Someday you will sell or transfer ownership of your business so you can move into the next chapter of your life. Too often, a business owner waits until they are ready to sell their business to start planning their exit. Unfortunately, this can lead to a decrease in value. Here are some best practices to follow long before you’re ready to sell:
Your financial statements are the key to determining the value of your company. You need to ensure that you have clean, accountant prepared financials so a buyer can easily see how your business is performing. A buyer will review the following financial reports (at a minimum):
Having clean financials will attract a wider pool of buyers because they can easily understand your business history.
Buyers want to see a good distribution of sales among a business’s customer base. They know that when a business relies heavily on two or three customers for a large portion of its revenue, this is a big risk. A business with a high client concentration is not easy to sell and will not likely get financed by a buyer. Recently we had a seller whose business historically was quite profitable; however, one customer accounted for more than 70% of their annual revenue. The interested buyer was seeking an SBA loan for the deal and couldn’t get approved due to the client concentration. Look at your customer reports and determine if any single account makes for more than 20% of the revenue. If it does, focus on de-risking your customer base by landing new customers preferably in a different industry.
When getting ready to sell your business, it’s important to be aware of how reliant your business is on you. It’s a risk to a buyer when they see that too much of the success relies on the owner themselves.
Ask yourself…
If you answered “yes” to either of those questions, it is time to consider how you can minimize dependency on yourself, build up your team, and start delegating responsibilities.
A top reason that businesses don’t sell is directly related to their asking price. It is very common for business owners to have an inflated sense of what their business is worth vs. what it is actually worth. This disparity creates unrealistic expectations about what your business can sell for and can delay the sale of your business.
Before you sell, educate yourself on how a business valuation works and how it can help you quickly sell your business. Then work with a credible valuation expert to determine the true value of your business. Their professional opinion will help you to have realistic expectations and set a selling price that will attract buyers. An additional benefit of getting a third-party valuation will also help you identify any weaknesses in your business and opportunities to increase your value going forward. It will also help your financial advisor accurately plan for your retirement.
Most business owners run personal expenses through their business and look for ways they can drive down taxable income. However, when you sell your business, the objective is the opposite: you want to show as much profit as possible so you can get maximum value. If you know that you want to sell your business, it’s a good idea to start removing your personal expenses as soon as possible. Yes, you will lose the tax write off but you will more than compensate for it when you sell the business. If you don’t believe me, check out this article.
The labor force is really tight right now. A buyer is concerned about being able to staff any business they purchase and having a committed team in place is an attractive asset. To maintain a strong and reliable team for a prospective buyer, avoid telling anyone your business is for sale, especially employees. Employees that know might get nervous about having a new boss and leave. A business that isn’t fully staffed will be a strike against you with potential buyers. Confidentiality is key.
Appealing to a potential buyer is more than a numbers game. Think about what your business looks like through the eyes of a prospective buyer. Look at your website, your brand, how you communicate, and what sets you apart from your competition. Ask others you trust what their first impressions are of the business to see if they can see things you can’t see. When you think like a prospective buyer, you can make the appropriate adjustments while you still own the business so when a buyer comes knocking, they will be convinced that your business can command top dollar.
The bottom line is your business is one of your most valuable assets. By focusing on the tips we’ve mentioned in this article, you will build a more valuable and sellable business. At Murphy Business, our objective is to help you navigate the complicated process of buying or selling a business so that you get to the closing table successfully. If that appeals to you, please contact us today. We would love to learn more about your business and objectives.