The reasons for selling your business may include a desire to reduce your ownership risk, a desire to pursue other opportunities or a desire to retire. Either way, you want to ensure you realize the maximum value of your business. Selling your business is a process that requires preparation and planning. You want to ensure that your business is represented at its best so that it demonstrates value to buyers.
Develop a business growth plan
Historical and projected year-over-year growth is a great way to attract buyers and motivate them to buy your business. Buyers aren’t interested in maintaining the status quo; they are interested in growth opportunities. Studies show that businesses with a well developed growth plan and exit strategy will sell for significantly more than businesses that do not have a plan. Declining sales will have a negative impact on the sale. Buyers will perceive this as the new normal and will discount the price and/or change the terms. Decreasing sales are very difficult to validate as a reason for selling.
Make yourself redundant
If your business can’t run without you it will be very difficult to sell. When it does sell, you will likely have to stay on for an extended period to “train” the buyer. Customers and suppliers need to see the value of signing on with the company — not the owner.
Develop a strong management team
You can’t remove yourself from the business unless you develop a strong management team. A buyer will consider the quality and experience of your employees as a valuable asset that will drive up the value of your business.
Consider replacing family members & reducing owner perks
Many business owners understandably consider their business a family asset. They hire spouses and children, lease cars and cell phones, and expense other owner perks through their business. Even if other family members add significant value, it is unlikely that a prospective buyer will be comfortable hiring a family member. Owner perks, although valid, reduce operating income and do not show your business in its best light. It is advisable to reduce owner perks in the year or two before sale (or at least show them as a specific, verifiable line item on your financial statements).
Sell or transfer non-core & unnecessary assets
Many owners keep obsolete or unnecessary assets that they no longer use. Similarly, many business owners keep non-core assets and real estate that are not required to run the business. Buyers are only interested in purchasing the assets that are necessary to operate the business. They will place a zero value on unnecessary assets. Non-core real estate assets may have negative tax consequences to the buyer on sale and should be transferred to a holding company.
Manage your working capital
Obsolete or excess inventory and stale accounts receivable are of no value to a buyer and may reflect badly on the quality of your business. It is prudent to reduce inventory levels, collect stale accounts receivable and write off obsolete inventory and uncollectable accounts prior to offering your business for sale. The Summit Group can help you determine your required working capital.
Diversify your customer base
Reliance on one or a few concentrated customers is a red flag for a prudent purchaser. It significantly increases the risk to the buyer and consequently reduces the price. A broad customer base will attract prospective buyers and also increase the earnings multiple and value. At a minimum, business owners should strive to “lock in” the core business relationships to written contracts.
Much like you would stage your home for sale, it is important that your business show well. Now is the time to repair your operating equipment or demonstrate that it is being properly maintained. Obsolete inventory should be discarded and redundant inventory written down. Uncollected accounts receivable should be written off and doubtful accounts written down. Look at your business premises with the eye of a potential buyer: Is it clean? Is it crowded? Is it well maintained?
Identify problems & deal with them
Nothing can destroy a sales transaction more than an unanticipated problem that only comes to the attention of the buyer during due diligence. The first reaction of a buyer is to wonder what other problems lay beneath the surface. It is important to know your businesses strengths AND weaknesses, and deal with all skeletons in the closet.
Obtain exit strategy tax advice
The time to get tax advice is not after you receive an offer from a buyer. At the end of the day, what is important to you as a business owner is how much cash is available to you after the transaction is closed. An experienced tax accountant or lawyer will have strategies and advice that will minimize the taxes payable on sale. However, those strategies may require action prior to offering the business for sale.