As they begin a new year, many business owners are considering how to prepare their business for sale. For some, this simply means sprucing up their operations with cosmetic improvements. For others, the following steps are necessary to ensure the goal of selling one’s business can be fulfilled.
Determine if now is the right time to sell. A business valuation involves many variables (and many of them are subjective) that often means various “experts” looking at the same company can formulate different recommendations. However, many small and medium-sized companies are sold for prices expressed as a multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers will pay. If the business’s current financial picture doesn’t match your expectations, one or the other has to be adjusted.
Know your reason for selling. This is one of the first questions a buyer will ask, so you need to be able to articulate your motivation. Your answer needs to be honest and, ideally, shouldn’t express any urgency. Buyers would expect to hear things like retirement, moving out of town or pursuing other non-related business interests. Red flags are raised if the answer seems ambiguous and unsure. This is why it’s better to sell when times are good rather than waiting to burnout when they aren’t.
Get your books in order. Prospective buyers will want to see at least three years of financial statements, including balance sheets and income statements. You will need to be able to document your business’s true profitability by identifying nonoperational expenses (e.g. personal auto lease and medical fees). Sellers need to quantify and substantiate these items because, at the end of the day, buyers purchasing a business are really buying into its profitability.
Make sure all legal commitments are in order. This means reviewing your permits, leases, client and vendor contracts, etc. and understanding their impact on the business. For example, if the business location is key to its performance, a long-term lease with options at or below fair market value would be appealing to a buyer. If client contracts, particularly large key clients, are coming due for renewal, buyers would find this less appealing as the risk of a non-renewal is much greater immediately following a transfer of ownership.
Don’t be a business owner who does it all. Some businesses can’t survive without the owners trying to do everything themselves. And they have no key employees to help manage the operations. Buyers for businesses like these may be concerned if they themselves can’t replace the skills and experience of the owner. If you are absolutely vital to the business, efforts should be made to gradually delegate key responsibilities to various staff members. A business that is excessively dependent on the current owner increases the risk in the eyes of a prospective buyer.
Put yourself in the buyer’s shoes. When a buyer comes out to see your business for the first time, it’s important to make a good first impression. Spotless office spaces, clean machinery, orderly desks, pleasant and smiling staff and vibrant activity are ways to leave a positive impression. Buyers look for companies that show well because this can often be indicative of an orderly run business.
Integrity is important. The common thread running through all of these steps is credibility. If you want buyers to move forward, you must show respect by being open, honest and accurate about all things, both good and bad. This starts with the information that is shared to summarize your business, but is imperative with all documentation and dialogue exchanged and will be critical in due diligence through closing to ensure the transfer stays on track.
Although preparation might seem time-consuming, many owners find that taking the above steps not only improves their management practices, it can improve the desirability and value of their business as well. Plus, when a buyer makes an accepted offer, the aforementioned preparation can help the deal close quicker.
Do you have a small business question you would like answered about this article or others? Bill Sivell is a salesperson with VR Windsor Inc., which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. He blogs about selling businesses at Maxbizvalue.blogspot.ca
More columns by Bill Sivell