Five Important Steps to Consider When Selling a Business
Selling a business can be a daunting and time-consuming task, particularly when planning has not occurred ahead of time as part of an exit strategy. When deciding to sell your business, some critical steps should be taken that can help to ensure the deal will go smoothly and that a strong value is obtained for the company. Often owners are not prepared until the time they are ready to sell and as a result will rush through some important steps that could end up costing time and money. Planning for the sale early on, even years before the owner is ready is a good practice and will prove valuable when the time comes to sell the business.
To maximize the value of the company it is important to begin as soon as possible, regardless of whether you are ready to sell or not. While there are many facets to the sale of a business below are five important things to consider:
1. Value the Business from Inception and Beyond
It is common to think that time is best spent ensuring the success of the business through the day to day operations of the company. However, many business owners are not properly prepared once they decide it is time to sell your business, and as a result have unrealistic views of the potential value, whether too high or too low.
Defining the company’s value at various points in its existence will not only give a better picture of the company’s success but will also help to set goals and develop a clear path for the future. Because there are various approaches to value a business it is a good idea to consult with an M&A Advisor or Business Broker who is familiar with the company and its industry. The most common approach is a market-based approach such as a multiple of EBITDA or of Sellers Discretionary Earnings. The ultimate value can include a combination of many parameters. Coming up with an estimated value early and throughout the life of the business will prove to be helpful not only while running the company and developing goals and strategies in line with target values, but also when it becomes time to sell.
2. Define and Implement a Transition Plan
The sale of a company can take various paths. For most small business transactions, the buyer values the existing management team and employees to help maintain continuity during the transition. Other strategic buyers may roll up the operations into another existing company and may no longer require the same management team. There are various other options that lie in between. It is also very common for the seller to be asked to stay on board for a certain amount of time to help continue to run operations and transition to new ownership. Before selling it is important to discuss how the company will function both during and after the initial transition.
3. Ensure the Financials are In Order
Many small to midsize business owners have been highly successful without the need to hire a full-time CPA to manage the financials. However, when it comes to the sale of the company, it is important to have clean financial statements to help paint an accurate picture to prospective buyers. Companies with sloppy or inaccurate financials can create red flags and cause buyers to become sceptical about what may be hidden under the roof once they begin to dig in. Sloppy financials can add time and cost to the due diligence process and can cause prospective buyers to become disinterested entirely. Keeping a clean set of books, and perhaps even paying for audited financial statements, will prove to be a valuable step in the sale of the business when the time comes.
4. Build a Strong Management Team and Organizational Structure
Many business owners are successful because they have specific experience in the industry they are in. They may have worked their way from the ground up and developed a unique skill set specific to their business. However, too often these types of owners rely so much on themselves that the company would not be able to run without them at the helm. Taking the time to define the organization and create a solid organizational structure to include management roles, head of sales, VP of operations etc. will align leadership and help to delegate roles and responsibilities across all areas of the organization. Taking this step to create a sustainable business that can function without the necessity of owner involvement in day to day operations will not only add to the value of the company but will also cast a wider net of prospective buyers that will be interested in the business.
5. Manage Future Risk of the Company
When assessing a company for purchase, buyers will evaluate the risk of the prospect in terms of the existing relationships that are in place. These relationships can include client makeup, lease agreements, vendor agreements, and employee benefit packages to name a few. It is important to ensure all contracts are up to date and are as long-lasting gas possible. For example, when it comes to customer contracts, the longer the term the better. This can be the same with Vendors if the company has negotiated a good price and satisfactory agreement terms a buyer will want to make sure they have this same contract in place for an extended period. Having all contracts clearly outlined and up to date will help alleviate the risk in the eye of the buyer and will potentially bring a higher value and greater chance of closing the deal.
Whether you are a business owner looking to sell your business tomorrow or five years from now, focusing on the above items will improve your chances of a successful deal with a smooth transition as well as bring a potentially higher sale price with a larger target market.