Close work with banker can smooth a sales transaction

For a small business owner, the process of stepping away from the business they started and watched grow can be intimidating. Whether the business owner is hesitant to turn over the keys to a new owner, or is simply unfamiliar with the selling process itself, bankers play an important role in preparation for a sale.

In addition to an enormous time commitment, small business owners invest their own money into a business. Thus, the valuation stage of selling a business is critical to maximizing return on that investment.

From the start of a business and along the way, bankers emphasize the importance of keeping organized, accessible records of past financial statements. When going into a sale, the seller must be able to provide extensive records of the business's finances over the past few years. This should include income, expenses and a balance sheet including all assets and liabilities.

On the other side, the banker analyzes these documents to make sure that the current cash-flow situation will be able to support the debt taken on by the buyer. Simply put, by presenting these records, the seller will be able to show a prospective buyer what exactly they will get for their money.

In addition, the seller should include inventory levels along with the past financial documents. Having organized records of how inventory levels have changed over the years will make a business more attractive to a buyer. Technology has made inventory tracking much easier today than it was two decades ago.

A significant part of any small business banker's job is to help business owners along the way, and make sure that they are able to produce these documents on a regular basis. There are several tips that U.S. Bank gives small business owners going into any meeting with their banker:

* Make sure your banker has the most recent financial reports about your business. This displays a commitment to both long and short-term management.

* Create a team of advisers and facilitate communication amongst the team. Examples of team members include bankers, CPAs, lawyers and significant others.

* Take advantage of two-way communication. Ask your banker for advice, and use meetings as a forum to discuss new ideas.

Jenkins Communications of Carson City provides an example of a business that worked to position itself for growth after an ownership change.

Jenkins Communications offers telecommunications and Voice over IP (VoIP) services to small and mid-size companies across Nevada.

Kevin Prinsen, then a partner at the company and 20-year veteran of the telecommunications industry, had the opportunity to take over the company in August 2012. U.S. Bank financed the acquisition through an SBA 7(a) loan.

The U.S. Small Business Administration is a common vehicle for the acquisition of existing small businesses. One requirement for an SBA 7(a) loan for acquisition is having at least five years of experience in a management or ownership role.

Prinsen gave several pieces of advice to individuals interested in acquiring a small business:

* "Keep all lines of communication open. There are many moving parts in this process, so it's crucial to make sure that all parties are informed and up-to-date."

* "Having knowledge of both the business and the broader industry was a tremendous advantage going into the process. I was familiar with the company's past financials, and I had a vision or where to take it next."

* "Keep paperwork organized. When I began the process of acquiring Jenkins Communications, I came to the bank with a detailed plan to move the business forward and extensive paperwork to exhibit my past financials."

A key to Prinsen's business plan was projecting future growth.

"Voice over IP is the future, and I expect that to happen sooner rather than later," said Prinsen. "With the low cost of a VoIP system, this is an attractive option for customers ranging from transportation to medical industries."

Prinsen's optimistic outlook is in line with the improving sentiment of small business owners throughout last year.

The 2012 U.S. Bank Small Business Survey provided a snapshot of the attitudes, perceptions and outlook of small business owners across U.S. Bank's 25-state national footprint. This year's survey was conducted in March and April of 2012 among 3,220 small business owners with less than $10 million in annual revenues.

Overall, 69 percent of respondents said the financial health of their business was "good," "very good" or "excellent," up from 64 percent in 2011. In addition, 29 percent said they saw revenue increase over last year, which is up slightly from 26 percent in 2011.

What about family businesses?

Age aside, it is difficult for a small business owner to imagine selling the business that they spent years investing in and growing. That's, in essence, part of the reason why family businesses exist. For those interested in pursuing the family business route, succession planning is something they should have in mind along the way.

Family-owned businesses are commonly passed down from generation-to-generation. However, according to the U.S. Small Business Administration, less than one third of family businesses survive the transition from first to second generation ownership. To ensure a smooth transition, it's beneficial to treat it like a sale by involving a team of advisors and provide comprehensive financial reports and forecasts.

The bottom line: There are many factors that go into how a small business owner chooses to step away from the business they built, but open communication with your banker from start to finish can ensure that an ownership transition is a smooth process.

Janet Hanley is an assistant vice president and relationship manager for U.S. Bank in Reno.