You could put up your business for sale tomorrow but you probably will not get top dollar for it. The same principal applies for any asset that you want to sell whether it is a house or car.
By preparing your business for sale, you ensure that all the nuances are resolved to ensure a smooth transaction. While doing this prep work, you may also discover things that you could change or optimize to help you sell the business at a higher price.
i) 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.
ii) Increasing 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.
2) Many people don’t understand working capital. Some business owners run their business with working capital as though it is their own bank account and keep a high cash level because they do not need the money or stock too much inventory. What this shows on financial metrics is that the business is not running on an efficient working capital structure.
Speak with your accountant or us 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 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.
4) Any capital assets (equipment, vehicles, etc) that are not being utilized to generate income should be sold so you can keep the money.
iv) Maintain Confidentiality
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 do not want your competitors finding out about the sale of your business.
v) Get Professional Advice
Unless you have sold a business before or are very familiar with the sale process, you could probably use the help and advice of an expert.
Many business owners who try to sell their business on their own end up damaging their business, losing clients, or have employees finding new jobs creating a HR nightmare. Data have shown that having the help of an expert could increase the sale price of your business by up to 20%.
If you are reluctant to spend 10% of your business value on commissions for a broker and still want to sell a business on your own but could use ad hoc expert advice, drop us a message. We love empowering business owners with the know how without the hefty price tag.
vi) 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.