Perhaps the most important decision for an Entrepreneur – besides opting to start a business – is deciding when and how to sell it. Selling a business hardly has a “one size fits all” guide, but regardless of the size or type of business, there are helpful principles that have universal applicability. I have gathered information from a variety of sources to highlight ten important aspects of preparing to sell a business.
The main underlying assumption here is that the owner wants to maximize the monetary value realized in the sale. To do this, the owner needs to start implementing these suggestions at least two to three years in advance of the transaction. In reality though, an owner may also have some non-value related objectives, such as finding the right owner for employees or preserving the legacy created by the business. The following steps apply differently depending on the type of purchase; for simplicity we will assume the sales transaction is a basic acquisition, where ownership will totally change hands, leaving most of the structure the same.
Run an efficient operation
Creating and sustaining a successful operation is an important element of preparing a business for sale. To ensure that you can accomplish this PWC recommends that before selling the business, “determine areas of your business that need improvement and take corrective action to resolve any issues1.” Amidst the introspection of looking for business problems and solutions, get to know your business from the ground floor to the top. Obtain the knowledge to answer questions about every detail regarding the company. Buyers will have more confidence in a well-run operation through the transparency of readily available information.
Hire and retain excellent management
Hiring capable management takes on a new meaning when you’re looking to sell your business. You need to prove to buyers that the business can “flourish” without you. Ernst & Young calls this principle “[making] yourself redundant.”2 Make sure your management is so good that they can operate just as well without you. In order to prepare them for the transition, Washington Post suggests to “Scale back your role.” Scaling back your role could require an essay in itself, but a couple of tips include creating teams within the organization to “limit your need for input” and systemize important operations to reduce customer service complaints3. In order to retain your best employees, consider putting financial incentives in place that may keep them longer. Remember, when you’re selling your business, the buyer gets all of the business’ assets except you. It is nice for them to believe in you, but that belief is useless when you’re gone if the management is not adaptable, capable, and engaged.
Show a trend of revenue and income growth
The buyer is actually paying for the future cash generating potential of the business. In light of this, a small business with growth potential can be worth more than a larger business with less prospects for future growth. It is important then to give some confidence to the buyer that growth will materialize. The best way to instill this confidence is to show a historic growth trend. By planning early and investing in revenue-generating activities, the business could show a track record of growth. It won’t be difficult to extrapolate this historic performance forward to convince the buyer that he can expect to realize the same results after the business purchase.
Understand and adapt to trends outside your control
Be aware of trends occurring in your industry and in the general work force and organize a structure that responds accordingly. These trends are not something that can be controlled, but can be understood and worked around. For example, a tectonic shift has occurred in the attitude of incoming graduates. Millennials generally do not plan to stay in one company for as long. In response to this, and shifts like it, make sure you have software in place so that millennials will feel they are receiving the training they hoped for when entering the position. This is just one of many examples of economic conditions, patterns, and trends, beyond your control that need adapting to. Implementing adaptations that cater to these shifts will demonstrate foresight, set you apart as a company, and inspire confidence in your buyers.
Closely monitor your company’s expenses to increase profit margins. Pay attention to assets that are underused or unnecessary and get rid of them. Pay attention to your return on assets and decide where you can produce more efficiently. See what costs you can outsource and what other processes or products you could perform or produce yourself for less. Some would go to the lengths of cutting the costs of research and development or marketing shortly before the sale. This will increase your profit margins momentarily, but may hurt future opportunities. If the company does not sell as easily as you expect, you could be harming the value by reducing future growth. This could also be damaging to the legacy you would hope your business carries forward.
Make sure there are processes in place for financial reporting and documentation so you can produce necessary financial documents. You may want to seek help from external auditors to ensure the “integrity” of your financial documentation. Hiring a CPA may be worth the expense because “professionally audited financials have more validity and the potential to increase your asking price.”4 You will need to produce timely, reliable documents for when you sell. Be prepared to present accurate cash flows statements, profit and loss statements, and balance sheets at the very least.
Mitigate concentration risk for your buyer
Take a good look at customer concentration because too few customers show that your company could be a risky purchase. Take steps to generate revenue from a wide variety of customers, otherwise your buyer may be uncertain the business will retain enough customers after you leave. Make sure that your customers have had multiple points of contact with people in your company. Smart Business National presents a number of other strategies to reduce customer concentration: (1) create relationships with your consumers so you become an irreplaceable “key vendor,” (2) purchase credit insurance for the customer, and (3) limit how much you’re willing to sell to one customer so you are not stretched beyond your capabilities when given a larger order5.
Communicate your Vision
The reason you started a business in the first place is because you had a vision for its future. That vision may need to stick with the business even after you leave. This vision should be communicated to employees to promote a sense of accountability and optimism within workers, and it should also be explained to potential buyers. This will make for a smoother transition with new ownership. Distribute employee handbooks containing company regulations, expectations, and set the tone for a positive company culture. As the new owners enter, they can hold employees to the same high expectations and implement changes naturally and effectively as they see fit. Believe in your vision as much as you did when you started the business, and let it carry the business after you have left.
Create an accurate forecast process
When you sell your business, you are really selling your future cash flows to the buyer. Creating confidence in an accurate forecast relies on having been predictably profitable in the past few years. This will add credibility to your predictions. Make predictions that are realistic and achievable. For example, increasing revenues and declining sales and marketing costs may not be realistic. Investments will support a strong revenue growth scenario. A detailed forecast can “demonstrate the underlying value of your business.”6 By continuing to spend in those areas you may be able to sell your business as it operates at its peak. If you have begun planning early, and have a good history of forecasting, you can show the buyer that your business’ financial forecast has a pattern of being accurate over the last few years.
Contracts and other documentation
Key documents can be critical to support the value of the business. Long term contracts with key customers and suppliers will increase the buyers’ confidence that that are buying a viable, sustainable enterprise. Other important documents could include robust lease agreements for premises, agreements with suppliers of utilities or other key services, documents relating to patents or other intellectual property, descriptions of key process or other technical know-how, employment agreements, certification from governments or industry standard institutions, distribution agreements, etc.
These ten suggestions will vary in importance depending on your business size and goals, but most are universally applicable. You can prepare your company for sale in many ways. I have provided just ten suggestions but the important thing to focus on before selling a valuable business is creating a valuable business. With real profitability, intrinsic value to customers, and a potential for growth, your business will be valuable to buyers.