Most business owners don’t plan to sell their business. They do it because they have to. The days where you could assume the next generation would take on the business are long gone. Whether it’s a forced retirement due to health issues or a lack of capital, there comes a time when a business needs to be sold. Regardless of why you’re selling your business, with some planning you can reduce the time it takes to sell your business and you can take actions to increase the sale price. In this post, I review my ten tips for preparing your business for sale.
Tip #1: Identify Areas That Need Improvement and Commit to a Pre-Sale Improvement Action Plan
Buyers want to buy a business that is low risk and holds the promise of big rewards. So, the first thing you need to do to prepare your business for sale is to determine which areas of the business need to be improved to make it attractive to buyers. You want to pay particular attention to the areas that are fundamental to the success of the business and where weakness will reduce a buyer’s interest or the price they offer for the business.
I go into detail about finances below but other things to consider include:
- Fix up the physical location. A thorough cleaning, fixing those little things you’ve been living with, and a coat of paint can make a big difference so take a critical eye to the whole space and see what some elbow grease and a dollars can do.
- Take little but important steps to enhance the business’s performance. For example, push hard to collect or write off old accounts receivables. Clear slow moving or unsaleable inventory, etc.
- Take a look at your administrative functions, HR practices, and marketing. Are you files a mess? Do you have incomplete employment records? Does the website need an update?
Review all the little things that will cost not much and might reasonably be expected to make the business look like a well oiled machine.
Tip #2: Keep Your Sale Plans Quiet.
Should word get out that you plan to sell the business, you risk creating uncertainty among employees, customers, and suppliers which can devalue the business at the time you most need to increase its value. Share you sale intentions with key staff and others only as necessary and only when the news is accompanied by a non-disclosure or confidentiality agreement.
Tip #3: Recast Financial Statements
Financial statements of private companies are typically prepared with an eye toward minimizing a company’s taxable income. This tends to be at odds with what a business owner wants to show a potential buyer when selling the business. The goal when presenting financial information to a potential business buyer is to maximize the presentation of net income and cash flow.
Financial statements should be recast or adjusted to reflect the discretionary cash flow available to a new owner. This recasting involves identifying expenses like:
- Shareholder and family member salaries
- Perquisites or fringe benefits shareholders customarily make available to themselves
- Current expenses for future expansion that have not impacted historical sales
- Extraordinary expenses, non-cash expenses, and other expense items not likely to recur or be applicable to future ownership
Potential buyers need to be able to read between the lines and appreciate the actual cash flow or income generating capability of the business. By recasting or adjusting the financial statements, you can help potential buyers recognize the financial capability of the business.
Tip #4: Develop a Growth Plan
A business that is seen as having untapped growth potential is more valuable to buyers. Kind of like staging a house for sale, a well thought out and realistic plan for growth can help a buyer see the potential in a business. It serves as a road map to expansion opportunities a new owner can exploit, assuming additional resources become available. The business growth plan should assume that significant capital resources will be available after the sale and should identify areas where historic sales were constrained due to capital limitations.
Tip #5: Tackle Deal-Killers Early On
Pretending issues don’t exist can jeopardize the sale of your business. Since any business issues will eventually surface, it is far better to address them proactively rather than take a defensive posture when they are uncovered. Deal-killers may include a lease that needs to be negotiated, property that requires environmental cleanup, equipment that needs to be replaced, financial statements that need to be revised, pending litigation, or employee retention issues. Business buyers have a greater willingness to proceed when they feel the seller has been honest in disclosing the skeletons in the closet from the outset. Further, addressing issues in a timely and forthright manner helps you avoid wasting time identifying qualified buyers only to have the deal fall through because issues were not disclosed.
Tip #6: Address Key Dependencies
Reducing key dependencies in a business will serve to increase the marketability and value of a company. Three key areas include customers, vendors, and employees. Customer dependency exists when a high percentage of the company’s revenue is derived from a few large customers. Vendor dependency results from difficulty finding comparable vendor replacements. Employee dependency exists when the business is highly dependent on by key employees whose departure could severely impair the business. These dependencies create significant risks for a buyer and thus negatively impact value.
Tip #7: Carve Out Excess Assets
One method of increasing a seller’s total financial yield from the sale of a business is to identify excess assets that can be converted into cash prior to sale without adversely impacting the future of the business. For example, if a company has accumulated $450,000 of inventory but only requires a $250,000 inventory level, the seller can generate an additional $200,000 by converting the excess inventory to cash. By reducing excess inventory or selling off excess equipment, you buy time to verify that the reduction of these assets will not negatively impact earnings. This is important to do prior to the sale of the business since a buyer will likely value the company primarily based on earnings and will not be interested in paying for excess inventory.
Tip #8: Identify Likely Buyers
Sometimes the best buyer of a business is a competitor or related business. Industry research can determine if it makes sense to approach companies in a related business that might be looking for complimentary products or services, new territories, capabilities, or sources of revenue. These strategic buyers may have a strong desire to buy a similar or related business as a means of growing through acquisition or because they may recognize the synergies that will result from the combination of the two companies. By identifying likely prospects, the search for a buyer can reduce the time to sell and can maximize the overall deal value.
Tip #9: Get an Independent Valuation
An independent business valuation enables a business owner to get an idea of what they can sell the business for and enables everyone to confirm they are on the same page prior to beginning the sale process. You should get an independent appraisals if your business is equipment-intensive or includes real estate. Appraising these assets will help determine the overall value of the business and will help in the planning process prior to going to market. The buyer will likely need to have these assets appraised and being prepared will convey integrity during the sales process.
Tip #10: Maintain Strong Sales Performance Prior to Sale
Current sales performance is often more important to potential business buyers than your sales record for the last ten years. The period during the sale process is a decisive one. If sales performance deteriorates during this period, marketability and value will be negatively impacted. The business owner must focus their efforts on whatever needs to be done to maintain consistent (ideally improved) sales, margins, and profits during the sales period.
Planning and preparation are critical in order to maximize the value of a business and the probability of closing a sale. In order to complete improvements by the time you start marketing your business for sale, be sure to document your improvement plan, determine the resources you will commit to the effort, and how you will assign tasks. Most importantly, create a plan you can commit to implementing. If you think selling your business is on the horizon, give us a call today at (440) 796-4592 to learn more about how we can help you prepare your business for sale.