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Prepare Your Business For Sale
If you are or are planning to exit from your business, you need to prepare your business for sale. Preparing a business for sale is not something you can do quickly and without planning. It takes planning ahead of time to be transaction ready. It could take anywhere from 4 months to 3 years depending on the size and complexity of your business as well as the current state of financial performance.
Here are some areas in your business you may need to prepare prior to putting it for sale:
Management & HR
1) Are you critical to the day to day operations of the business? If you are then take steps to plan for either a manager in training to take over or if yours is a smaller business, document the responsibilities and tasks you do. This will ensure that when the times comes, you will have either an owner absent business in place, or a training documentation on hand to pass over to the buyer.
2) Do you have any family or relatives working in the business that will leave when you do? Ensure succession plan is in place.
3) Are there any key employees that are critical to maintaining revenue or a client base? Take note of any of these key employees and the impact should they leave. Then either work out an employee retention plan or start planning contingency plans or decentralizing their client contact base.
Maximizing Business Valuation
1) Do you have any untapped opportunities that will bring in significant profits within the time frame that you plan to sell the business? If there are and you can wait 1 year for those to materialize into your financial statements, why not work on it and get those contracts or sales? While a surge in the last year will not increase the valuation proportionately due to most valuation using weighted average methods, it will have a decent impact. It also shows the buyer that the business is growing and now slowing. Earnings are important to business valuation and the more you have in a growth trend, the better your valuation will be.
2) Many people don’t understand working capital. If you are unsure what the impacts are, you can learn about working capital here. If you are a single owner of a business, you may run it as though it is your own asset and keep a high cash level or overload on inventory. Basically, this means that you are not running on an efficient working capital structure. Speak with your accountant on how you can optimize the structure. While this is not critical as the minimal working capital can always be calculated during a due diligence, it will help to reflect all these in the financials prior.
1) If you have hard assets, make sure that you keep up proper maintenance and they are all working optimally to generate the most revenue for you.
2) If you have not protected copyrights or trademarks, then check with your lawyer to do so. Make sure your patents are filed if you have any.
3) Organize your inventory. If you have any slow moving or products that have not moved in a long time, discount them and sell them off to recoup your costs. Buyers typically do not like aged inventory and usually do not want to pay for it.
1) Maintaining confidentiality is of utmost importance when selling your business. The negative impact can be devastating if the word got out that you are selling your business. Employees who find out start to feel insecure and many begin job hunting as a safety net. Even if there are no plans to lay off any employee, you do not want them job hunting only to find a better job for a higher pay and leave you in the critical moment. You also don’t want your competitors finding out because they can sabotage you or if you were in the B2B business, they may use the info to jeopardize your client’s confidence. These are just some scenarios that could play out but as every situation is very fluid, but maintaining confidentiality of your intention to sell your business it paramount.
Get Professional Advice
Unless you are a Business Broker or a Merger and Acquisition expert, you could probably use the help and advice of one. There are business owners who think selling a business is as simple as selling a house but they are wrong on both ends. Houses are not an easy transaction, and businesses are much more complex with many moving parts where the deal can fall apart. Many business owners trying to sell on their own end up damaging their business, lose clients, experience employee exits, all of which affect the bottom line. When profits fall, then so does the value of a business. The professionals are there to guide you along the way, protect you, and do the heavy lifting involved in selling a business so that you can focus on holding the fort or even ramping up sales. The biggest mistake business owners believe is that once they have a potential buyer, the deal closes. Nothing can be further from the truth. It may take up to 3-4 potential buyers or more to successfully sell a business. Statistics prove that businesses sold by a good business broker can sell for up to 20% more than if you sold it on your own. I know of a business brokerage that has a 90% close ratio while the industry average is just 20-30%. Picking the right broker is critical so that you protect your business and don’t waste your time.
Identify Your Potential Buyer
It is very helpful to know who your potential buyer could be as this can affect how your company is valued and the final transaction price. There are 3 broad groups of buyers: Strategic buyers, financial buyers, and entrepreneurs (or people leaving jobs to own a business).
Strategic buyers tend to look at the revenue and customer base side of the business because they are acquiring your business to “add on” to their existing structure. They typically do not get bothered by your cost structure because the synergies of merger will allow them to share the cost base with their existing business. Many times, a strategic buyer may be willing to pay more for your business if the synergies are significant or they highly value a certain client in your client base.
Financial buyers are the ones that may use leverage to buy your business. They are most interested in the strong cash flow and profits of the company, the current interest rate, and the ability to use financial leverage to improve returns. They may be more sophisticated in their due diligence and deal structure with you. So if your potential buyer is a financial buyer, you have to be flexible with the deal structure as they financially engineer an offer for you.
Entrepreneurs are the ones that buy a business to run on their own. They may have some business background and often are willing to take more risks. They can be flexible and easy to work with or they may have a low risk tolerance and crash a deal. Typically, entrepreneurs have a higher risk tolerance than regular employed person. Most times, entrepreneurs will just start their own business from scratch. However, those that have started and exited their previous business for a good profit might not want to have to deal with startup problems and just want a quicker way into the new business.