8 Tips for Selling Your Business for the Best Price

November 6, 2018

Are you considering selling your business?

 

Selling a business is a major challenge for entrepreneurs. Besides the complexity of the procedure and feelings involved, entrepreneurs need to make sure they get the best price for the business they've invested so much of themselves to building.

If you simply make cosmetic last minute changes before you put your baby (aka business) on the market, the chances of getting a price close to what you were hoping for falls significantly.

When it's time to sell their business, most business owners know the price they need to fund the next stage of their life. That said, when they do put their business on the market, they sometimes discover that their business' market price is less than their expectations.

Planning and preparation for a transition is the way to go and entrepreneurs need to take the time to do it right.

You also don't want to take too much money out of the business. Good retained earnings on your balance sheet— that's the profits that you don't take out of the business and reinvest into the business—indicates to buyers that the business has been profitable and is healthy.

Showing buyers that you are profitable is certainly a good first step but if you can show them that your profits are still increasing, that will certainly drive up the price they are willing to pay. An increasing profit line tells buyers that there is growth opportunity which increases the purchase price multiple.

It's obvious to say that sales is important but some business owners forget this in their pursuit for net profit (after all, that's what they take home). A business doing $50,000 in sales won’t sell for the same multiple of profits as a similar business doing $5 million. There are simply more risks  associated with a smaller business. A minor hiccup to a larger operation can be a major disruption to a smaller one. To put it another way, a $10,000 unexpected expense could wipe them out but a $5M company should be able to weather that storm.

Analyse your processes and look for ways to increase operational efficiency, cut costs and control inventory without affecting your operations.  In the years leading up to your exit, consider ways to consistently increase sales and revenue, with special attention on recurring revenue sources that generate gross income for a new owner right out of the gate. Building recurring revenue streams and shoring up any pending customer or vendor contracts will give buyers comfort that they will have a consistent revenue flow while they get  used to the new business.

Review the past three years’ annual cash flows. Are they trending upward? If not, you need to describe in your growth plan what the strategy is to increase sales in the future.

Focus on creating a diversified customer base that, ideally, generates recurring revenues. Buyers typically look for a customer base in which no single client accounts for more than 8-10% of total sales.

Something people do not think about is that concentration of client is also be a concern to the buyer. They don't know if the biggest customers are loyal to you, rather than to the company or other employees. Will these customers leave if you area no longer involved in the business?

It's also important to note that if you have a highly concentrated customer list when your business sells, you may be asked to include a so-called “erosion clause” in the deal that lowers the price if a top customer leaves.

One of the biggest mistakes business owners make is to take their foot off the accelerator after deciding to exit.

 

The moment you stop investing in new equipment, maintenance and process improvements is the moment you start reducing the future value of your company. Use the expertise you have in your industry to get technology up-to-speed, show increased efficiencies (and profits) and sell for a higher price. A business that seems stuck in the technological past will be a turnoff to potential buyers.

 

It’s difficult to create any useful product or service that can’t be quickly imitated and commoditized by competitors. Consider several strategies that enhance recurring revenue and address commoditization.

 

What some people forget is to negotiate the right kind of lease. You might think a month-to-month lease is great because it offers flexibility. But buyers and banks think more about how expensive it is to move a business. In fact, for other than professional type businesses, banks are reluctant to lend for longer than the term of a lease, including options. No lease can mean no sale.

 

For more information on what banks like to see when it comes to lease terms, feel free to contact us at Just Business.

 

 

All too complicated?

Running a business is hard enough, if you want some advice on different types of funding, feel free to contact us.

A formal plan that presents measurable goals and milestones for the coming years will give your business credibility as a growing concern with long-term potential.

Financial controls or reporting is an obvious minimum requirement.  Many small to medium businesses lack reliable financial reporting to such an extent that buyers can’t determine what the company has or track the source of its revenues. Usually, this problem is correctable, but it takes time to do so. More importantly, sloppy financial reporting can indicate to buyers that there’s an underlying problem, at the minimum is that owners and management lack a clear understanding of their own company’s financial performance.

Because of the importance of determining value, it's extremely important for owners to prepare future cash flow projections for their business. If you don't prepare them, then the buyer will make their own assumptions on future cashflows.

There is a more important reason for clear financials and business plan.  If your company is to grow substantially and quickly, it “has to be fed.” As you create a growth plan for your business, you must project the cash flow cost of implementing it. Plan at least one year ahead in order to give yourself time to arrange financing if necessary.

For more info on how best to finance your growth feel free to contact us at Just Business.

The processes in your business need to be repeatable and teachable. If your business can't function without you, you will have a hard time finding a buyer. As the seller, your job is to convince buyers that they can continue to successfully operate the business after you leave the scene. The way to do that is by developing airtight processes and routines that enable the company to function effectively without your direct involvement. Make sure these processes are also well documented so the new owner essentially has a guide to running the business successfully.

A scalable business is one in which profit margins increase as revenues increase.  Profit margins increase because costs do not rise in lockstep with increasing revenue.  Other value drivers such as efficient operating systems and processes, as well as your business model can improve profit margins as revenue increases.

 

Don’t be too dependent on a key employee.  It’s not unusual for a small company to encounter problems if a top salesperson leaves and takes along some key accounts. The problem can also arise with a technical expert, machine operator or “indispensable” office manager.  

Train, motivate and empower your people. Pay particular attention to the management team. Work to solve any internal conflicts and strive to keep employee turnover rate low. The last thing a new owner wants is employee turnover. Skilled employees bring stability to the business and generate real dollars for the company. By actively cultivating a high quality workforce, you can increase your company's worth, especially if employees are committed to remaining with the company after you exit. Build long term incentives for key employees, such as equity ownership that vests over time or bonus plans tied to profits that motivate key employees to stay on after a business sale.

A properly trained and widely knowledgeable management team is desirable for any company. A truly valuable team is deep (you have several key players with job-specific experience) and the knowledge of the business does not reside with any one individual.

Are you able to leave the business for extended periods of time and feel comfortable that the business will run as efficiently or even better than if you were there? If not, start building a deeper management team through training, improved corporate alignment and, if needed, hiring. It may impact profitability in the short-term but it will more than make up for it by creating future value.

A strong, professional team adds value to the business—especially in companies with few tangible assets.

 

 

All too complicated?

Running a business is hard enough, if you want some advice on you can take advantage of the best type of funding, feel free to contact us.

 

 

In many ways, selling your company is a marketing challenge of its own. That's why it's important to showcase to potential buyers whatever differentiates your product or service from the competition. Ask some of your long-time clients for testimonials explaining why they are doing business with you and what keeps them coming back.

Creating an effective auction process with the use of a professional intermediary is critical to achieving the best sale outcome. These experts will better position your company, support your valuation, get more qualified buyers to the table and negotiate favorable terms. Other professionals, such as tax and M&A advisers, must be involved early in the process to maximize the after-tax dollar value you get on exit. This is the time when a business owner’s years of efforts are monetized, therefore this process should not be taken lightly. Check out the ATO website more information tax implications of selling your business.

It really doesn't matter whether you actually go through with the sale. All of the things mentioned above will help you build a stronger, more efficient and valuable company.

 

 

 

 

All too complicated?

Running a business is hard enough, if you want some advice on you can take advantage of the best type of funding, feel free to contact us.

 

 

 

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