Michael Seibert, SBDC Business Consultant at Yavapai College
Selling your business is similar to selling your house
When you sell your house, you want to get the house ready because you know that potential buyers are going to be coming through and evaluating your house against the other houses on the market. Most of us really want to make our house shine so that it will present favorably, leading to a quick sale at a high price. To this end, we may paint the house. We may do some re-landscaping. We may take care of any deferred maintenance that might distract from the house’s beauty and curb appeal. When you sell your business, you should follow the same approach. Do everything that you can to make your business shine in comparison to the other similar business that may be on the market.
Below are some key factors that can make your business more valuable:
• Business earnings historic track record.
• Ease of operation, which makes transition to new ownership feasible.
• Quality of management and staff.
• Lowing risks associated with market and customer concentration.
• Location and the condition of facilities and equipment.
• Industry and business growth prospects.
• Competitive pressures.
• Business position in the market place.
• Acquisition financing terms.
Below are some actions that will make your business more marketable.
- Get the financial statements ready.
You should have the Balance Sheets, Income Statements and Cash Flow Statements for at least the last three years available for the buyer before putting your business on the market. If possible, you should also have pro forma financial statements for the future three years, especially if there is significant growth expected in the future.
In addition, you should also be able to explain the story of your business that these financial statements tell. For example, if your business has grown by 15% in each of the last three years and you are expecting that to continue in the next three years the financial statements should show that and you should be able to explain the reasons for that growth and why it will continue. A growing company is usually worth more than a company that is declining or just maintaining. Likewise, a company whose sales or profits are declining will be worth less.
Some business owners may run certain discretionary costs (e.g. “business trip” to Hawaii or a business seminar at Disney World) through the business for tax purposes that a future buyer would not need to incur. Now is the time to have your accountant rework your financial statements so that these discretionary costs stand out and can be explained to a buyer. This will present your business’ true earning potential and probably bring you a higher sales price.
If you need help in getting your financial statements ready, you should first discuss this with your accountant. However, the Small Business Development Center at Yavapai College (SBDC) can assist you by reviewing your financial statements and providing feedback, before your put your business on the market.
- Make your business easy to hand off to a new buyer
The more you can document how the business operates, the more appealing your business will be to a buyer. By creating checklists and operating manuals that show how the business operates on a day-to-day basis, it will be easier for a potential buyer to understand and see how he can take it over successfully. Think about it from a potential buyer’s perspective. One business is very organized and has operating manuals and checklists and another business has none of these – which do you think the buyer is going to be more interested in? Of course the one that will be the easiest for the buyer to understand and take over.
The Small Business Development Center can assist you with this by reviewing your current operating documents and making recommendations where improvements are warranted. We have experienced business consultants who will share their perspective and insight.
- Make your business independent
Your business should be independent in the following four areas:
You – Your business should not rely exclusively on you. If your business does not run efficiently when you are not there, then it is too dependent upon you. You should take steps to see that you could go on vacation for several weeks and your business will still run without a hiccup.
Employees – A business should not rely exclusively on any one employee. If any individual employee quit and it would cause a huge problem for your business, then you have a problem now. Although some employees will always be better than others, your business should not be so dependent on any single employee that losing them would affect the financial results of your business. If that is currently the case, you need to take steps to build this independence into the operations of your business.
Customers – Your business should not solely depend on any one customer. If your business is so dependent upon a single customer that your profitability would be significantly hurt if that customer left, then you have a major weakness in your business that needs to be addressed. You should take steps to acquire other customers so that the importance of this major customer is diminished.
Vendors/Suppliers – Relying on a single vendor for essential supplies can increase the business’ risk of a business shutdown due to lack of inventory. In addition, a business generally will incur higher costs related to the need to maintain larger inventory safety stocks and because of a lack of bargaining power with the single supplier. Both of these issues can result in a lower business valuation. It is generally a good business strategy to develop multiple supplier relationships so that a shortage at one vendor can be mitigated with supplies from a second, or third, vendor. These relationships also allows the business owner to negotiate better pricing and better service from its vendors because each vendor understands that they are replaceable.
Dependence in any of these four areas will decrease the value of your business to a potential buyer because these dependencies increase the risk in your business. Buyers pay for the future earning/cash flows of a business. Anything that jeopardizes the certainty of those earnings/cash flows will cause them to discount their value and in turn the value of your business.
The Small Business Development Center can help you develop strategies to mitigate these risks and build a stronger business.
- Appearances do count.
The time to replace that old worn-out piece of equipment, upgrade to new technology or paint the front of the building is before you put the business on the market. Do not assume that a new owner will want to do it or that the price will be only slightly lower because you have not replaced it. The time to “spiff up” the business is before you put it on the market.
It might also be helpful if you took a good look at your business from the perspective of a buyer. Try to put yourself in the place of a prospective buyer. What would you do to make your business more attractive? Then do it now, before you put your business on the market.
Going back to the house analogy, new houses sell faster and at higher prices than “fixer uppers”. The same is true with businesses. So you need to look at your business and decide: is it a fixer upper or is it in pristine condition? If it is the former condition then start making renovations to put it into pristine condition. Your business will sell faster and for a higher price, just like a house.
- Be ready to address buyer questions.
If you are not already, you should get up to speed on your industry and business environment. You should be able to discuss your business’ position in the market place, why your industry and business are growing, and the affect competition might have on that growth potential. Serious buyers are going to be interested in these issues and your ability to explain why your business is positioned to grow in its current environment will lead to greater interest and a higher price.
The Small Business Development Center has experienced business consultants that would be happy to review your current industry with you and suggest some talking points that might address concerns that a buyer might have. We can even role play with you so that you can practice addressing buyers questions.
- Eliminate Surprises!
Before you put your business on the market, do your best to eliminate the surprises. Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises – most of all potential buyers. Whether it is a legal problem, an accounting issue, environmental concern, or something else – solve it now. Nothing kills a deal faster than surprises.
- Financing is an important aspect in sale of your business.
Studies have shown that a seller who asks for all cash receives on average only 70 percent of his or her asking price, while sellers who accept financing terms receive on average 86 percent of their asking price. That is a difference of 16 percent. In many cases, businesses that are listed for all cash just do not sell. With reasonable terms, however, the chances of selling increase dramatically and the time from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. It also tells the buyer that the seller has confidence in the future of the business.
If a seller cannot afford to finance their business, then helping the buyer find financing will also add value to the sale. Working with the Small Business Development Center, we can assist the buyer in applying for small business loans.
The Small Business Development Center at Yavapai College provides no- cost, one-on-one, confidential consulting to business owners and their teams. We have a wide variety of tools and expertise to assist you!