In Part 1, you met Steve and his family. Steve is ready to sell his manufacturing business and just got the ball rolling with an informal meeting with a broker and his first outside perspective on the value of his business. What’s next for Steve? Read on.
A formal estimate of value
One of the biggest steps in getting ready to sell your business is understanding what your business is worth and if there are ways you can improve the initial valuation. A reputable broker should be able to give you a professional estimate of the market value. There are fees associated with this step because it is a detailed valuation based on a complete diagnostic “look under the hood” of your business. There are common industry methodologies the broker will use, including a recast of your financials to demonstrate the value of your business to a potential buyer and demonstrate their potential income. This information serves as a guide for establishing the best asking price for your business that you can justify when potential buyers come along.
Feeling good and reassured after his first meeting, Steve and his wife Heather discuss the initial complimentary valuation we provided and decide that getting a comprehensive, official estimate right now was a worthwhile investment. Even if they choose not to sell now, it establishes a benchmark for them for retirement and future planning.
There is a lot of financial data to collect in order to complete a professional valuation. Some of it’s easy for Steve to pull together himself and we work with his accountant directly to get the rest. Steve is a bit nervous about the pending valuation and, despite his satisfaction with the initial estimate, he still worries about whether it will be enough. His business reflects a life-time of work and sacrifices and he hopes the financial payoff will give him the retirement he and Heather dream of.
Steve and Heather aren’t sure if now is the time to talk to their son Jason, who’s working in the business. They decide that they will wait until they get a more formal valuation so they can give him a bit more details. They don’t want Jason to feel obligated to take over the business. They know he had been planning to go back to University and didn’t want the business to be an obstacle to his own ambitions.
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Understanding your valuation
The valuation you receive should be based on the results of standard, accepted industry factors as well as a professional assessment of how a buyer would view your business. It’s important that you prepare for the results objectively because the valuation is unrelated to what you “need” to get out of the sale and can sometimes not reflect what you think your business is worth. To help you with this, your broker should provide a thorough explanation of the methods they used to arrive at the value so you can make decisions on how to proceed.
A good broker should also be able to offer advice on how you can make changes or adjustments to your business to improve your valuation. In fact, you can get started on some of the factors most relevant to your valuation years ahead of the sale of your business. Sometimes things like improving the quality of your financial statements or strengthening your formal business processes can go a long way towards getting the valuation you want.
When Steve received his formal Broker’s Opinion of the Most Probable Selling Price and met with us to discuss the results, he was relieved to see the initial estimate was in the ballpark, and that there were some pretty straight-forward ways he could increase his company’s value. He could spend the next 6 months making some changes to get the number closer to what he’d hoped for. In particular, Steve was going to review his unproductive assets like some aging equipment and consider selling them off. He also wanted to work with his long-term customers to firm up existing contracts so he could demonstrate a more stable and predictable cash flow into the future.
Steve shared the valuation with Heather and reassured her that he was making a plan for some changes that would improve the asking price for his business. They also discussed the timeline and felt that they could move forward on the sale within the year. They both felt relieved that they had started building a timeline for their retirement.
Steve and Heather sat down and talked to their son Jason about their plans to sell the business and the valuation. Jason wasn’t surprised and told them he’d already been thinking about his role as they retired. Not only is Jason not in a financial position to purchase the business at a fair value from his father, he’s ready for a change as well. Steve and Heather are relieved in some ways because they know the sacrifices required to own a business and weren’t sure if they wanted that for their children.
It’s normal to have concerns about the word getting out about your decision to sell. In fact, you should do all you can to keep it confidential for as long as possible. It’s important to take a balanced approach to marketing your business. You want to reach the right potential buyers while also keeping your sale confidential to avoid any negative impacts. Your broker should help you formulate a “Plan B” in the event the information gets out before you want it to. That way, you’re prepared with how you’ll manage it.
To help with your confidentiality concerns, be sure your Broker gives you the opportunity to approve the marketing plan so you’re comfortable with how and where they’re talking about your business. It’s common for business sale listings to be done without naming the company or disclosing details that will reveal the company identity. You can look at our website listings as an example. It’s also very important that potential buyers be screened and sign a non-disclosure agreement before they receive any information about your business.
Both Steve and Heather are nervous about others finding out about their decision to sell the business. When they spoke to their children they were very firm that they couldn’t talk about this outside of the family because it could impact the outcome. The good news is, they have confidence in how Bridgepoint manages confidentiality and see value in their track record. They’ve created a Plan B in case information gets out to employees, suppliers, customers, or competitors, but are pretty sure they won’t need it.
Putting your business on the market
When it comes time to actively put your business on the market, you need a complete and professional approach that tells your business story to potential buyers. There are a few important things you should expect from your broker at this stage:
Your broker should put together a package that details your business from company history, industry position, financials, and current operations (among others). It’s a comprehensive snapshot that answers all the questions a buyer might have. Be prepared to provide additional information if questions arise.
A full marketing plan from your broker will show you how they plan to get the word out about your business. There are different tactics they can use to do this, and you should be comfortable with all of them before you get started.
Selling your business means identifying and targeting potential buyers. A reputable broker should have a buyer database they can leverage. In fact, they may even have a few people they know would be good candidates.
Also keep in mind, that once all of this gets started, you should focus on business-as-usual. If your business is ticking along as well as it always has, then the valuation stays relevant and therefore more attractive to buyers.
It’s been a busy couple of months for Steve. He’s firmed up those contracts with long-term clients and managed to liquidate some (but not all) of his unproductive assets. The result is a valuation that he and Heather feel is right in line with what they need for the future.
Steve is a bit nervous about actually “putting his business on the market” but he feels he’s put the whole thing in the right hands. He was relieved to see that the documentation Bridgepoint put together for him was a good reflection of the business and after a few changes to the original marketing plan, he was comfortable with the next steps.
Both Steve and Heather are excited about this next move.
Playing the waiting game
You might be lucky and the broker you use will have potential buyers in mind to make you an immediate offer. But that’s not usually how it works. Selling a business takes 6 – 12 months on average, so patience is important. Your broker should be busy getting the word out and harvesting potential leads to ideally get you multiple offers at the same time. Don’t get frustrated or down if there are no offers immediately, that’s normal and it doesn’t mean there is no interest. It takes time for potential buyers to review information and consider how to proceed.
There was no fanfare when Steve’s business officially went on the market. He continued on, business as usual. Even though Bridgepoint was in touch with him on a regular basis and told him that the process could take a year or so to get the right offers, he was a little impatient and nervous. After the first month with no offers, he started to wonder if anybody would see the value in his business. What if nobody wanted to buy his business? We assured him that he had a great marketing plan and we were actively finding him prospects. In fact, there was interest and several potential buyers had been screened and sent information about his company. Steve received this information from us through regular marketing updates which helped him understand what was happening behind the scenes.
What’s next for Steve and Heather?
Steve receives multiple offers for his business. Not all were what he was expecting so he has to consider each of them carefully. We cover how it all plays out in the final stages of his business sale in Part 3. Watch for it in the coming weeks or sign up for our newsletter so you get notified when it’s published. Or, if you think you’re ready to take the steps to get to this stage, give us a confidential call or click the Let’s Talk! button below.