This is the first article in a series to help you navigate one of the biggest decisions you’ll ever make as a business owner: selling your business. Even if a sale isn’t on your radar right now, the strategies we’ll share will help you build a stronger, more resilient business today.
Key takeaways:
- When you’re selling a business, informal business systems and lack of documentation increase perceived risk, even when a business is profitable
- Well-documented financials, operations, and employee policies give buyers and lenders confidence that a business can thrive during and after a change in ownership
- Formalizing your business practices now makes running your business easier now and selling in the future easier
You’ve poured your heart and soul into your business, from the day-to-day operations and your employees, to the business relationships you’ve formed. When the time comes to sell, the next owner needs to understand all of these aspects to manage the transition and keep things running smoothly. Yet many business owners keep information on what makes their business tick in their head or spread across systems that only they can understand.
In these situations, selling becomes difficult because practices and systems aren’t formalized. Things like undocumented procedures, scattered financials, and verbal-only agreements create uncertainty for buyers and their lenders, and uncertainty doesn’t inspire confidence or investment. Buyers need to “see” what the current owner “knows”—and they need to see it on paper.
Why business formalization matters
The reality is that your business needs to be able to run without you one day. Formalizing your practices and procedures now isn’t just about preparing for a future sale. It’s about building a business that can thrive independently of you, making it both more valuable and more transferable when the time comes.
Buyers are making a major investment decision, and they’re comparing your business against others to potentially buy. Well-documented operations give them a clear understanding of what they’re purchasing, which reduces their risk and can lead to a higher price.
On the flip side, informal operations signal owner-dependency. For most would-be buyers, that’s a deal breaker. They won’t invest in what they can’t understand, no matter how profitable your business appears.
Small business lenders’ perspective matters too, as your buyer will most likely need financing to complete the purchase. Lenders need clean, organized documentation that allows them to conduct due diligence faster and move the deal forward smoothly. When lenders are waiting on you to gather scattered information, the process drags out and you risk losing a qualified buyer. Cleaner documentation often translates to receiving more competitive offers and higher certainty of closing.
Four critical business areas to formalize
Formalizing your business systems can feel overwhelming, but you don’t have to tackle everything at once. Focus on these four critical areas to make the process manageable and make meaningful progress quickly.
Accounting and financial systems
Buyers and their lenders start by reviewing a business’s accounting and financial systems to find early signals as to whether things are in good enough shape to proceed. Common issues include disorganized receipts, crossover between business and personal finances, and an inability to produce historical tax files or year-to-date financial data. Messy books are an instant red flag to lenders and buyers.
If you’re not confident in your financial recordkeeping, now is the time to start working with a bookkeeper or accountant. Their expertise will save you time, reduce errors, and ensure your financials meet the standards buyers and lenders expect.
Here’s your path to formalizing your financial systems:
- Transfer financial systems into professional accounting software (such as QuickBooks, or Xero), if you’re not already on a platform
- Separate personal and business finances
- Document all revenue streams and expense categories
- Create a clear chart of accounts payable and receivable
- Identify top clients and/or products and include the supporting numbers
- Establish regular financial reporting. This includes monthly profit and loss statements, current balance sheet, and cash flow records
- Keep 3+ years of clean financials ready to review. These should be the same financials that you submit to the IRS during tax season
Formalizing these systems gives buyers confidence that they will be able to manage them when they take ownership of your company. They’ll know exactly who to pay and when, and operate with clearly documented accounts, consistent financial reporting, and audit-ready records.. Lenders will be able to look at the business’s financial health quickly to keep the sale moving forward.
Human resources (HR) policies and employee documentation
Buyers need to understand who works at your business, how they’re compensated, and what expectations are in place. Verbal agreements, unclear roles, and inconsistent policies create risks that a buyer may not be willing to take on.
Here’s the essential HR documentation buyers will expect to see:
- An employee handbook, even for small teams
- Job descriptions and responsibilities
- Compensation structures and benefits
- Clear policies around PTO, sick leave, and termination procedures
- Organized personnel files
- Key employee agreements or non-competes
When policies, roles, and compensation are well-documented, you reduce your liability after the sale and avoid getting pulled back into employment disputes or misunderstandings.
Operating procedures and systems
Long-time business owners often keep critical information in their head without even realizing it. When you’re the only one that knows how the operating procedures and systems work, a new buyer runs the risk of the knowledge walking away when you do.
Here’s what you need to document so the business runs without you:
- Standard operating procedures (SOPs) for core business functions
- Production and/or service delivery process
- Your sales process and customer journey
- Quality control procedures
- Training materials for key roles
- Any proprietary methods or information
As you document these aspects, do so in a way that someone would be able to run the business without you based on the information you’re providing.
Relationships and contacts
You’ve likely accumulated hundreds, if not thousands, of relationships and contacts throughout your time in business, but if these contacts aren’t centralized, a new owner risks losing them.
Here’s what to centralize and document:
- All vendor and supplier contacts along with the contract terms
- All professional relationships, including attorneys, accountants, insurance brokers, etc.
- Key customer relationships and history. A customer relationship management (CRM) system or organized database can help with this
- Written agreements with critical partners
- Exclusive arrangements or special pricing
Your business is built on relationships. Documenting them along with critical contacts is essential to keeping the business healthy after a sale. Getting agreements with key contacts in writing reduces post-sale risk and showing that these relationships are transferable will give buyers confidence in your business’s ability to thrive after they take ownership.
Your first steps toward formalization
Getting started is often the hardest part, but you can start knocking things off of your list in two ways.
- Choose the area that you struggle with the most and focus your attention there first
- Choose the area that’s “almost there” and take it to the finish line for a quick win
Right now, don’t aim for perfection. Once you get started, you’ll get an idea of the areas that need more work. The more formalized your systems and documentation are, the more likely your business is to survive a change to a new owner.
Work with Grow America to prepare your business for sale
Formalizing your business might feel like a big lift, but the payoff is a business that runs more efficiently today and commands a higher valuation tomorrow. Buyers will see a well-run operation they can confidently step into, and lenders will view the transfer as lower risk.
Whether you’re just beginning this process or putting the finishing touches on your documentation, Grow America can help. We’ll work with you to structure your business for sale and position it to attract serious buyers and competitive financing.