02 Sep 12 Steps to Prepare For Selling a Business
Most business owners don’t realize that over 75% of businesses put up for sale never get sold. The number of transactions is near record levels as baby boomers are selling their businesses. Buyers have many choices. If owners prepare for selling a business it will help them fight the daunting odds.
If sellers don’t take steps to stand out from the crowd and prepare for the business sale, they will likely not sell or be heavily discounted.
Here are 12 important steps owners can take to maximize the value and chances of selling a business:
- Start Early. When you think about preparing and selling your business it is measured in quarters and years. You will need a lot of time to make changes and demonstrate the highest level of performance you can just prior to the sale of the company. If you are going to prepare and sell your business it will probably take at least a year for a small business with minor work. That gives you about one quarter to do the work and nine months to continue the work while you sell the business. The process could easily take 2 or more years for a larger business with a longer sales cycle.
- Maximize profitability. As the seller you must be aggressively implementing improvements and growing the business right up to the close of the sale. This is the time to pull out the stops and increase your profitability. You need to be looking at ways to reduce costs and increase overall margins. Every dollar you increase the profitability will be multiplied when figuring the business value. Have you neglected increasing your prices lately? Can you pass on a small increase without affecting your long term sales? Remove hidden costs like unnecessary memberships, special perks, etc. If you are not willing to pay 2-3 times the price then you probably want to move it off the books.
- Minimize the working capital. One thing that is often overlooked by business sellers is the working capital required to operate a business. (AR + Inventory+ prepaids – AP) The seller may have built the working capital up over many years but the buyer has to fund this immediately upon buying the business. This is often referred to as “the second check” a business buyer needs to write when they buy a business. Now, many deals include a “working capital” adjustment. This means the price the buyer is paying includes the seller leaving sufficient cash and/or AR to fund business operations. If you are managing the working capital you are freeing up trapped cash and lowering the barrier to entry for a new buyer and your potential “working capital” adjustment.
- Know the value of your business. The #1 reason for a business not being sold is the valuation gap between what the owner thinks the business is worth and what the buyer wants to pay. Buyers have to believe they will be getting a good return on the money they are paying for a business. Get an independent business valuation early in the process to understand the realistic market value. If the value is lower than you want, review your options. It may be worth it to take the time and make changes to increase the value. It will only cause frustration if you put the business on the market much higher than fundamentals suggest. Marketing your business for the right price eliminates the biggest challenge and a waste of time.
- Develop a sales pipeline that shows historical growth and future growth potential. Good sales make or break a business. The same can be said for selling a businesses. If you want to sell your business faster and for more money you need to show a history of consistently increasing sales with a solid current pipeline and future growth areas/targets identified. Buyers want to see that the business has a solid sales pipeline so they can feel comfortable that the revenues will remain solid after the transaction. You are laying the groundwork for the buyer and your business to be successful for the long run. Have the sales information available, current and share it with the buyers.
- Get Owners out of the critical path. When your business started you (and/or your family members) were the one who had to make the decisions, had the knowledge and the vision. You were the hub of the business. You will be gone shortly after the sale. Any special knowledge, daily management, or key relationships you hold need to be transferred to others who will be staying with the business. Having a solid team of people around you that can run the business when owners are gone will significantly increase the value and attractiveness of the business. A good measure of your team is being able to take a couple weeks to a month off without the daily operations of the company taking a hit.
- Get the financial records and controls in order. If a buyer can look at good financial records and easily sees that the accounting was done properly and has proper controls, it gives them confidence in the numbers. If you have poor or non-existent financial records and controls it is worth the investment to get them set up and in place. Your business will be discounted heavily or not sell because of poor financial records. Buyers need to have confidence in the financial information because it is the basis for the price they will pay for the company. This is a must have item.
- Get business records in order. Tax returns, corporate ownership records, operating agreements, partnership agreements, leases on equipment, loan documentation, are all going to be needed. It is best for you to dig through those files and find them now. You might need to get replacements from different organizations that can take a while. Get them scanned and organized electronically so you can share them easily. You can spend many hours later frantically putting these things together or you can do it now and save the stress later. Just like everything else, complete and concise records show the buyer you are organized and adds to the value of the business.
- Look at the business from the viewpoint of the buyer. This is a critical and often overlooked aspect of selling a business. You as the business owner are in the best position to identify issues potential buyers may find when looking at your business. Each one of these could kill the deal. Take a hard look at your business pretending you do not know anything about it. Ask others to review your business to get other perspectives.
- Physically prepare the business for sale. Just like any major asset, it will increase you chances of selling a business with a deep clean and staging. This is not a light dusting. This is a deep cleaning. In many cases this means bringing in professionals. Clean all vehicles. Fix building issues and make sure to replace tired office equipment. Also make sure the lighting is all in working order. A well light business creates a more positive atmosphere. Remove all items you are not using that are causing clutter and store off site or dispose of properly. Only the most serious buyers will be walking through your business. If you prepare for selling a business properly it will sell faster and for more money.
- Show potential buyers how to be successful. Potential buyers want to see that they will be able to come into the business, run it successfully, and increase the profits over time. Buyers don’t know that you are making improvements, launching a new product line or ready to land new customers. Get these things in process, document them, and communicate to potential buyers. Better communication will , you have a much greater chance that they will better understand the business potential and value. Write down your ideas, plans and your progress on each. Explain how you think the transition may go with the new owners. Your plans will give buyers an initial path to follow while they are developing their own plans. Ask buyers for input. You might get some great ideas! Showing buyers that you have thought about how they might go forward and be successful will help to close the deal.
- Seek professional advice. Selling a business is often the largest financial decision you will make. Advice from seasoned Investment Bankers or Business Brokers will help you to sell for more and reduce the tax liabilities considerably. You will probably need to go outside of your current advisory network unless your advisors are actively involved in business transactions regularly. Your current advisors should be able to provide you with a list of potential transaction advisors. If not, you can seek out M&A Advisors, Business lawyers, etc. that deal heavily or specifically in transactions. Do not take your current business advisors word that they can help you through it. The comfort factor may cost you dearly in the end.
Owners can significantly increase the chances of creating a successful company if you prepare and execute. Selling a business takes time, preparation, and effort. If you are diligent, you can successfully create your business exit.
It is a sad situation when business owners get to the end and can’t exit like they want.
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