When you’re preparing to sell your business, you need to take a step back and have an objective look at the company from an outsider’s perspective. It’s important to start the “house cleaning” well in advance of the actual sale of your business. Some of the things that should be done can take a long time to correct so if you want to get the most from the sale of your business, it’s best to start early.
Here are the top things to tend to if you plan to start the process of selling your business in the next 2 to 5 years.
1. Improve Financial Statement Quality
Financial statements are the first documents that a buyer asks for. If they are incorrect, insupportable or incomplete, the buyer would most likely walk away from the deal. Financial integrity is critical to the sales process. Consider purchasing higher quality financial information from your accountant, better record all revenues, avoid putting non-business expenditures through your business accounts, and assess the internal management system and how capable your business is of accessing current financial statements on demand.
2. Demonstrate Stable and Predictable Cash Flow
Buyers are looking for cash flow and revenue. An established pattern of growth in these areas and a history of consistent and growing profits is a strong signal to a premium buyer. Brokers can help recast your financial statements from an income-tax-minimizing one to a tool that can show potential buyers the true cash flow available to owners. Firm up any contracts you have in place and showcase the predictable revenue stream from recurring sources like contracts, monthly support agreements, subscriptions, warranties, annual license agreements or other revenue streams that are repeating in nature.
3. Delegate Personal Goodwill
There are two types of goodwill - personal and business. Personal goodwill is when your customers or clients deal with you because of the owner. Business goodwill occurs when customers and clients are attracted to the company brand, history, employees, service or products. For a buyer, it’s the goodwill that remains after you leave that is important and so you should consider the expertise and experience of your remaining staff and management. Focusing on quality training, mentorship and minimizing employee turnover provides a buyer with continuity when they take over. You may want to consider implementing programs like equity participation plans that are designed to retain key people through a transition.
4. Show Future Growth Potential
A solid future growth plan can demonstrate to a buyer the viability of the business in areas that they may not have considered. By maintaining a future growth plan you can show realistic growth opportunities that support cash flow projections and demonstrates the growth potential after acquisition. Consider researching and documenting additional markets to pursue, product or service line extension and high-margin areas of the business that can be expanded.
5. Strengthen Business Processes
Establish and document standard business processes to show a potential buyer how the business can be successfully maintained after the sale. This is an opportunity to show that you have a successful, streamlined operation in place.
6. Diversified and Loyal Customer Base
A broad customer base helps insulate a company from the loss of any single customer or a downturn in a particular segment. Buyers look for a diverse customer base to be sure a business isn’t too dependent on a single customer. A business with a single client making up more than 50% of its revenue is risky for a buyer and a sale relying on bank financing may fall through. Be prepared to answer: how will current customers be retained and are there any contractual arrangements with customers?
7. Find and Build Your Niche
Buyers are often willing to pay a premium for businesses that have a strategic advantage over the competitors or something about it that can be leveraged for future gain. A buyer will look for: a solid market presence, proprietary products or processes, strong competitive advantage, and scalability with capital or people. It is important to show how your competitive advantage will continue after you are gone.
8. Consider Partial Seller Financing
When a seller finances a portion of the purchase, it often plays a huge part in the successful closure of a deal. When a business is selling goodwill (future profits), buyers will look to the seller to share in the risk. Partial seller financing can often increase the number of buyers who qualify to purchase the business and therefore increase the chance for multiple offers. It’s also a way to increase the total compensation to the seller as it becomes a function to charge interest. A common workable structure for the sale of business sales is 1/3 buyer cash, 1/3 bank financing, 1/3 seller financing.
9. Review Your Assets
This is your chance to clean up your books and make them relevant to potential buyers and to help speed up any due diligence process. Take the time to review and take action on the following: sell off or dispose of unproductive assets or unsalable inventory, remove or buy off any assets that are primarily for your personal use, capital gains – purify your business.
10. Get Good Help
It goes without saying that you should always assemble a good team to help you with the sale of your business. A lawyer can protect you in the legal aspects of a sale, an accountant assists with financial due diligence and tax issues, a financial planner can assess the impact of the sale on your personal investment portfolio, and a business broker can lead the business sale process, keeping the deal on track and managing the details of the sale.