5 Ways to Prepare Your Business Before You Sell It
Roger Murphy, President and CEO of Murphy Business & Financial Corporation
Roger Murphy is President and CEO of Murphy Business & Financial Corporation.
Approximately 700,000 to 800,000 small to mid-size businesses change hands each year. And, I can guarantee that in every case, the seller, and buyer for that matter, invested a good amount time, money and emotion throughout the undertaking.
For the seller especially, the process of selling a business can be an emotional undertaking. You've put your sweat equity into the business. You've sacrificed over the years — missing family time, skipping paychecks and working at all hours of the day and night. Your business is your baby.
However, when it comes time to plan and execute an exit strategy, you have to strip away a lot of the emotion. It is important to be as realistic as possible about what your business is worth. If the exit strategy is not done correctly, your business can suffer damage.
A few of the most common factors for a business not selling:
- Lack of preparation of business for sale
- Unrealistic selling price
Having a trusted, third party business valuation conducted is one way to begin the process. With the data from the business valuation, you can plan for the procedures needed to raise the value of the business so that you can maximize the return on your years of investment in the business.
The following list offers 5 tips to "put a shine" on your business when it comes time to sell. These have proven to add up to 20 or 30 percent more value to businesses.
Timing is everything
The best time to sell is when you are on top, when the company is doing well, the industry is flourishing, and next year looks even better. Additionally, cyclical factors are important. For example, in retail most revenue is earned in 4th quarter. Thus, it is recommended that you aim to sell your business in the 1st quarter of the following year to show good revenue and the inventory is at lowest point.
Getting a proper business valuation done to set the selling price
Most business owners are not aware of how businesses are valued. And, in many cases, sellers assume value based on emotion or rules of thumb. They overvalue based on how much time and work they put in, and how much it means to them. Generally they think the value is higher than the true market value. Thus, they need for a professional to give advice.
The first step before business valuation is to determine how much money the new owner will have to make … reason being, generally businesses sell for a multiple of what they earn or Sellers Discretionary Earnings.
Another formula is a Percent of Revenue. Hard assets are not a driving force in business valuation. Some assets add or subtract from value such as Accounts Receivable, Inventory and Work in Process. Comparable sales data is often used to determine market multiples.
Organize the books and records
When preparing your business to be sold, re-cast the financial statements, or normalize them.
Most small businesses operate their companies in a manner to minimize taxes. However, when selling, they need to know the true economic value of the business. Analyzing financials and eliminating all non-operating expenses and discretionary expenses do this.
De-emphasize the owner's personal role in the business
When selling a business, you want to be certain that the buyer knows he's acquiring talented leadership that can continue to run the business after the purchase. The original owner should not be positioned as the only decision maker. Rather, others should be involved in customer contact, and vendor contact. A "right hand man" is needed — male or female managers who are part of an infrastructure that reduces the dependence on ownership.
Understand the mindset of buyers today
Seventy percent of all buyers are first time buyers, often displaced corporate employees who will be owner/operators replacing a job and looking for financial independence. What matters most to buyers today? Here's a list of what buyers are looking for in businesses for sale:
- Buyers look for ways to enhance the business, is there an "upside." They generally think that they can do better than the previous owner
- Proven verifiable books and records, tax returns
- Reasonable price
- Leverage and terms — they want to use bank financing, owner financing and as little of their own money as possible
- Solid, verifiable cash flow
- Furniture fixtures and equipment properly valued and in good condition
- Positive appearance of facility, good reputation
- Favorable lease and lease options
- Training, transition period with the seller
- Covenant not to compete, non solicitation agreement
- Solid reason why the owner wants to sell
- Experienced employees who will stay on
- No last minute surprises
The views expressed are those of the author and do not necessarily reflect the views of BusinessNewsDaily.