garth Stephanson: What Really Happens When You Sell Your Business

  • 1
  • 2
Loading comments, please wait.