When should you think about selling your business? The best answer is, when you become the owner. At the earliest stage, consider an exit strategy. Selling is one way to exit your business. Other exit strategies can be to take the business public in an initial public offering (IPO) or pass it on to family members with a succession plan.
If you plan to sell your business, then understanding what creates value will help you focus on value-creating aspects of the company. Buyers look at the history of a business as support for today’s value. Wouldn’t you rather buy a business with revenue and profits trending upward? That means timing of the sale will be important to you. If your interest is waning, the industry is stagnating, competitors are multiplying, your health is declining, you may find sooner rather than later will bring in the best offer. Managing the business with an eye to its sale, will allow you to pick the best time to sell.
An experienced, serious buyer will spend considerable time on due-diligence. That is the process of scrutinizing your markets & marketing strategy, financial operations, property & equipment, and business operations & personnel. Your preparation will reduce a buyer’s concerns and increase their willingness to make an offer.
Manage the following aspects for creating value.
Maintain excellent records. Lowering the buyer’s risk will increase what they are willing to pay. Help the buyer feel confident that what they see is what they’ll get. Keep good documentation for inventory control, payroll, financial statements and other key business processes.
Buyer’s thinking: A buyer has to continue to run the business when you are gone. Having up-to-date written processes means the transition will go smooth even if some employees leave after the sale.
Have a clean balance sheet. Write-off or negotiate payment of old accounts receivable items. Take care of the accounts payable items that have been on the books because of disagreements. Focus on paying down debt, cleaning up the inventory, and minimizing liabilities.
Buyer’s thinking: Old receivables show an unwillingness for customers to pay. A buyer will think there are unsatisfied customers. Then the question is raised as to the quality of the product and service, the level of customer service provided, and the overall customer experience and attitude.
Focus on profit. The concept is simple… increase revenue, reduce expenses, increase profits. At least it’s simply stated. To get the highest dollar for your business will require you to manage the income statement. Are there opportunities to increase sales that have been overlooked or put on hold because you’ve concentrated on serving the current customers? Have you reviewed contracts on real estate, property insurance, employee benefits, and so on to see if you can get the same or better service for a lower price. Does the company lease vehicles? Can you cut your lease expense? If your income statement reflects accelerated depreciation, which is used to reduce profits and lower the tax liability, a different method for income statement purposes may reduce this expense, increasing the bottom line. These are some general ideas for you to consider.
Buyer’s thinking: A trend of increasing revenue and profitability shows that current management and processes are performing well. The buyer can focus on growth with the expectation the current profits will be maintained after the purchase.
Be sure the facilities, machinery & equipment are in good general condition. Curb appeal is important. Present a clean, organized facility. Have the furniture & fixtures, vehicles, machinery & equipment in good condition.
Buyer’s thinking: If the seller maintains the property and equipment, then there is reason to think other parts of the business are well managed. The buyer may be using these assets to collateralize the loan to finance the purchase. The better the condition of the assets the more value the banker will assign to them resulting in a larger loan.
Have the right personnel. A good management team and employees with the right skills need to be in place.
Buyer’s thinking: Adequate personnel keeps business disruption to a minimum during and following the transition. A buyer can be more confident that sales will be maintained and impact on cash flow will be minimal.
Get a valuation analysis: It’s difficult to value your own business. The personal attachment after years of hard work and personal sacrifice tend to inflate the value to a seller. An ouside expert can give you a range of value developed from sound valuation practice and experience.
Getting the highest price for your business may take 3 to 7 years of preparation. The payback comes when you get the best price possible for the firm. And, knowing the business you have worked so hard to create will continue into the future serving your customers and providing jobs for your employees.
